Airlines India, Indian Airlines

The Board of Indian Airlines has approved the lease of eleven new aircrafts. This would include five Airbus A-320 aircrafts and six 70 seater regional jets. The aircrafts shall be delivered over the next six months. The Indian Airlines is planning to promote its subsidiary Alliance Air as low cost air carrier to compete with the new low cost private players. The regional jets will be operated by the Alliance Air on a cost competitive model. The airline is also planning to outsource the maintenance work for the new regional jets to reduce its fixed wages. Such steps would be necessary to bring about a cost competitive model.

Earlier in February 2006, the airline had placed an order to Airbus Industries to buy 43 aircrafts including 19 A-319s, 4 A-320s and 20 A-321s. Out of which one aircraft has been delivered recently. Presently the airline has a fleet of 74 aircrafts.

Indian Airlines is getting aggressive in expansion. It is adding more aircrafts to its fleet to stay in competition with the private players.

After the proposed merger of the Indian Airlines with Air India, the cargo arm of Indian Airlines will be hived off to operate as separate entity. The proposed cargo operations will be handled as a division of Indian Airlines till the process of merger is completed. The airline has already taken approval from the Government of India for its cargo operations. India has a huge market for cargo carriers and is growing at a rate of 20 percent per year. Jet Airways and Kingfisher Airlines are also planning to start their cargo operations. with the booming retail sector, the cargo business is expected to grow at a higher pace as the retail companies would use air cargo services to ship their goods to various destinations across the country.

Under the process the airline is planning to convert some of its existing passenger carriers into freighters. To start with, the airline will convert its five Boeing 737 aircrafts into cargo carriers. Some non airline companies are also showing their interests in air cargo business, therefore, the airline companies are making their first moves to encash the upcoming opportunity.

Air Deccan has said it will stop flying unprofitable routes, as it seeks to come into the black by 2008. The Bangalore-based budget airline aims to carry 80 lakh passengers in 2007, compared with 45 lakh this year, and aims to break even on as many routes as possible by cutting operation costs. It has not indicated which routes will be affected by the plan.

Air Deccan, Jet Airways, Spicejet, Kingfisher Airlines and other private airlines are facing losses as a result of increasing competition, which is squeezing their margins. Air Deccan made a loss of Rs341 crore ($74 million) in the 15 months ending June 2006. Indian private carriers will probably make a combined loss of Rs1,125 crore ($250 million) this year and next, as they cut fares to as low as 1 rupee to maximise capacity utilisation.
Redeploying excess capacity and containing costs by utilising aircraft for longer hours could help Air Deccan and other budget airlines emerge from losses. Air Deccan is India’s second-biggest airline by market share behind Jet Airways.

The airline recently sold and leased back two Airbus SAS planes and three spare engines to balance its books. The company will consider similar deals for more planes. Air Deccan has 92 planes on order, valued at Rs 17,000 crore ($3.8 billion), to be delivered by 2012, most from Airbus. The airline has postponed a plan to start overseas routes in a joint venture in Sri Lanka, to focus on the turnaround.

The airline today announced a Rs675 crore ($150 million) 10-year maintenance agreement with Lufthansa Technik to support its fleet of 14 Airbus planes. Lufthansa Technik and its Indian subsidiary One Stop Airline MRO Support will independently serve the fleet of 60 Airbus A320 airplanes with spares at the carrier’s hub, Bangalore, Air Deccan and Lufthansa said in a joint press release. Lufthansa Technik will set up a regional pool of spares in India because of increasing demand in South Asian countries.

Taking on the budget carriers, full-service airlines today demanded that the government should regulate prices and suggested that higher entry barriers for new players could be a way out of the present financial cauldron facing the industry.

The move, however, was vehemently opposed by budget carriers, which stated that the excess capacity was only a temporary phenomenon and would pass as the market grew on lower fares.

The government, which called a meeting with airlines to work out a method to solve the sector’s financial problems, told the carriers that it would not interfere in pricing, which will be left to market forces.

The budget carriers are Air Deccan, SpiceJet and GoAir, while the full-service carriers include Jet Airways, Indian and Kingfisher.

