High Flyers Low On Cash

The monsoon may have been a tad slow in arriving, but in India, it is raining aeroplanes all of a sudden. Since the second half of 2010, budget airlines in India have been on a roll.

In November 2010, SpiceJet, whose ownership changed that year, ordered 15 Bombardier Q400 planes to launch its regional operations. In addition, it ordered 30 B737-800 aircraft to expand its existing operations. It also placed on option an order of a further 15 Q400s.

In January 2011, IndiGo announced a mammoth order of 180 Airbus A320s (150 A320Neos and 30 A320s) for close to $16 billion. In 2005, the airline had ordered 100 A320s, 44 of which it has already taken
delivery of.

At the Paris Air Show this year, GoAir — which most aviation industry observers consider something of a lightweight — placed a huge order for 72 aircraft (A320Neos) in a $7.2-billion deal. The airline expects to take delivery starting 2015 till end-2020. Another 10 options for regular A320s have been firmed up, and these will be delivered over the next 18-24 months.

That this is quite ambitious can be gauged from the fact that GoAir's existing fleet comprises only 10 A320s (the airline started in 2005). In comparison, rival IndiGo, which started a bit later than GoAir, operates around 39 A320s already. SpiceJet has a fleet of 30 B737-800/900 with another 33 due to be delivered.

There are two or three things worth noting about these developments. One is that all the action or so-called action is happening only with the budget airlines. It is only these airlines that are in the news, have something positive to report and have any plans worth speaking of. How far their plans will actually materialise is hard to say, but that budget airlines are going ahead with all guns blazing is evident in their announced intentions.

So silent are the full-service airlines in India — even in the media — that you may be forgiven for forgetting their very existence. They are all subdued — none of them are placing new orders. Kingfisher, in fact, has postponed taking delivery of some of its past orders. Even these airlines' budget wings (Kingfisher Red and JetLite) are not expanding and are nowhere in the low-cost pecking order.  

Air India is supposedly excited about taking delivery of B787 Dreamliners, though more than one official will tell you that they have no idea what they will actually do with them. Some almost comical media reports have suggested that these aircraft coming in could change the fate and the course of the airline or could be the panacea for Air India. However, many in the airline believe that adding these expensive planes to their fleet without any concrete utilisation plan could well be the final nail in an already highly-punctured coffin.

A second point is that while there may be optimism in the air, none of the airlines — be it Kingfisher, Jet Airways or GoAir — has been able to raise any external funds in a long, long time. The last time was in 2006 when Air Deccan raised some money through its initial public offering (IPO).

Jet Airways has been trying to raise funds through rights issues since 2006 but has consistently failed in its bidding. Whenever the airline has tried to raise funds, the market conditions have not been conducive. Since it has been over five years, it is reasonable to assume that as far as aviation is concerned, few investors are willing to put their money where their mouth is. Kingfisher, too, has been talking of raising funds through various routes, but that is what it has remained so far — just talk.

GoAir and IndiGo are also looking at raising money from the public, but one will believe it when one sees it. While the latter may generate interest in a public offering (since it has been profitable and is arguably the best run among the low-cost carriers in India), timing it right may remain a challenge.

The airline industry is vulnerable to all kinds of externalities and to quote one of my favourite quotes (attributable to a senior Jet Airways official): "Aviation is a business that is affected by God (nature), politicians, bureaucrats, terrorists, equipment manufacturers, global economy, bugs, oil and non-oil vendors, investors, commentators, the market...", the list goes on.

So the airlines that have ordered planes must keep in mind that a large proportion of their orders may need to be financed through internal funds or debt. With Air India and some of the other full-service airlines reeling under debts, the budget airlines must ensure they do not follow suit.

anjulibhargava(at)gmail(dot)com

(This story was published in Businessworld Issue Dated 25-07-2011)