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BW Businessworld

Annus Horribilis

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Last year was a bumper year for losses in the aviation sector. Initially, International Air Transport Association (IATA) had predicted that losses in 2008 would be around $5 billion (they were finally closer to $17 billion). The economic downturn and high fuel prices were two of the main factors that pulled down the sector last year. IATA had, however, predicted that 2009 would bring much-needed relief. In March, it said losses would be around $4.7 billion in the year.

The reality has been very different. IATA revised its forecast in June to losses of $9 billion. This has now been further revised to $11 billion globally despite the fact that worldwide airlines have improved financial performance in the third quarter of the year.

Things have picked up, but at a snail's pace. Passenger demand in October 2009 is 6 per cent better than the low point it had reached in March 2009, but it is still 5 per cent below the peak recorded in early 2008. Yields, too, have remained under pressure. Although there has been a modest rise in air fares since mid-2009, it remains around 20 per cent less expensive to fly in real terms today than it was a year ago. Yields have also suffered since premium traffic has fallen even more sharply. There was a 14 per cent fall in premium traffic in September 2009 against the same month last year. IATA chief Giovanni Bisignani says 2009 was "annus horribilis" that cost the industry "two years of lost growth".

In India, too, the year has not been easy for the aviation sector. Traffic has fallen through most of the year and capacity has been cut steadily. But losses have remained high due to low yields — not enough capacity reduction and high costs for some of the carriers.

The legacy carriers — Air India, Jet Airways and Kingfisher Airlines — continue to have a particularly bad time. Air India's problems drew attention at a national level. It is now expected to get close to Rs 2,000 crore of equity from the government by the end of March 2010. However, it is yet to show any visible improvement in its performance.

Jet Airways, which has been trying to raise funds for the past three years without much success, reiterated its intention to do so. But willing investors remain few and far between. The same holds true for Kingfisher Airlines, which has also been trying to raise funds. Jet has undertaken a major restructuring of its operations and a sharp cost reduction programme. But the same cannot be said for Kingfisher whose initiatives appear to be either missing or being done covertly.

Smaller airlines also felt the heat in 2009. MDLR stopped flying and Go Air remained as it has for a while — in the shadows.

Only two of the low-cost airlines, IndiGo and SpiceJet, gave hope that it is not curtains down for the sector. Going by media reports, IndiGo made some money in one quarter. SpiceJet managed to pull itself out of a troubled and lethargic phase it went through in 2007 and partly in 2008, with a change in management and leadership.

Will 2010 actually bring some relief or will it go the way 2009 did? Predicting aviation trends is a mug's game, as IATA's experience shows. However, it has gone ahead and predicted a loss of $5.6 billion globally in 2010, up from its earlier forecast of $3.8 billion.

But in India, aviation company executives are hopeful about the next year. They claim that capacity and cost cuts will help pave the way to profits. Already, they feel that there are clear signs of traffic and loads rising (although in many cases loads have risen because capacities have been cut). They expect a turnaround halfway through 2010.

Many analysts and observers agree that 2010 is likely to be better than 2009. But this is mainly true for the low-fare airlines. Most feel that recovery will be a long haul for the full-service carriers in India. Their accumulated losses are high, investors are staying away, and some of the main operation and tax constraints that they face in India are yet to be tackled. Moreover, all three have problems with their respective mergers. They urgently need to look closely at their entire model and restructure operations. Competing with international airlines for foreign traffic is not easy as they offer better connectivity and frequencies. Also, the large full-service airlines are unable to charge a whole lot more than the low-cost airlines on domestic routes in an environment where passengers are shying away from air travel and few are willing to pay any more than what is absolutely necessary. So, competing with the low-cost airlines means charging fares similar to theirs. Unless their costs, too, become comparable, they must realise that it is a losing battle.

anjulibhargava at gmail dot com

(This story was published in Businessworld Issue Dated 28-12-2009)