New Delhi: Despite the government restricting access to international routes, Indian airlines are queuing up to fly them attracted by higher profit margins, a 20% growth in passenger traffic every year, lower operating costs and cheaper jet fuel.
Kingfisher Airlines Ltd, SpiceJet Ltd and Paramount Airways Pvt. Ltd are gearing up to go global. Kerala has even floated an airline, Air Kerala, to fly only international routes.
Aiming high: Aeroplanes of different airline companies at the Delhi airport. India only allows carriers with five years’ experience on domestic routes to fly.
Air India and Jet Airways (India) Ltd are currently the only airlines flying international destinations. India only allows carriers with five years’ experience on domestic routes to fly overseas.
The goverment is willing to relax the current guidelines but a group of ministers, responsible for finalizing the new aviation policy, has not been able to reach a consensus.
Total size of the global market in 2007 was about $490 billion (Rs19.3 trillion) for airlines part of the International Air Transport Association or IATA. IATA’s 240 member airlines account for 94% of all international traffic. The total net profit of IATA carriers was $5.6 billion in 2007, representing a wafer-thin 1.1 % net profit margin. The net profit of these airlines is expected to fall to $5 billion in 2008, according to IATA.
According to an analyst with a leading domestic brokerage, the size of international market for flights into and out of India is about Rs30,000-35,000 crore. Out of this, the West Asian market accounts for 25% and the South-East Asian and European market account for 15% each. Other key markets include the US.
“Globally, international traffic grows faster than domestic (traffic) and so (it) is (an)...interesting opportunity. In India, (the) domestic (market) has been growing faster resulting in excessively low fares. International routes are more attractive since they are restricted by the government,” says Craig Jenks, president of Airline/Aircraft Projects Inc., a leading New York-based air transport consulting and advisory services firm. A restricted access means fewer airlines fly these routes and that, in turn, means less competition and more profitable tariffs.
Indian carriers seem to be well aware of these facts. According to Hitesh Patel, executive vice-president of Kingfisher Airlines, which recently acquired a controlling stake in Deccan Aviation, historically, margins are higher on international routes.
K.G. Vishwanath, senior general manager (MIS and investor relations) of Jet Airways, which operates international flights to the US, the UK and West Asia, says going global is a logical extension for any domestic airline as there is huge opportunity. “Indian private carriers can compete with any international airlines on the service standards and are capable of capturing the market share up to 50%,” he adds.
Until recently, the international market was under-served, and the state-owned Air India was the only airline entitled to fly overseas because of government regulations. Given its inadequate fleet size, Air India ended up barely using 50% of seats of its entitlement under most agreements between Indian and foreign governments.
Flights between countries are decided on the basis of agreement between the respective governments. Jet Airways started its international operations in March 2004.
“International routes carry about 30 million passengers a year, growing at 20% every year. Generally, it will take at least 12-18 months for making an international route profitable but West Asian routes take a year (to become profitable). Most profitable international routes include West Asia, the UK, the US and South-East Asia,” says Vishwanath of Jet Airways.
Wolfgang Prock-Schauer, CEO of Jet Airways, points to one reason to explain why the cost in international operations is less. “Long-haul operations is always profitable since it lowers the operations cost. Bigger planes will offer you three times bigger capacity than small ones in domestic routes. Margins for international are always more than that of domestic depending upon sectors,” he says.
Yet another advantage is that jet fuel prices are much cheaper for international operations in India as well as abroad.
Kapil Kaul, chief executive officer (Indian subcontinent and Middle East), Centre for Asia Pacific Aviation, an international aviation consulting firm, says the international routes have potential in terms of volume and strong demand for first and business classes and this will result in better profit margins for airlines.
However, there are risks too. For instance, the profitable India-UK route has already been saturated. “You need to have a different business model. We are planning all non-stop overseas operations,” says Kingfisher’s Patel.
Other risk for domestic carriers, which collectively reported a loss of Rs2,000 crore in 2007, is the significant investment required in operating international routes and competition from established and huge international counterparts.
To compete with international carriers, an Indian airline “needs to have globally competitive standards and appeal, which up to now Jet Airways has had and Air India has not had (although it did have this decades ago). To obtain high recognition and acceptance in countries other than one’s own is not easy,” cautions Jenks of Airline/Aircraft Projects Inc.
Indian carriers ferry only about 35% of total international passengers travelling to and from India. Among international carriers, airlines from the Gulf account for the largest portion (20%) of India’s international passenger traffic, with 80% seat occupancy on this route, says Sidharth Agrawal in his report for the research department of IL&FS Investmart Securities Ltd.