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BW Businessworld

An Uncertain Takeoff

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resources (Pic by Amit Verma)

Jet airways’ and kingfisher airlines’ attempt to save themselves from daily losses of Rs 10-15 crore through an alliance is reverberating across India Inc. The airlines’ woes are the first tangible sign that the slowdown gripping western economies is spreading to India. If the airline industry is indeed a predictor of larger economic trends, then the future looks bleak. Within a day of announcing the alliance, Jet Airways sacked 1,900 employees.
Both airlines have also turned to the government for succour and asked for Rs 5,000 crore in easy credit, as well as tax cuts, lower airport charges and reduced air turbine fuel prices. While Aviation Minister Praful Patel strongly supports these demands, the finance ministry has demurred. Earlier it had rejected a plea from Patel to waive the 8.24 per cent excise and 5.14 per cent custom duty levied on air turbine fuel (ATF). The Left parties are strongly opposing any “bailout”. Since only 3 per cent of Indians fly, the state should use its money to shore up the railways and public carriers Indian Airlines and Air India, they say.

Other critics are asking why Vijay Mallya and Naresh Goyal, both wealthy individuals, have not tapped their personal fortunes. While the airline industry is facing market challenges, many of Jet’s and Kingfisher’s problems stem from their own mismanagement. Both airlines have expanded very rapidly despite warnings from analysts. Between them, Jet and Kingfisher have about 190 aircraft. Though they initially plan to ground about 15 aircraft after the alliance, further downsizing would be prudent, analysts say. Both airlines also carry huge overheads. For example, Jet pays Bollywood personalities Shah Rukh Khan, Javed Akhtar and Yash Chopra about Rs 10 crore to sit on its board.

The commercial sense of the alliance is also generating debate. “It is a very unusual alliance,” says Ankur Bhatia, CEO of Bird Group, a travel company that also represents the global distribution service, Amadeus, in India. “Globally, alliances are among complementary airlines, such as Star Alliance, but not between competing airlines that depend on the same routes.” Since Kingfisher is yet to commence its international flights to Europe or the US, it could sell seats on existing Jet flights to those destinations. But code sharing between the two airlines will require significant re-planning of flight schedules and tweaking of reservation systems, says Gurvindar Pal Singh Arora, senior manager at business consultancy KPMG.

Supporters of the alliance say it will help both airlines out of their financial nosedive. “The payload improvement through flight timing adjustments and route rationalisation will help them raise their revenue per passenger per kilometre,” says Ajay D’Souza, head of research at Crisil. Kingfisher Chairman Vijay Mallya has said that the alliance will save both airlines Rs 1,500 crore over the next year. But since Jet flies Boeings and Kingfisher Airbuses, it is not clear how they will enjoy technical collaboration or cost-cutting. But most important is the issue of creating a precedent. With many other industries likely to hurt from the slowdown, any support to the airlines could spur similar demands.

(Businessworld Issue 21-27 Oct 2008)

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