There was a lot of concern over capacity building in certain routes and this was seen as a major reason for a large number of airlines bleeding, said Ajay Singh, director, SpiceJet, who attended today’s meeting. Singh also said the carriers raised questions on rationalisation of fares.

According to industry estimates, the domestic carriers together are expected to make staggering losses of Rs 2,500 crore in 2006-07.

The meeting was attended by Jet Airways Chairman Naresh Goyal, Kingfisher Chairman Vijay Mallya, Air Deccan Managing Director GR Gopinath, SpiceJet’s Singh, Paramount Airways Managing Director M Thyagarajan, and Air Sahara President Alok Sharma.

The government, on its part, is planning a slew of steps to bring financial health back into the sector. The government is putting stiff conditions on the entry of new airlines that want to fly in the domestic skies.

These include enhancement of the minimum paid-up equity capital requirement, prior approval of business and fleet plans before permission is given to fly and directly linking an increase in fleet size with a commensurate increase in the paid-up equity capital norms laid out for carriers.

In order to ensure that the financial health of a carrier does not lead to bankruptcy, and also to curtail any example of predatory pricing by carriers, the government has proposed that it will review the business plans as well as the financials of the airlines every quarter and suggest corrective measures if required. This was a model the government said it was borrowing from the US.

The paid-up equity capital norm for new carriers will be hiked from the current Rs 30 crore to Rs 50 crore. For every five new aircraft inducted in a fleet, the airline’s paid-up equity capital will be enhanced by Rs 20 crore.

So for instance, a carrier that increases its fleet strength from five (which is the minimum needed for starting operations) will have to enhance its paid-up equity capital to Rs 70 crore if it has 10 aircraft.

In case it starts operation with 10 aircraft, it also has to pay the same amount. Earlier there were no such norms.

According to Civil Aviation Minister Praful Patel, the government has decided to step in to ensure that the Indian carriers remain in good financial health.

“There is massive growth, but at the same time, there are losses, too. We want to ensure better business conditions. The government does not want a repeat of 1991,” said Patel. In 1991, a number of private airlines went belly up due to bad business plans and mounting losses.

New applications to start airlines will have to wait for some more time for licences, as the government wants to evaluate the business viability of these companies before awarding them permission to fly. This has been done to ensure that only sound players enter the sector.

The government came under fire from the private players on higher jet fuel prices. The airlines had pointed out to the government that while prices were high, oil marketing companies passed on the increased price to the carriers, but no such step was taken when fuel prices were down.

According to airlines, the civil aviation minister has assured the carriers that the civil aviation ministry is taking up this issue with the oil and finance ministries. The contribution of jet fuel prices to a carrier’s costs is about 40 per cent.

In addition, the civil aviation ministry is also proposing a tax package to the finance ministry, including long-term waiver of aircraft leasing tax, financial transaction taxes and abolition of services taxes.

Delhi-based low-cost carrier SpiceJet has posted Rs 17.81 crore loss for the quarter ended August 31, 2006 as against Rs 10.81 crore for the corresponding period last year. Total income however, rose to Rs 180.33 crore during the reporting quarter when compared with against Rs 66.26 crore for the quarter ended August 31, 2005.

“High fuel prices coupled with weak demand have resulted in loss for August quarter. However, this is the lowest loss figure compared to other airlines,” Ajay Singh, director of SpiceJet, said.

The expenditure for the airline rose to Rs 194.68 crore for the quarter ended August 31 against Rs 75.37 crore for the corresponding quarter of previous year. The operating loss of this no-frills airline was at Rs 14.35 during the reporting quarter against Rs 9.10 crore for quarter ended August 31, 2005.

Singh said August quarter was the weakest for airlines in terms of demand. “We expect to break-even in the next quarter when our capacity will go up with increasing demand. Our business model is also intact,” he told Business Standard.

He said the airline has always maintained that it will breakeven with 9 to 10 aircraft in its fleet.

“We will be adding two aircraft in October and one each in November and December, which will take us to total fleet of 10 aircraft,” Singh added.