Monday, June 1, 2009

India's Domestic carriers fly into worry zone

1 Jun 2009, 0106 hrs IST, Mithun Roy, ET Bureau

MUMBAI: Praful Patel, assuming charge at the civil aviation ministry on June 1, has his task cut out. The minister, in his second innings, will 
be overseeing an industry that’s staring at a cumulative loss of Rs 30,000 crore per year, largely contributed by the three full-service carriers — Air India, Jet Airways and Kingfisher. 

According to the Centre for Asia-Pacific Aviation (CAPA), a Sydney-based sector researcher, the combined debt of the three could reach Rs 45,000 crore by the end of this fiscal. While Indian aviation industry accounts for 17% of global losses, it only accounts for 2% of global traffic. How did the trio fly into this air pocket? 

Analysts point their fingers at the reckless expansions that Kingfisher and Jet undertook in both, the domestic and international sectors, without any real demand. The roller coaster ride of the aviation turbine fuel (ATF) prices didn’t help things. Some analysts even say that the egos of the promoters, too, played a part in this aviation drama. 

With the economy on a roll, growing at 9% plus rates in the past few years, Jet and Kingfisher had set their standards a bit too high: they wouldn’t consider themselves as national players, if they didn’t have more than a dozen flight services per day between Delhi and Mumbai. Later, Kingfisher’s Vijay Mallya and Jet’s Naresh Goyal struck a chord of friendship, but the alliance, struck for reducing excess capacity last October, is yet to take off, said an analyst with a brokerage firm on the conditions of anonymity. 

Analysts are not expecting any silver lining in the quarterly results of listed airline entities — Kingfisher and SpiceJet, a low-cost airliner. On Monday last, Jet announced a standalone net loss of Rs 402 crore for the full-year ended March 2009 compared with a net loss of Rs 253 crore in the previous year. It suffered losses mainly on the account of high fuel and other operating costs, and lower load factors resulting into lower revenues than expected. Jet has a debt of $3.1-billion. 

The net losses of Kingfisher jumped to Rs 626 crore in the third quarter of FY09 from Rs 423 crore in the same quarter of the previous year, following international operations’ initiation costs of Rs 174 crore, and exchange rate dollar-denominated expenses amounting to Rs 60 crore. Kingfisher started international operations last September. 

The domestic aviation industry has been badly hit by surging crude oil prices last calendar year, which touched a record high of $147 per barrel in September last year. ATF prices had peaked to Rs 71,028.26 per kl in Delhi in August on international crude prices touching a historic high. 

To mitigate the ATF heat, carriers were forced to raise fares, which resulted in slowing air passenger traffic growth. It fell by 12% in the first three months of the current calendar year. Industry experts are now increasingly questioning the need for business class and first class, when corporate travel has declined considerably due to the economic slowdown. There has also been a talk of full-service carriers looking seriously at the low-cost option to stay in business. 

Two analysts in leading brokerages that ET spoke to were unanimous that these airlines should go aggressive on cost-cutting and capacity reduction, apart from structuring airfares keeping an eye on passenger load factor, if they have to land in positive territory. Interestingly, Kingfisher Airlines has converted 24 flights to its low-cost model Kingfisher Red (earlier known as Air Deccan). Jet, too, recently launched JetKonnect, a low-cost service, over and above its Jet Lite services. 

Mark Martin, senior analyst with KPMG, says Indian carriers need to act quickly with time running out. 

Many airlines are strapped for funds and raising money is not an option in this environment. The full-service carriers, such as Jet Airways and Kingfisher, have been trying to raise funds to meet their working capital requirements. Jet Airways raised around Rs 2,000 crore from nationalised banks three months back, while SBI, last week, agreed to provide a Rs 500-crore loan to Kingfisher Airlines to meet its immediate cash needs. Kingfisher’s spokesperson confirmed that the airline would get funds from SBI. 

Experts feel that low-cost carrier is the best model for India and low-cost carriers remain convinced about the potential in India. SpiceJet CEO Sanjay Aggarwal, for instance, thinks India is the place where only the low-cost carrier will survive, since less than 3% of the country’s population opts for flying as a travel option. “SpiceJet has clear cut strategy for low-fare segment and our market share has been increasing steadily since November,” said Mr Aggarwal. Airlines have started taking drastic measures, apart from converting business class to economy. Jet Airways had reduced capacity by 20% and Kingfisher by 15%, followed by JetLite, which had decreased capacity by around 5%. 

Jet Airways spokesperson said that airline has undertaken additional measures to streamline costs to improve the financial health of the company under the current global economic environment. The airline has issued termination notices to some cabin crew on probation in accordance with the terms of their contracts and in compliance with the law.

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