Airlines Deals

The dissolution of the Jet Airways takeover of Air Sahara is typical of the growing pains that emerging markets go through.

The match appeared made in heaven just six months ago, providing Jet with aircraft and human resources plus a roughly 10 percentage point boost to its domestic travel share, to help it defend its market position in the face of rising competition. But airline valuations in India have plummeted about 40% this year, despite rapid market growth, which made Jet’s $500 million deal for Air Sahara, announced back in January 2006, look too expensive.

The correction in investor sentiment for Indian airline companies followed last year’s rush of capital into the sector, when start-up valuations reached unrealistic levels, touching almost $200 million. It also became clear that Jet would be required to make continuous investments, estimated as high as $200 million, to turn around Air Sahara.

In the end, Jet said its withdrawal was driven by “commercial considerations”, as delayed government clearances were not available by the deadline. Overall, this may reflect a strategic miscalculation by Jet, which could prove damaging, particularly if the legal battle becomes drawn-out.

Air Sahara is reportedly planning to sue for damages of up to $450 million. The financial implications for Jet are likely to be serious as it tries to make an out-of-court settlement with Sahara. Jet also faces the capital-intensive route of growing its business organically, rather than expanding via acquisition.

The aborted deal leaves Air Sahara vulnerable, with only a 9.7% share of a highly competitive market and the difficult prospect of rebuilding its airline (12 aircraft are currently grounded) and organisation structure quickly. The carrier aims to hire about 700 employees – mainly pilots and cabin crew – in the next six months to meet its immediate needs, but this will come at significant cost in a tight labour market. Fresh management and restructuring expertise is also critical to the airline’s survival.

Both Jet and Air Sahara are left with the immediate prospect of urgently needing fresh funds, but they have fewer options at their disposal following the Indian stock market tumble in May and June. Jet Airways is reportedly in talks with local Indian banks to raise $400 million in short-term loans to finance aircraft pre-delivery payments, following the delay in its proposed issue of $500 million in foreign currency convertible bonds. Air Sahara is yet to announce its immediate funding plans, but further bank debt is likely.

Trailblazers such as Air Deccan, Go Air and Spicejet are capturing a significant proportion of the market, at the expense of full-service carriers. Back in October 2005, full-service carriers – including Kingfisher for the purposes of analysis – commanded 84% of the market, including 35% by Jet and 12% by Air Sahara. By May 2006, the full-service-carrier share had dropped to 73%, including 34% by Jet and 9% by Air Sahara.

Reviewing the past eight months, full-service carriers are, on average, bleeding 1.5 percentage points of market share a month to no-frills carriers. We do not expect this rate to slow in the short term, given the profile of current fleet orders. Low-cost carriers could therefore control more than 35% of the domestic market by the end of 2006 and pass 50% some time in the second half of 2007. By 2010, the low-cost carrier share could be as high as 70%.

On the other hand, business travel – the bread and butter for Jet and Air Sahara – is expected to increase only a little above GDP growth levels for the next five years. The spectacular rise in demand in India since 2004 has been at the leisure end of the market. It is the emerging untapped leisure sector that will drive the domestic market to more than double over the next five years (growing at 25% a year) to about 60 million passengers by 2010. This leisure growth will mainly be captured by the new breed of low-cost carriers entering the market.

Investment opportunities
These forecasts carry massive implications for airline strategy and financing in India. The recent stock market correction, coupled with the state of the airline industry’s financials, has resulted in more sensible valuations in the market. Nervous investors will be looking at other investment opportunities – such as cargo, maintenance companies and airports – which offer more reliable revenue streams and better long-term returns. Investors will also weigh up the merits of full-service versus low-cost carrier prospects, and will back those that demonstrate efficiency, productivity and stable yields.

Air Sahara, in particular, will need to decide which market segment it aims to serve over the long term, although successfully transitioning from a full-service to low-cost operating model has met with almost universal failure in other markets. For those that survive the current turmoil, the spoils could be significant. But bouts of upheaval and investor nervousness are inevitable in fast-growing markets like India. The bulls will return eventually – India’s aviation future is too bright to keep them away for long.

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YOUR cellphone has just doubled up as your personal travel agent, enabling you to search for and book the cheapest available air tickets on the move, thanks to Flight Raja.

This Bangalore-based company is all set to revolutionise air travel—after its official launch on Friday—because of its mobile flight reservation service.

‘‘We offer all domestic airlines, available to the entire nation on a single SMS and provide instant ticketing, a first for India,’’ said Harsh Azad, director (Mobile), Flight Raja.

The simple, four-step procedure to fly through mobile (see box) took the team six months to execute and has seen an investment of ‘‘roughly a quarter million US dollars,’’ Azad added.

‘‘Payments can be made both by credit card and cash. We have tied up with UTI and SBI banks for the latter,’’ said Amit Aggarwal, director (Kiosk).

Clearly, the success mantra for the venture will be the ability to penetrate the 100 million-strong mobile market in India.

Currently, among the domestic carriers, individual airlines like Indian, Air Deccan and IndiGo have options for mobile bookings. While Indian’s is restricted to Reliance customers, Air Deccan requires one to register before availing the service and IndiGo offers bookings only on GPRS-enabled phones.

Meanwhile, Air Sahara, SpiceJet, Kingfisher and GoAir have no plans for launching similar services in the near future, their spokespersons confirmed.

Industry watchers say that in such a scenario, this will be a one-stop shop for travellers because of easy accessibility and having the cheapest options across airlines listed for you at your fingertips.

