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.

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.

Responding to indications that Prime Minister’s Office (PMO) in India has objected to the proposal to merge Indian and Air-India, the Civil Aviation Ministry has confirmed that there are no impediments in the process related to the merger of the two state-owned carriers. In fact, the Civil Aviation Ministry is likely to move a cabinet note on the proposed merger in November this year.

“There are no impediments in the process. Everything is going on as planned,” Civil Aviation Minister Praful Patel said. He added that Patel the proposed merger process was moving on track and would be completed as planned within the current financial year 2006-07.
Patel’s remarks follow a local media report, which shared that a composite note prepared by the PMO, comprising comments from the finance and commerce ministries, stated “the proposal in its current format is not viable because the two airlines were set up for different purposes and a merger will weaken their position in the domestic and international markets.”

But going by the merger process, the consultancy firm Accenture, which has been appointed to prepare the roadmap for the merger, is expected to submit its report in October. As per the information available, the Accenture consortium which includes Ambit Corporate Finance has been given a mandate to prepare a detailed blue-print for the merger within 26 weeks.
Among the issues titled in favor of merger are - economies of scale when it comes to maintenance, ground operations, the use of landing slots and parking rights. Also, the single entity can effectively deliver the classic hub and spoke system that the largest airlines have been operating.
The carriers are also expanding their fleet. Indian has already placed an order valued at US$2.2 billion, for 43 Airbus A320 family aircraft comprising 19 A319s, four A320s and 20 A321s. Air India, too, signed a deal with Boeing Commercial Airplanes, ordering 68 aircraft, earlier this year.

Domestic full service carriers (FSCs) are losing in excess of Rs 150 crore per month in their bid to cope up with the slack season on one hand and compete with low cost carriers (LCCs) offering cheap fares on the other.
FSCs which have a combined market share of 62.5% have resorted to heavy discounting on their tickets, according to industry estimates.

This, coupled with high aviation turbine fuel (ATF) prices and rising staff costs, has pushed these airlines deeper into the red.

With seats capacity growing at 45% per annum, a phase of intense price competition has begun. FSCs like Jet Airways, Indian Airlines and Air Sahara are discounting upto 60-70% on most of the domestic routes to match the new entrants’ ticket prices.

ATF prices, which are up 27% in the last 12 months, and increasing staff costs on the back of shortage of trained personnel, are already exerting pressure on airlines’ bottomlines, resulting in losses for all the carriers.

For the quarter ended June 30, 2006, Jet Airways had a net loss of Rs 45 crore while SpiceJet had posted a net loss of Rs 13.5 crore in the quarter ended May 31, 2006.

Air Deccan is yet to break even, despite more than three years of operations. According to an analyst with a brokerage firm, airlines are expected to incur losses even in the current quarter.

SpiceJet vice president (marketing), Sanjay Kumar said, “In the last two months, FSCs had reduced fares to a great extent to match the fares of LCCs. Typically, the difference in fares of FSCs and LCCs is 40%, but owing to the slack season, it has come down to 20%.

While, Air Deccan started the trend of lowering fares, other airlines including SpiceJet, GoAir and Kingfisher Airlines followed suit, leading to a situation wherein all players are bringing down fares even when it is not feasible. Interestingly, the discounted tickets offered by these carriers have doubled since last year even as their cost of operation is higher by 35% compared to LCCs. According to an analyst with a brokerage firm, FSCs have put around 70% of their tickets on the block at discounted rates during this season.

However, there might be respite for all the carriers post the slack season. Travelguru founder and CEO Ashwin Damera said, “From October, the travel season will pick up and would boost passenger load factors. In the slack season, the passenger load factors of FSCs and

LCCs have dipped to about 60% and 70% respectively. However, in the coming months, it is expected to climb to 72% for FSCs and 85% for LCCs.”