Indian Airlines

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CAPACITY UTILIZATION IN INDIAN AIRLINES
Danish A. Hashim*
Sir Ratan Tata Fellow
Institute of Economic Growth
Delhi. 110 007. INDIA.
E-mail: danish_hashim@yahoo.com
April 2003
Abstract
The financial performance of the state -owned Indian Airlines has deteriorated since 1989- 90. The main reasons cited for the poor financial performance of Indian Airlines include: rising fuel prices, excess staff, serving uneconomic routes and increasing expenses on insurance. However, low capacity utilization has rarely been cited as one of the main reasons for the poor performance. The present study thus makes an attempt to measure the extent of capacity utilization in Indian Airlines and its impact on the unit cost of production. Using data from 1964-65 to 1999-00 and applying a translog variable cost function, the capacity utilization has been estimated with respect to two alternative measures of potential output: (i) where short-run average cost is minimum, and (ii) whe re short-run and long-run average cost curves are tangent. The results reveal that the capacity utilization in Indian Airlines has been poor in general and also declining over the last decade. Therefore, the study suggests a need to improve the capacity utilization, which in turn would improve the financial performance of Indian Airlines by reducing its cost per unit of output. * The present study is a part of my work as a Sir Ratan Tata Postdoctoral Fellow at the Institute of Economic Growth, Delhi, India. I am grateful to Prof. B. N. Goldar and Prof. Arup Mitra for their valuable comments and suggestions. I would also like to thank Dr. D. N. Nayak, M. S. University of Baroda, Dr. Vinish Kathuria, Madras School of Economics, and Mr. Pravakar Sahoo, IEG, for their helpful comments. An earlier version of this paper was presented at the Institute of Economic Growth, Delhi, on 27 December 2002. Comments from seminar participants were helpful in fine-tuning the paper. The usual disclaimer nevertheless, applies. 2

I. INTRODUCTION
Capacity utilization has an important bearing on the financial performance of any organization. This can be stated as being especially true for domestic and stateowned Indian Airlines, which has incurred losses for as many as 10 financial years in between 1989-90 and 2001-02. The cumulative net losses amounted to Rs 14.55 billion against a cumulative profit of just Rs 1.13 billion for this period. This happened despite several bouts of increase in fares at various points in time (Abreu 1998). The bad financial performance of Indian Airlines is not sufficiently attributed to poor capacity utilization, a fact which has been overlooked as it is protected by the government; rather other factors such as increasing fuel cost, excess employees and rising insurance expenses are faulted heavily. Against this background, it is not surprising to know that Indian Airlines is planning to add as many as 43 new airbus aircraft to its fleet, costing over $ 2 billion (Bereaus 2002). Even without undertaking a detailed economic analysis, the problem of under utilization of capacity by Indian Airlines is obvious. There are at least five reasons to believe so. First, excess fleet is not being disposed off, as it may not fetch the expected price in the second hand aircraft market. This is because the aircraft to be disposed off are very old and continuing with them in service seems a better option. Second, the load factor on many short routes falls even below 50% (Planning Commission 1987). Third, between 1987-88 and 1999-00, the level of output measured in available ton kilometer declined by about 3% whereas the capital stock increased by 110%. The decline in output was registered mainly due to the entry of private scheduled airlines under the ‘open sky policy’ since 1991. Fourth, in 1997- 98, the average daily flying time per aircraft in Indian Airlines was just 8 hours whereas the same in one of its main competitors, Jet Airways, was 10.5 hours (Karmali...
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