India's beleaguered aviation sector set for clearer skies in 2010

Indian aviation report, authored by Centre for Asia Pacific Aviation predicts that providing costs, capacity and pricing can be managed, the sector is due a change in fortunes in 2010.

Return to profitability

The report, Indian Aviation: A Review of 2009 and Outlook for 2010 expects India's 7 private airlines, operating 11 separate brands to achieve combined profits of over US$ 250 million in 2010-11.

However with combined debts of US$ 10 billion, the three main airlines - Air India, Jet Airways and Kingfisher Airlines - can't take recovery for granted.

The report written by Centre for Asia Pacific Aviation (CAPA) warns, "Airlines should not allow growth to distract them from focusing on restructuring their operations and profitability".

Domestic and International growth

Following 12 consecutive months of year-on-year decline in domestic traffic, July 2009 saw a return to growth. This continued and is set to lead to growth in domestic traffic of 15% during 2010, an increase on the expected 10% increase for the year.

International traffic that remained positive in the downturn is expected to receive a boost of 10-12%. These improved figures are set to improve profitability and yield.

Focus on budget travel

The most significant industry development has been the new focus on low cost air travel. A model that did not exist six years ago is expected to account for 70% of domestic capacity within 2010.

Five years ago, the report says 80% of air travel was for business; today the figure has been halved.

This change in emphasis has made cost more of an issue. The report explains that the transition to low-cost operations, "should allow the big three carriers to develop a more competitive cost structure, which is essential for their survival".

Further infrastructure investment

Recognising that infrastructure constraints would stifle the industry, the Government have spent US$ 10 billion on airport upgrades. This investment is now having a positive influence on customer experience and aircraft turnaround times and utilization. A further US$ 20 billion is expected in the next decade.

Change in industry structure

With competition still fierce CAPA expects consolidation, describing it as both "desirable and inevitable". In addition, the report encourages Government to make further reforms, amongst them a change in rules on Foreign Direct Investment.

International carriers attracted by the long term opportunity that India presents, are keen to enter the market. Despite the predicted industry turnaround, creating joint ventures through equity sale provides the quickest way for India's airlines to reduce debt levels.

December 29, 2009 Add a comment

India aviation shifts capacity to budget flights as sector wide bailout gets knocked back

With state owned Air India publishing their recovery strategy, government financial aid looks increasingly likely. The sector at large is struggling and privately owned airlines are unable to force government's hand for a sector wide bailout, consequently the industry has been forced to switch focus to no-frills budget flights.

Air India are in debt to the tune of US$ 1.5 billion, India's government has pushed for substantial changes before committing to financial assistance. Chairman and Managing Director, Arvind Jadhav has responded with a major overhaul of the airline.

New structure and plans for IPO

Four, more manageable business units are to be created, cargo, engineering services, ground handling and airline operations. This provides potential for new revenue streams, as outsourced services can be offered to other airlines. Jadhav expects the next nine months to be about survival, medium term plans are for an IPO.

Renegotiating loans, leases and credit

The airline will ask banks to defer loans, leased aircraft will be returned and credit extensions on jet fuel payments will be discussed with state run oil providers.

Wider sector bailout - threats of strikes

The Federation of Indian Airlines (FIA) expects industry losses of around Rs 570 billion (US$ 11.9 billion). They and their privately owned members want an industry wide bailout and have tried forcing the issue without success. FIA and their members announced a 24-hour strike, grounding all domestic flights on August 18. Secretary General of the FIA, Anil Baijal commented, "We have thought about this and now we think the time has come for the government to bail out the private carriers".

Despite the strong stance the strike was cancelled. FIA claimed they didn't want to inconvenience passengers, speculation is that budget carriers IndiGo, SpiceJet and GoAir - who have a better cost structure - pulled out as they were not prepared to support costlier and consequently poorer Kingfisher and Jet Airways.

Switching to low cost

In addition, to the restructure, Air India plan to shift 150 flights a day - about half of Air India's domestic flights to their low-cost carrier, Air India Express. Jet Airways and Kingfisher are now following, switching their domestic fleet to budget flights.

India's budget airline fleet totaled 75 planes in January, Kapil Kaul of The Centre for Asia Pacific Aviation believes that number will grow to 160 by end of year, near 80% of India's domestic capacity. Ticket fares are likely to drop 25%.

Lack of demand

Refocusing on budget travel is a wise decision, low-cost air travel led the sectors growth in the first place, but only between 2% and 4% of the population fly, the rest use rail and road due to cost. India's aviation industry grew quickly, opening new routes and growing fleets, the failure to date has been the inability to stimulate demand in the larger market, consequently flights are empty and airlines unprofitable.

