Airlines urged to trim the fat to stay profitable

India - Rising oil prices should be a signal to airlines to trim the fat elsewhere in the organisation, said consulting firm KPMG.

Escalating oil prices coupled with India's costly aviation turbine fuel (ATF) prices, which now account for 30% to 45% of the operating costs of airlines, are threatening to lower the profit margin of air craft carriers and cause the airline industry to slow down.

The heavy taxation imposed by the Indian government on ATF prices keeps airline expenses up. The increasing costs incurred by the airlines are then passed on to consumers through price hikes, which decrease demand and lower revenue.

However, KPMG is optimistic that airlines are still able to turn a profit as incomes are rising nationwide and passenger traffic in India is among the highest in the world and has increased significantly in the past year.

Another reason for this optimism stems from the fact that the fleet of Indian aircrafts is relatively young and the costs of maintaining them are relatively lower than other older fleets.

Indian airlines would still be able to stay in business despite the rise in expenses by adopting cost-cutting measures. While rising fuel prices are uncontrollable, other expenses can be minimised to prevent unnecessary wastage of fuel, said KPMG.

Some measures suggested to counter the rise in ATF prices includes cutting out excess capacity by being more route efficient and minimising the weight carried by aircrafts.

To cope with rising fuel prices, some international airlines have resorted to grounding planes, reducing route frequencies and even slashing headcount.