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Business News/ Companies / Slowing economy ushers in a tough year for airlines
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Slowing economy ushers in a tough year for airlines

Slowing economy ushers in a tough year for airlines

Air India pilots deboarding. Photo: MintPremium

Air India pilots deboarding. Photo: Mint

New Delhi: The finances of airlines in India may worsen next year if slowing economic growth dampens demand for travel, compounding problems for the carriers that have struggled throughout 2011 because of high fuel prices, weakening rupee and mounting debt.

“Growth in passengers has been the only redeeming feature of 2011," said Jitender Bhargava, a retired executive director of state-run Air India. “Now, imagine 2012, with general recession in the offing and a euro zone crisis almost certain. If these high (passenger) loads turn into medium or low and with low fares, you can look at the consequences. The writing is on the wall."

Air India pilots deboarding. Photo: Mint

High fuel prices, which account for about 40% of an airline’s total cost, have been the biggest contributor to airline’s losses. Jet fuel prices have more than doubled to 63,739 per kilolitre in December from 31,750 a kilolitre in December 2005, according to data from Indian Oil Corp.’s website.

The depreciation of the Indian rupee, Asia’s worst-performing currency, against the dollar has raised costs further as most of the aircraft leases and spare purchases are denominated in dollars. A weak rupee also increases import costs of fuel and raises repayment costs for airlines.

The 23.3% decline in BSE Ltd’s Sensex this year, the second-worst performer among Asian benchmark indexes, has made it tough for airlines to raise money by selling shares. Plans to raise as much as $1 billion from the capital markets by airlines have been deferred.

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To make matters worse, a new ground handling policy could be implemented subject to a court verdict. Airlines oppose the policy as it may raise handling charges. Besides, additional charges levied by operators to finance the construction of Delhi and Mumbai airports may kick in next year after the regulator decides on them.

There are four scenarios that decide the fate of the airlines’ balance sheets, said Bhargava. “The first is a high flight occupancy and high fares which is very good for the industry; high occupancy and low fares is manageable; low occupancy and high fares is also manageable but low occupancy and low fares is disastrous for the industry."

The year 2011 was bearable for the airlines because it fell in the second scenario with 70-88% occupancy, Bhargava said, referring to the 17.6% growth in the number of passengers carried in local routes in the 11 months to 30 November.

As financing becomes hard to find and the economy slows, Jet is looking at ways to cut costs.

“The airline has attempted to control costs wherever possible and is continually looking at several non-payroll areas to optimise costs, but without pruning our workforce," said a spokesperson for Jet Airways.

The airline is looking at areas, including contract renegotiations, improvement in processes, increasing ancillary revenues and sale and leaseback of some of the aircraft to repay existing high-cost working capital loans, the spokesperson said.

Still, state-run banks may stop lending to airlines because of their worsening finances, which “could create a political issue in itself," according to Capa. Air India, however, is expected to get government approval for a 25,000 crore bailout that will be spread over the next 10 years. SpiceJet has raised money through a sale of preferential shares to its controlling shareholders.

“The most revealing happening was the public disclosure of Kingfisher’s dire status, due mostly to mismanagement, wrong strategies and suspected interference from the primary stock holder," said US-based Steve Forte, a former Jet Airways chief executive. “Otherwise, the trend followed a predictable curve that mirrors the major economies in the world. As the year progressed and world crisis worsened, so did aviation results. Even Jet Airways, normally a fairly healthy carrier, lost money as the year went on."

Mallya did not comment on how did he look back at 2011. A text message to Mallya remained unanswered.

Liquor baron Vijay Mallya’s Kingfisher has pledged assets ranging from its brand to office furniture for bank loans of as much as $1.2 billion already. Goa’s Kingfisher Villa, famous for new year parties hosted there, two helicopters, Kingfisher’s headquarters in Mumbai and shares have also been used as collateral for loans as of 30 November, minister of state for finance Namo Narain Meena told Parliament in December.

“The market in India has developed faster than in most other countries; however, it has not developed in a regulated, intelligent and profitable way as it should have been," said Forte. “Great expansions were pursued based on market share rather than on calculated profits."

While the pace of growth in the market may continue in the long term, questions on profitability of the carriers will remain. Between 2012 and 2017, airlines are expected to grow at an average annual rate of 12%, according to the aviation ministry.

This means that the number of domestic passengers is expected to almost double to 209 million by 2016-17 from 106 million at the end of the last fiscal.

Critical to the turnaround of Indian carriers will be the fate of Air India, which is estimated by Capa to post $1.75 billion in losses in the year to March.

“For Indian aviation, the biggest problem remains with Air India and the government stranglehold on it. How long will taxpayers be willing to subsidize such (an) economic black hole?" Forte said. “Even in Italy, not one of your more efficient countries in the world, after years and years of subsidies they finally let go and bankrupted Alitalia, now reborn with private equity. When is enough, enough?"

For most of the year Air India had priced its tickets much less than rivals Jet and Kingfisher in a bid to win market share. While the strategy helped Air India boost market share, it put pressure on rivals to match the fare to prevent erosion of their market share. Air India relented in November, raising fares to peg it just above the ticket prices of low-fare carriers after complaints of undercutting from private airlines.

“The only way to see a bright spot in 2011 would be to compare it to 2012. Because 2011 will look good compared with 2012," said Bhargava.

tarun.s@livemint.com

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Published: 26 Dec 2011, 11:09 PM IST
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