Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday

Airlines ignore ‘unsustainable’ worries, float on growth story

Airlines ignore ‘unsustainable’ worries, float on growth story
Comment E-mail Print Share
First Published: Tue, May 29 2007. 11 48 PM IST
Updated: Tue, May 29 2007. 11 48 PM IST
New Delhi: Emergency landings, chronic delays and millions of rupees in losses—and that’s just for the month of April.
The Indian airline industry has grown at breakneck speed, with a huge increase in passenger numbers, the formation of new airlines by entrepreneurs, ready financing from banks and aggressive sales campaigns by Boeing and Airbus.
Now, at a time when many Indian airlines had predicted that they would be profitable, the industry is still haemorrhaging money, and some operators are struggling to meet day-to-day expenses even as they order more planes.
Outdated airports are staggering under the crush of passengers and flights. The arrival on Sunday in New Delhi of the first giant double-decker Airbus 380 on a three-day tour required the grass shoulder of the runway to be mowed and picked clean of rocks.
Kingfisher Airlines, the homegrown start-up that began operating two years ago, has ordered five of the planes and has options for five more, despite the fact that it has not yet made a profit.
Optimists in the industry, including many of the entrepreneurs who are backing the airlines, repeat a familiar mantra in India: Growth will take care of the problems. India’s economic expansion and its increasing links with international business means there is plenty of room for a multitude of carriers as passenger traffic surges, they say.
India has the fastest-growing number of passengers in the world. The number taking domestic flights jumped nearly 50% last year, and that total is projected to increase more than fivefold by 2020, to 200 million a year. “You have to look at the opportunity that is out there,” said David Velupillai, an Airbus spokesman who arrived aboard the A380. “The thing that drives air travel is economic growth,” he said, pointing to India and China. “We’ve consistently underestimated what the total Indian market will be,” he added.
Many airports are being upgraded. GMR, an infrastructure and power operator, is building a state-of-the-art airport near Hyderabad. The airport expects to attract 40 million passengers a year and will be fully outfitted with hotels and shopping malls on the expectation of being a hub linking Europe and the rest of Asia.
Just three per hundred people travel by air annually in India, compared with about 10 per 100 in China, said T. Srinagesh, chief operating officer of the Hyderabad airport project. Given the size of India, lifting that low figure to just six would mean “plenty of traffic for us”, he said. But considering the industry’s current state, fulfilling those rosy predictions could take some work.
Competition is so cut throat that carriers lose $10 to $15 (approx Rs410 to Rs615) a passenger per flight, according to the Center for Asia Pacific Aviation. Maintenance crews and airports are stretched to their limits as new passengers take advantage of supercheap flights. The industry is losing half a billion dollars a year.
So far, emergencies have been minor, like a collapsed wheel on an Air India plane that left it tipped on a runway in April, and no one is suggesting that Indian airlines are unsafe to fly. But the industry is unsustainable as it is, its critics say. “The entire industry is operating with fares below their costs,” said Kapil Kaul, who heads the Center for Asia Pacific Aviation. “Mergers, acquisitions and liquidations are necessary.”
A shakeout in the Indian airline industry may already be under way, but it is not happening fast. After months of negotiations, Air Sahara agreed to a takeover by Jet Airways in April.
The two government airlines, Air India and Indian, are expected to sign a long-awaited merger this year.
Air Deccan, the first low-cost start-up, has been searching for an investor that might include a partnership with Kingfisher, bankers and analysts say, though Air Deccan denies any plans to link up.
Part of the problem is personality. Most of the executives at India’s new airlines are entrepreneurs with deep pockets. Most contend that they are going to come out on top.
Kingfisher, owned by Vijay Mallya, the magnate who produces beer under the same name, is not going to run out of money any time soon. But Air Deccan’s future is in doubt. The company has suffered a loss of Rs213 crore in the first quarter of 2007, even though MD G.R. Gopinath had promised that it would become profitable by December.
In some cases, readily available foreign cash has stoked airline executives’ convictions. BNP Paribas, Goldman Sachs and the Dubai government’s private-equity arm have invested in Spice Jet, and HSBC in Jet Airways. Private-equity players, who are having a hard time finding places to put their piles of cash in India, are sniffing around: most recently, TPG Inc, better known as Texas Pacific Group, has looked at taking a stake in Air Deccan.
“These investors are betting on their own horses and waiting for the others to die,” said Gautam Roy, an analyst with Edelweiss Capital in Mumbai. “All these companies have strong investment backing, and that’s not going away.”
Until these sources of capital cut their losses and close their wallets, the industry’s woes can’t be reversed, analysts say.
Roy estimates that about 15% of the industry’s capacity needs to disappear before the industry can make money.
“It’s a situation where more money coming in is bad for everyone,” he said, except—for the short term—for the carrier that is getting the cash.
Aircraft manufacturers have also played a role in the industry’s overcapacity, some say.
“Airbus and Boeing have been very aggressive,” with a total of 400 to 450 new aircraft on order from India, Kaul said. “Most of these companies have slim resources, and some of them don’t have the cash to run their daily operations.”
Of the $188 billion in Boeing back orders, Indian carriers make up $20 billion. Air India has ordered 68 planes; Jet Airways is awaiting nine; its new subsidiary, Air Sahara, has ordered 10; and Spice Jet has also ordered 10.
Most of these back orders already have guaranteed financing in place, thanks to the US Export-Import bank, which guarantees loans so as to increase trade with the US.
“We feel very, very comfortable—we don’t lose sleep at all,” said Dinesh Keskar, a vice-president for sales at Boeing.
Velupillai said Airbus planned to deliver 1,100 aircraft to India, worth $105 billion, over the next 20 years. He said there was such high growth in India and such high demand for aircraft that he was not worried about Airbus’s exposure to any particular carrier.
Comment E-mail Print Share
First Published: Tue, May 29 2007. 11 48 PM IST
More Topics: Corporate News | Sector Spotlight |