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Trouble in the transit lounge?

Global ambitions and new fleets are powering dreams in Indian airline firms. But a global slowdown, cutthroat competition and high fuel prices pose some problems. Lalatendu Mishra reports.

india Updated: Apr 22, 2008 00:17 IST
Lalatendu Mishra

India’s biggest carrier Jet Airways is on an overdrive. So is less than three-year-old Kingfisher Airlines, which is venturing overseas, even at a toddler age.

While that happens, Air India’s Maharaja, once dismissed as an ageing discard, is bouncing back in a new avatar with brand new birds to fly long hauls non-stop—and a mission to change the state-controlled company’s flagging image.

On the face of it, it seems as if every Indian carrier is trying to move out of the domestic market, which is growing at 20 per cent per annum. But then, growth for growth’s sake may not be everything. The carriers are bogged down by all-time high jet fuel prices, rock bottom yields on account of low fares arising from cutthroat competition and excess capacity caused by what critics dub as a mindless addition of aircraft by new operators over the last two years. All Indian carriers, which are already in the red, will report an estimated collective loss of a staggering Rs 4,000 crore ($1 billion) as they announce their results for the financial year ending March 31, 2008.

But there is no stopping of their harbouring overseas ambitions.

Jet Airways, Naresh Goyal’s airline, which he started in a modest way in 1993, is swiftly opening international routes and aspires to be one of the world’s top five airlines in just about four years. Between August 2007 and now, Jet has opened new international routes to multiple destinations in the US, West Asia and now to Hong Kong and plans to hit China by June, making it one of the fastest growing international airlines from India.

“I have not seen any other airline adding so many aircraft and opening new international routes. In the last one-year we added 20 new aircraft in our fleet and more are coming,” said Jet Airways’ CEO Wolfgang Prock-Schauer, an Austrian national who previously worked with Austrian Airlines.

In about a year’s time, 50 per cent of Jet’s total capacity would be dedicated to international services and it hopes to break even with profits in 18 months after opening a new route. In 2006 and 2007, it did not add any capacity in the overcrowded domestic sector but plans to increase domestic capacity by 15 per cent in 2008. Similarly, other airlines such as Kingfisher, Deccan and SpiceJet are slowing down their aircraft induction to address the problem of overcapacity, which is forcing them to sell tickets far below the cost.

Vijay Mallya’s Kingfisher Airlines is getting ready to fly international from August 2008 by utilising the licence of Deccan Aviation, which is now part of its fold. Mallya had to invest more than Rs 1,000 crore to acquire Deccan so that his airline could use Deccan’s rights to undertake overseas flights without completing five years of flying experience as required by government norms and to rationalise domestic prices.

In his determination to make Kingfisher the world’s best airline in service Mallya has sunk more than Rs 1,000 crore in running the airline since its launch in 2005. He is investing more money in buying wide-bodied aircraft and setting up overseas operations.

Not to be left behind, low-cost airline SpiceJet is also lobbying hard to fly into West Asian sectors, hoping to make money from flights to the area rich Indian expatriate workers. But how much profit can international flights generate? “The international long haul market is very complex, extremely competitive with low yields and is marginally profitable. The key is to sell the first and business class seats as otherwise it is not sustainable. The regulatory environment is negative though there are visible signs of change and downturns in business cycles are very sharp,” said Kapil Kaul, CEO- for India at consulting firm Centre for Asia Pacific Aviation (CAPA).

However, Indian carriers would have a unique advantage, as the economy is overall expected to grow by 8 per cent or more annually until 2020. The 300 million middle class potential target market, large NRIs in key markets like the US and UK, India’s strategic geographic location and massive investments in airport infrastructure are expected to drive growth momentum.

“The compelling market dynamics will also ensure fierce competition from Lufthansa, Singapore Airlines, Emirates, British Airways, Air France and KLM,” Kaul added.

CAPA expects Jet and Kingfisher to be major players in the future with the large possibility of making strategic acquisitions in Europe. “High fuel prices are a threat to the entire industry and can result in exits but I also think industry is better prepared to confront this challenge unlike in the past, Kaul said adding “the only worry for India carriers is the ability to raise capital under the present circumstances. Access to capital is key for Indian carriers as they have massive roll out plans.”

While top-class service aided by relatively inexpensive crew and a growing market of Indians flying overseas are the main strength for Indian carriers, their biggest weakness could be their aggressive ambitions riding on weak balance sheets. They must watch out for hub-based airlines like Emirates from the Gulf and Singapore Airlines, which are getting more hauls into India. The Wharton School of Business suggested in a recent report that glamour could be driving investments into airlines. “The airline industry still remains glamorous in spite of high mortality rates,” said the report quoting Charles Dhanaraj, professor of management at the Kelley School of Business in Indiana University.

The report quotes Deccan’s executive chairman Captain G R Gopinath as saying: “The glamour quotient of the industry does attract entrepreneurs and investment. But that alone cannot create a successful business.”

Pilot shortages are a reality, though fuel prices are a bigger drag.

“Indian staff costs are a huge advantage. The costs of Jet and Kingfisher KFA will be much lower than their global competitors with huge legacy costs,” Kaul said.

But some caution that Indian aviation staff may be low on productivity.

Yields are also a key issue. One airline’s chief financial officer said the yield per passenger in the Mumbai-London sector was Rs 1 to 1.25 per passenger km, while the domestic sector offered a much higher yield of between Rs 3.50 and Rs 4.

Low-cost carrier Oasis Hong Kong Airlines shut shop earlier this month citing massive losses blamed on long hauls to London and Vancouver. Long haul costs in parking, landing, ground handling, staff expenses and hotel layovers add to pressures, though jet fuel rates are cheaper. In India, Air Turbine Fuel prices have gone up by an average to Rs 57,000 per kilolitres (1,000 litres) from Rs 40,000 a kilolitre, last April. Air India, which has been operating international flights for several decades, makes more money from the nearby Gulf routes. An airline needs to have an 80 per cent load factor to break even in the long haul routes as compared with 65 per cent in the domestic sector, experts say. Then why go international?

“It is a question of pride. Irrespective of the financial outcome, owners get high on flying international and in getting rid of the regional player’s tag,” said a senior airline officer who asked not to be identified.

This year will be more challenging as international oil prices have crossed $116 a barrel, threatening the existence of many airlines across the globe. Four airlines including three from the US—ATA Airlines, Aloha Airlines and Skybus Airlines—have ceased operations and Delta Air Lines is acquiring North West Airlines primarily to tide over rising jet fuel prices.

The world’s third most profitable airline Australia’s Virgin Blue last week sent shock waves in the industry by drastically lowering annual profit forecast from $216 million last year to $140 million for the current year.

According to Kaul, the likely US recession could hit roll out plans, as capital would dry up for Indian carriers. However, these are short-term issues and will not threaten the long-term prospects. Jet is scouting to raise Rs 1,600 crore, while Kingfisher is planning equity dilution to raise Rs 1,200 crore. But where is the money?

Despite all the issues surrounding low yields, fuel costs and more cash for investment, CAPA expects that next big name in the world of global carriers will be from India. “There is much to expect from Jet and Air India. Kingfisher will introduce a game-changing product. Expect Indian carriers to offer world-class services at competitive prices,” says Kaul.

Sometimes, pride seems to be more worthwhile than profit.