This may explain governments indifference. While they may prefer the industry to get its own house in order they must also recognise the importance of the sector to an emerging market. Division across the sector is no use, a common agreed strategy is required.

August 11, 2009 Add a comment

Air India has 30 days to shape up or face possible collapse

Crisis hit Air India and India's government are finally negotiating a financial bailout. The carrier - that suffered US$ 875 million losses during the last fiscal year - has 30 days to submit a restructuring plan to government before any form of investment is made.

Predictably, government has had to step in to prop up the carrier. Already struggling due to factors affecting all airlines, a bloated workforce and spiraling debt is making it near impossible for Air India to meet day-to-day operational costs.

Competition from leaner carriers

Following years of virtual monopoly, and restricted international competition, Air India is under pressure from leaner carriers. Share of passenger traffic has fallen from 38% in 2004 to 15%. Exacerbating the problem, the carrier has an employee-to-plane ratio of 210 employees, compared to industry average of about 150. In its current state Air India is no longer viable.

Leaner structure, lower costs

While Prime Minister Manmohan Singh is willing to approve investment of US$ 2 billion, it is contingent on a major business overhaul. Given Singh's decisive national election win, he may be tempted to privatize the carrier or even let it collapse. Although unlikely, newfound power gives him leverage over management and he must hope unions.

Praful Patel, India's aviation minister, has warned, "Air India must shape up, become leaner and trimmer, and also must put its best foot forward".

"Harsh decisions"

Chairman and Managing Director, Arvind Jadhav is trying to prepare his 31,000 staff members for new realities, "Considering the critical financial state of the airline, we should all be prepared to face the impact of harsh decisions that will be required to be taken in the coming weeks to meet the current difficult financial situation."

Management want to cut annual employee costs by more than 17%, or US$ 100 million, and have already asked senior staff to go without July salaries. The carrier is also looking at how to improve employee productivity and eliminate restrictive working practices. A committee has been set up to review existing wage agreements with unions. Despite Jadhav's hopes, the Jet Airways' experience of last year makes a union - management stand off likely.

Government is also reviewing the carrier's order for 100 new Boeing and Airbus aircraft. Changes at board level can also expected as Delhi seeks long-term change.

Remarkable failure of management

While Air India stress that the industry at large is in trouble and company spokesman, Jitendra Bhargava pleads, "Tell me, which airline is making profit, you can't view Air India in isolation, right?". Industry analysts aren't convinced by the argument.

Kapil Kaul, chief executive of Centre for Asia Pacific Aviation blames poor management and the fact that the carrier has not evolved to meet newer competition. Kaul comments, "Air India is an example of a remarkable failure, (it is) still an iconic brand, but unfortunately it has a reputation which is of an unreliable and shoddy airline."

Drastic changers are required. The airline, its staff, government and the unions must work together - and quickly - to reach a viable solution if Air India is to remain in the skies.

July 5, 2009 Add a comment

Development of India aviation at a "critical stage"

The challenges facing India's aviation sector, and the need for Government assistance have been covered previously by India Insights. Nothing appears to have changed. New research published by Center for Asia Pacific Aviation shows extend of the sectors demise and calls for new Congress Government to finally take action.

Double the debt

The report, "Aviation Agenda for The Next Indian Government" finds that sector losses for year ending March 2009 hit US$ 1.75 billion, double the year previous. Despite the fact Indian airlines contribute just 2% of world air traffic, Indian losses account for 20% of global airline debt, estimated at US$ 8.5 billion International Air Transport Association.

"Critical stage"

Kapil Kaul, Indian head of Center for Asia Pacific Aviation comments, "The industry now is at a very critical stage". Over expansion in an attempt to grab market share, high fuel costs and increased competition have left the ailing industry requiring drastic treatment.

Passenger nosedive

April saw domestic passenger numbers fall by an astonishing 591,000, a 15% drop on last year. All a far cry from past double-digit growth and projections of 25% annual growth through to 2010. Credit crunch and financial uncertainty has driven travelers back to the the more reliable railways.

Government intervention

Kaul recommends that Government help reduce operational costs, namely jet fuel taxes, "It needs to quickly restructure and the new Government has to help them reduce high structural costs". In addition, Kaul concludes that foreign airlines be allowed to take equity stakes in domestic carriers.

Industry rationalization

Air India has accumulated debts of US$ 800 million and Jet Airways reported third quarter losses of US$ 44 million, rationalization through merger, acquisition or bankruptcy is inevitable. Remedying the situation will be painful, how painful depends on whether Congress listen to the reports conclusions and chose to intervene. The industry must hope that their call is finally heard.

May 25, 2009 Add a comment