Airlines in the country have only themselves to blame for the Rs 10,000 crore (Rs 100 billion) losses they are expected to make this fiscal. They failed to respond to the slowdown in demand and quickly reduce excess capacity.

According to the Airports Authority of India estimates for 2008-09, even as overall traffic (domestic and international) will be down 7.2 per cent, the number of aircraft movement will go up by 0.3 per cent in the same period. In simple terms, this means the airlines have increased capacity despite the fact that the overall market has been shrinking.

"The airlines failed to respond to the falling market. While there was a cut-down in capacity by around 25 per cent in September, the airlines brought back the flights starting from January and replenished capacity in all sectors. So we have a clear case of oversupply," said DP Singh, general manager, corporate planning, AAI.

The inability to gauge the slowdown was reflected both in international and domestic airlines. Domestic air traffic in the country is estimated to plummet 12 per cent by the end of this fiscal, while the number of flights (arrivals and departures) will only come down by 1.9 per cent. For international flights, air traffic went up by 7 per cent, but, surprisingly, carriers also increased capacity by 9.9 per cent.

Industry experts say that airlines are faced with a situation wherein they need to cut down 18-20 per cent of their flights and increase prices by 15 per cent to achieve a break-even. Their current loads are hovering around 65 per cent and their break-even loads stand at above 90 per cent.

"Compared to December levels, costs are down by around 8-10 per cent due to lower fuel costs. So the break-even factor for the airlines has come down from 105 per cent to 90 per cent now. Bringing down the number of flights by 20 per cent will increase their average loads from 65 per cent to 80 per cent. Increasing their prices by 15 per cent will bring the break-even levels down from 90 per cent to 80 per cent. But again, this is based on an impossible condition that the traffic figures in future remain the same," said Mahantesh Sabarad of a Mumbai-based brokerage firm, Centrum.

So why did airlines not cut flights despite knowing demand was slowing down? The answer, they say, is cut-throat competition. They fear that the competition may deploy flights on the routes left unserviced by them.

"The customer looks primarily at connectivity. If he does not find an Air India flight at a convenient time, he will take another one," said an Air India spokesperson.

The trend started around December when, after cutting down flights, airlines led by SpiceJet and Kingfisher started bringing back their flights.

"The flight cuts had led to a lot of routes, especially in the south, going unserviced. This led to a lot of airlines grabbing the opportunity and starting flights on those routes. Competition followed, and soon the capacity was back to normal," said an industry executive.

Still, the over-capacity is expected to go up. Airline executives say all of them have been asked for additional flights for the summer schedule beginning in March, which will increase the number of flights by at least 5-10 per cent.

The downfall in traffic has also impacted AAI revenues. "Revenues will be down by Rs 400 crore... (Rs 4 billion). More than 90 per cent of the airports under AAI are estimated to be in loss. Profits are going to be lesser by around 5-6 per cent this fiscal," said an AAI official.