Mumbai: Amitabh Malhotra, director of investment banking firm N.M. Rothschild and Sons (India) Pvt. Ltd, has seen Indian aviation from close quarters since the sector was opened to private investments.
Bang for the buck: Amitabh Malhotra says the aviation industry should restore common sense in fares, pushing out the predatory pricing. Photograph: Ashesh Shah / Mint.
He was instrumental in bringing in the first private equity investor into Air Deccan (now Simplifly Deccan) in 2004. Four years later, Malhotra brokered another important deal — WL Ross and Co. Llc’s $80 million (around Rs338 crore) investment in Delhi-based low-fare carrier SpiceJet Ltd.
Malhotra says finding an investor for a private carrier in India, when the rising price of jet fuel is pulling down their profits, is a very tough job.
The SpiceJet deal will certainly not open up a floodgate of such deals in the industry that is gearing up for consolidation. There could be only two full-service and low-fare carriers each, Malhotra says in an interview. Edited excerpts:
How difficult is the job for an airline deal?
It’s extremely difficult to work on an aviation mandate and convince an investor even though such deals have a glamour quotient and give us visibility. We have done better transactions than this, but people talk more about the SpiceJet deal.
Incidentally, this is not my first aviation deal. I had helped Deccan Aviation Ltd to get private equity in 2004-05. I had also helped it to get a sale and lease back for its ATR planes. We were advisers to the GVK-South African consortium for the Mumbai International Airport project.
The SpiceJet deal is an example of changing times. When we were doing the Air Deccan deal, there were nine offers and we took only three to the data room. That was the time when supply was more favourable than demand. Now, it is the other way round.
What led Ross to invest in SpiceJet?
All airlines in the domestic aviation market are enjoying a level playing field when it comes to making losses. I would be glad to see more investors participating in Indian aviation sector.
It’s important to know why Ross has decided to make an investment in SpiceJet when other carriers in the market are queuing up to raise capital. The investment in SpiceJet speaks volumes about the company’s inherent business strength.
It’s no secret that SpiceJet has stuck to its core low-cost business model. It almost started making profits in its first nine months of operations of the last financial year (to March) before airlines started losing money because of the rising jet fuel prices.
What finally clinched the deal?
Ross has taken a view on oil and possibly on the company. Considering the opportunities in the sector, Ross has selected a firm where it is going to get the best for its bucks. It has invested money in a company that is on the path of profitability, has a decent market share and a strong business model.
SpiceJet was not blindly running after market share, though it is good to have that. Market share is not the name of the game. Instead of market share, I would like to believe in concept, service offering, value proposition, sticking to the business model and, financially, close to profitability, even at a time of adverse environment.
Do we see more such investments in the domestic aviation industry?
I don’t think this transaction will open a floodgate of investments for other airlines. There are bigger airlines with larger market share trying to raise funds in the market. Either they are not able to get investors or the promoters are not happy with the proposal that they have received. However, the degree of interest in aviation from investors’ perspective is diminishing.
I am hopeful that the SpiceJet-Ross deal will help airlines to wear a thinking cap and re-look at the need of consolidation in a realistic manner. The airlines are now taking away excess capacity and cutting routes. These are right things to do and they could have done these long back as these could have helped them cut losses.
What is your outlook on the aviation sector?
I am keeping my fingers crossed. Chaos is the right word to describe the current turmoil. The government needs to build quality airports, good air and ground infrastructure and the carriers should focus on economical, efficient and safe operations.
Predatory prices are only good at the time of entry, to spread awareness of brand and create an aura of your service offerings. You cannot have Re1 and Rs5 fare on a sustainable basis. And, there should be a vision in managing growth. These days, airline management is strictly telling the promoters not to buy an airline because they are still trying to manage the existing growth. May be a cliche, but I always believe in walking first before you run.
Is jet fuel price the villain of the sector?
Oil is not the only factor. Insane pricing is also taking its toll. But the capability of the carriers to weather the storm counts. All existing players are thinking that others will go bust. Whether that will really happen or not, consolidation will stop the insane competition. In 2004, jet fuel was accounting only 28% of the operating cost. Now it is 45%.
But there seems to be not much benefit out of recent mergers and acquisitions.
In the first wave of consolidation, Jet Airways India Ltd absorbed Air Sahara and Kingfisher Airlines Ltd took over Air Deccan. But this is not enough for better financial benefits. There should be another wave of consolidation.
I may be wrong, but I think India has a market for two full- service carriers and two low-cost carriers. The industry should restore common sense in fares, pushing out the predatory pricing.
Won’t that dent growth in passengers?
Sensible fares may arrest the growth in incremental passengers and passengers could be switching over to other modes of transportation. But all these would be mainly for short-haul passengers. I don’t think that air travellers would opt for 40-hour Geetanjali Express to travel from Kolkata to Mumbai. Longer flights will give better economics to airlines. It would be better to have more long-haul passengers than worrying about losing the short-haul passengers.
A separate category of regional carriers are waiting in the wings. Shall we see a repeat of 2006?
I don’t think the history will repeat itself, considering various factors, including jet fuel prices. At present, airplane manufacturers are finding tough to make deliveries. Moreover, it is hard to believe these regional carriers, operating three or four flights, would go to an investor for capital.
Let me tell you, capital is the key in this industry. And a good bet is always a good bet.
What should the managers focus on?
CFOs and CEOs (chief financial officers and chief executives) should concentrate more on running a lean organizational structure with efficient operations. Like CEOs, CFOs have a huge role in the current scenario as they are busy in finding working capital and long-term finance.
Airlines such as Southwest Airlines Co. of the US had made profits for 26 quarters in a row. The cash it accumulated in its good years is coming handy to counter the cyclical downturn. Indian carriers should learn from such instances. Airlines should continuously focus on efficient operations because airlines had lesser number of good years than bad.
How to cut costs?
It’s tough to differentiate low-cost carriers and full- service carriers where oil constitutes 45% of their operating costs. But SpiceJet has the lowest operating cost compared with other carriers. Leisure travellers and small and medium enterprises widely use low-cost carriers... There is a market for low-cost carriers though they are not offering tickets six months in advance unlike a year back. Because they are worried that today’s pricing is no good for tomorrow.