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BW Businessworld

An Uphill Climb Ahead

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The year started on a pretty positive note for the aviation industry. After two or three bad years, 2011 was expected to bring back the clear, bright skies for the industry. In fact, to start with, the International Air Transport Association (IATA) had predicted that global airlines would earn a profit of $15.1 billion this year.

Things were looking up in India, too. After two or three very bad years, the Centre for Asia Pacific Aviation (Capa) projected that the country's private carriers will post a combined profit of $350-400 million for the financial year ending 31 March 2012. State-owned Air India, however, is expected to remain in the red with losses in the range of $1-1.25 billion (assuming an average oil price of $85-95 per barrel). Capa also predicted that demand will outstrip capacity, with domestic traffic growth projections of 17-18 per cent, possibly as high as 20 per cent. With IndiGo and SpiceJet introducing international routes in their network, it is expected that international passenger numbers — which grew by approximately 10 per cent last year — will increase by 10-12 per cent over the next 12 months. Airlines started hiring again and aircraft manufacturers began to count on more orders from the Indian subcontinent.

But suddenly, it looks as if the initial optimism may have been misplaced. The unrest in West Asia has kept oil prices higher than anticipated (they have crossed $100 a barrel against the estimated price of around $84 per barrel).

Then, Japan's tsunami and the hit that travel took on account of the lowered global expectations. This, in particular, had an impact on premium travel. Premium air travel fell significantly in March — the numbers travelling business or first class were 2.9 per cent higher than a year ago in March, compared to 7.8 per cent in February.

If premium travel is lower than expected, economy travel is causing even more worry. Since November, global economy travel has been falling steadily, touching a new low in March 2011 (the increase has been 1.1 per cent compared to 3.4 per cent in the previous month of February). In fact, IATA, which in March revised its profit estimates downwards to $8.6 billion for the year, is more concerned with the fall in economy travel than in premium travel.

In India, though some of the airlines have shown improvement in performance (Kingfisher showed an operating profit after years of consistent losses), most aviation analysts do not expect Indian carriers' fourth quarter results to be very strong. An April 2011 aviation report by Kotak Institutional Equities says it expects losses for both SpiceJet and Jet Airways in the fourth quarter. But it also goes on to say that it expects the first quarter of this financial year to be better for the airlines in general. In fact, in the usual gung-ho style of equity analysts, it maintains a buy position on both the Jet and SpiceJet stocks.

But if I were a small investor — or even a private equity firm — I would think many times before putting my money on any of the Indian carriers in today's scenario. As things stand, there is likely to be very little improvement in yields for most airlines. This is despite the fact that most airlines have increased fares across the board to pass on higher fuel costs. Kotak's aviation report — which calculates a regular index of one-week forward fares (average of air fares over eight routes from Mumbai and Delhi) — says that fares have gone up by 10 per cent at Rs 6,000 in the first week of April from the average levels in the third quarter of last year.

Unless the airlines are able to increase fares substantially — and not see an accompanying dip in traffic due to the rise — I do not see how they will show improved results. Kingfisher and Air India continue to bleed — the former still appearing in the news for all the wrong reasons like its failure to pay its dues. SpiceJet is busy trying to simultaneously introduce international flights (which will initially add to its losses), while adding a new type of airplane to its fleet to diversify regional operations. Jet Airways appears to be augmenting its revenues more by leasing out its planes than from its own operations, and has been unable to raise any funds for its expansion plans or to reduce some of its debts for many years now. Moreover, the airline's service standards and efficiency of operations seem to have lost some sheen with many people opting for the efficient and no-frill low-fare airlines.

So, all in all, I would say that the worst is not yet over for India's aviation sector and if at all there is a light, it is not at the end of the tunnel, but at the top of a long, steep, slow, uphill climb.

anjulibhargava(at)gmail(dot)com

(This story was published in Businessworld Issue Dated 30-05-2011)