Airlines brush aside fears of slowdown

Airlines brush aside fears of slowdown
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First Published: Mon, Feb 18 2008. 12 12 AM IST
Updated: Mon, Feb 18 2008. 12 12 AM IST
Mumbai/New Delhi: Unfazed by mounting losses and the slowest growth in three years in December, India’s airlines say they are now embarking on a phase of profitable growth and expect to turn profitable in 2008-09.
The turnaround comes in the context of slower passenger growth, down to 25% a year from the heady 40% seen in the past two years—in December, the growth was 16% as compared to a year ago—and a reduction in the number of planes joining airline fleets.
The predictions of imminent profitability come at a time when the combined losses of domestic airlines are estimated to have risen some 50% to $750 million (Rs2,963 crore) in 2007-08 over 2006-07. Airline executives blame the high cost of jet fuel (commonly referred to as aviation turbine fuel or ATF), unfilled seats on planes, and tickets priced below cost as firms expanded reach and fought for shares in a fast-growing market for the losses.
“Financial and market analysts were initially estimating the combined losses at $300-350 million for this year. But later they increased the loss estimates to $700 million,” said Saroj K. Datta, executive director of full service airline Jet Airways (India) Ltd, which operates 78 aircraft flying to 59 destinations with more than 370 flights daily. The new loss estimates are collated from va-rious analysts tracking airline listed firms, Datta added. After four profitable quarters, Jet posted a loss of Rs91.12 crore in the December quarter.
One reason for the losses, and for predictions of a better 2008-09 could be delayed benefits from three mergers that the aviation business witnessed in 2007. “The expected consolidation has not happened. Jet Airways and JetLite are still running as different entities like Kingfisher Airlines and Deccan Aviation, leaving little room for rationalization of routes,” Datta said.
Kingfisher Airlines Ltd and Deccan Aviation Ltd run eponymous airlines and will be majority owned by the Bangalore-based UB Group from April pending regulatory approvals for a proposed merger.
Another reason for the losses is costs that spiralled out of control. High fuel costs and wages are hurting the state-run National Aviation Co. of India Ltd or Nacil. S. Venkat, executive director of Nacil, said the airline—branded Air India, and the result of a merger between Air India and Indian Airlines—spends one-third of its revenues buying fuel and another 20% paying employee salaries resulting in as much as 53% of revenues being “non-controllable” costs.
“Besides the high ATF cost, airline industry is hiring pilots and engineers at high salaries. Worldwide, airline industry is operating at a wafer-thin margin of 2-3%. Therefore, (even) a one-cent variation in fuel prices will have direct impact on profitability,” Venkat said. Nacil posted a loss of at least Rs700 crore in 2006-07, a figure that is expected to increase this fiscal year.
While the new estimates of losses have come at the same time the industry appears to be slowing in terms of passenger growth, analysts refuse to read too much into this. While the October-December quarter usually sees the most number of passengers travelling on account of holidays, the growth in passengers of 16% in December, the lowest since January 2005, should be seen in the context of a high 40.5% growth in passengers in December 2006, according to Kapil Kaul, Delhi-based analyst for consultant Centre for Asia Pacific Aviation. Kaul termed December 2006’s growth an aberration created by excess capacity in the market, which had airlines offering fares as low as Re1 a ticket plus taxes. He added that an average 25% growth (in passengers) is what the industry will see till 2010. “That’s the growth we should believe in rather than having an unprofitable industry,” he?said.
Airlines, too, don’t reckon there is a slowdown. The planes aviation firms added to their fleets in expectation of growing demand have already been inducted and “we will see (excess) capacity come down,” said Samyukht Sridharan, chief?commercial?officer?at?low-fare airline SpiceJet Ltd.
The Gurgaon firm added 10 aircraft to its fleet in the 13 months since December 2006 but will add half that number this year.
Indian commercial airlines added 44 planes in 2007 to their fleets—nearly one-fourth were replacements—to the around 274 aircraft in the skies in December 2006. But aircraft deliveries in 2008 are unlikely to be as aggressive. Plane-maker Boeing Co. alone delivered 50 aircraft to Indian buyers last year in what was a company record. That number will go down to 20 this year.
Even large carriers such as Kingfisher have put fleet induction plans under “evaluation”, said its executive vice-president Hitesh Patel. “The way we look into it is that we have totally redone our schedule (starting April for Kingfisher and Deccan combined). We are evaluating our capacity induction for the coming financial year,” he added.
Still, the key to stemming losses and turning the airline businesses lies in the hands of the Union and state governments. Deccan vice-president (finance) Anand Ramachandran said there could be a turnaround at airline firms in the next fiscal year if government announces concessions on ATF. The industry and the civil aviation ministry have both asked for a reduction in the levies on the fuel. Taxes on fuel vary from 4-23% and GoAir Ltd’s chief financial officer G.P. Gupta estimated that if state governments cut the sales tax on ATF, it will result in savings of 10%.
Deccan posted losses of aro-und Rs600 crore in the first ni-ne months of 2007-08, while Kingfisher is estimated to have lost Rs700 crore in the period.?The merged airline is expe-cted to turn in operational pro-fits, measured by earnings before interest, tax, depreciation and amortization, in 2008-09.
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First Published: Mon, Feb 18 2008. 12 12 AM IST
More Topics: Airlines | Slowdown | Growth | Losses | Jet fuel |