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Dim And Dimmer

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For the past several weeks, two major airlines in India — Kingfisher and Air India — have been running with truncated schedules or less aircraft or flights than usual. The former has been operating with fewer aircraft since last November. Aviation analysts expected this would result in gains for other airlines, especially Jet Airways, which would be in a position to capture some of Kingfisher's lost market.

However, quarter after quarter, India's leading private airline Jet Airways has also been losing money. The fact that the airline is not able to turn in profits even during a peak season quarter and when its loads are at an all-time high is evidence that the airline has its own set of problems that need to be resolved.

IndiGo, second in the skies after Jet, is the only airline that is reportedly making money, albeit less than last year, and less perhaps than what they expected. It is pretty evident from all this that there is something fundamentally wrong with India's aviation sector.

According to the latest Capa estimate, in the 12 months ending 31 March 2013, Air India is once again expected to be the worst performer in the industry and report a loss of $1.3 billion. Kingfisher Airlines is projected to lose $220-260 million. And for some reason, Capa estimates that the remaining four private carriers combined could post a modest profit of approximately $200 million (I am not too sure about this; going by 2011-12 financials, all private carriers, barring IndiGo, were losing money).

Most of the airlines are also heavily in debt. According to the Capa report, the carriers together have a total debt burden of $16-17 billion, which could rise to $20 billion over the next 12-18 months. Airports have an additional debt of $2.5-3 billion. Indian banks, as a result, have a massive exposure of $9-10 billion to the aviation sector.

I also think that Capa estimates for FY2012-13 may be rather optimistic and things could turn out to be worse. There are both general and airline specific reasons for this.

For one, fuel prices could play a spoilsport. For the past several months, oil prices have been rising and this has had a severe impact on airline costs, especially in India where taxes on ATF (aviation turbine fuel) remain high.

Then, there is the impact of the rupee weakening. Most calculations would assume a dollar-rupee rate of Rs 51-52. However, the fact is that the rupee has weakened dramatically over the past 12 months and shows no signs of strengthening. For airlines, many of their payments are made in dollar terms, while only a small portion of their revenues are in dollars (for the carriers that fly international). Even aircraft purchases will prove costlier with a weaker rupee.

Another factor adding to the airlines' cost will be the increased charges across airports. While the increase at Delhi has already been approved, Mumbai, Chennai, Kolkata and Bangalore will soon be following suit.

Then there are airline-specific problems that don't seem to go away. Air India is still recovering from its month-long pilot strike (although it may turn out to be a blessing in disguise). The airline has so many problems to resolve that I don't envy Rohit Nandan and his team. Kingfisher is sputtering along for the past few months but no revival is in sight.   Allowing foreign airlines a 49 per cent stake in domestic carriers, if it happens, is unlikely to bring much respite. In fact, Emirates president has said that "much more is needed than just 49 per cent stake" for any foreign airline to put its money where its mouth is.

There is little noise about it as of now, but I think GoAir could well be the next Kingfisher. According to a former GoAir employee, the airline's losses, net of interest, are actually higher than Kingfisher's on a per aircraft basis. While it has a lower level of borrowings, according to the employee, "it will soon face a huge cash crunch and high borrowings, given the pre-payments for 72 A320 Neos".

One of the major problems with some of these airlines — the smaller ones like GoAir and SpiceJet — has been a fairly high churn. According to one source, GoAir in the past three years has had four HR heads, three chief financial officers and five heads of sales and marketing. The current CEO is its third. Although the airline's promoter claims he is a "tortoise who is here to run a marathon", it remains to be seen whether there is anyone left to run it with him! SpiceJet with its recent change in management also lost most its old trusted hands and is again in a phase where it is setting its house in order.

No matter which way one looks at it, Indian aviation is not an industry where one wants to be in at the moment; I don't see any light at the end of this seemingly endless dark tunnel.


(This story was published in Businessworld Issue Dated 25-06-2012)