In four steps
Step 1: Search for the cheapest airfares. SMS Fly, first three letters of originating city, first three letters of destination city, date of flying to 4242 and receive list of cheapest air tickets (e.g. Fly Del Mum 28 July)
Step 2: SMS Fly Book to book
Step 3: A customer care representative will call back to complete the booking
Step 4: The PNR number is delivered via SMS and you can collect the e-ticket from the airport counter or print it online

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After 43 aircrafts being bought from Airbus for USD 2 billion, public sector carrier Indian is leasing 16 aircrafts to compete more aggressively in the booming aviation market.

Of the 16 aircraft being leased, 12 are wide-bodied aircraft which could help in substantial additional capacity.

Indian has already received four bids for dry lease of wide-bodied aircraft. The airline is also working out plans for short-term lease of four Airbus A320 aircraft.

Indian now deploys only 36 aircraft as many planes are undergoing maintenance. The fleet utilisation will be increased by one aircraft per month to 42 aircraft by January.

Deploying more aircraft will help Indian in competing on a strong footing with private sector rivals. New generation carriers like Air Deccan, SpiceJet and Kingfisher are expanding aggressively, banking on the strength of the booming market, while IndiGo is expected to launch operations next month.

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The intense competition in the Indian aviation market is now forcing Indian carriers to join hands. In a first of its kind arrangement between a legacy carrier and a low-cost carrier, Jet Airways and Air Deccan have joined hands for a set sharing arrangement across all sectors.

“We have finalised a seat sharing arrangement where in case a Jet Airways flight is cancelled a person holding the Jet boarding pass can board an Air Deccan flight operating on the same route,’’ Air Deccan’s MD Capt G R Gopinath said here today.

Gopinath said that the airlines would carry out seat swappings in case of cancellations to avoid passenger inconvenience and the accounts paring would be done at the end of every month.

With airlines increasingly facing pressure on their margins, such an arrangement is likely to help both the parties in offsetting losses due to cancellations.

Air Deccan already has a similar arrangement with SpiceJet. ‘‘Our relationship with SpiceJet stands however it was limited to a small number of routes. At the moment we serve close to 56 destinations while Jet serves 44 destinations. Both of us have a huge network and this will help us serve passengers better,’’ he said.

This arrangement is probably the first step in the increased co-operation between the two carriers. There are indications that both of them are looking at an interline arrangement to face-off competition. The two airlines are also contemplating sharing engineering resources and pilots in the future.

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Stiff competition and high fuel costs are creating turbulence for Asia’s fledgling budget airlines — and their shares.
Five years ago, Asia’s first budget carrier, Malaysia-based AirAsia, took to the skies, followed by a slew of similar airlines in India, Singapore, Thailand and Indonesia. The new airlines broke up de facto monopolies in some countries and enticed many first-time flyers with fares that often cost little more than a bus ticket.

But now, those new players are feeling growing pains.

Kuala Lumpur-listed AirAsia’s profit for the quarter ended March 31 fell 44% because of high fuel costs and …

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Low-cost air carrier Spice jet plans for a hangar facility at the Hyderabad International Airport (HIA).

The air carrier is in talks with HIA for setting up of hangar facility. It is looking out at both the possibilities of either owning an hangar facility or renting down the facility to be established by HIA.

Spicejet already has a hangar facility in New Delhi. The hangar facility is likely to strengthen the air carrier’s infrastructure and ensure better maintenance of its aircraft.

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With the low-cost carriers having cornered close to 40 per cent of the civil aviation market in the country, airport planners are seriously considering providing separate terminals for these “no-frills” players whose business depends on faster turnarounds.

The Delhi Airport, in fact, could well become the first airport in the country to have dedicated terminals for carriers such as Air Deccan, SpiceJet and Go Air.

Speaking to Business Standard, G M Rao, chairman of the GMR Group - which is executing the airport modernisation project in Delhi - said that the existing terminals at the airport here will not be dismantled.

According to Rao, the existing terminals will be modernised even as the new terminal is being built. “We are thinking of reserving the existing terminals for use by the low-cost carriers,” said Rao.

The new terminal will be an integrated one with international and domestic sections being housed under the same roof.

“The new terminal will have stainless steel roofing from end to end. The terminal will be a steel and glass structure like the best international airports of the day,” Rao added.

Asked whether the new terminal will be ready by the time the Commonwealth Games Review Committee arrives to inspect the facility in 2009 (a year ahead of the Games), Rao said that by then 95 per cent of the work would be completed.

“Our targeted completion is for March 2010 and we expect to complete the terminal before time.” The holding capacity of the airport is expected to increase from the present 16.2 million passengers per year to around 30 million passengers by then.

The concessionaire for the modernisation project also plans to open a shopping mall inside the airport complex. The mall will most probably be open to people other than air travellers as it will be located before the terminal and will be accessible to the residents of the city as well, Rao added.

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The new aviation policy, in the works for nearly a decade now, couldn’t have come at a better time for India’s new crop of airlines. The carriers hope the new policy, expected to go before the Union cabinet in the coming weeks, will free them from a set of tight regulations, which they say are anachronistic and penalise them. With the air-travel market growing 30 per cent, they are lobbying for a regulatory regime that will be easier on their operations (and, bottomlines).

The airlines’ list of expectations is topped by a demand not to treat air travel as a ‘luxury service’ and reduce tax on fuel and landing charges to make air-travel accessible to more people in the country. Aviation turbine fuel or ATF prices - at around Rs 35,000 per kilo litre - in India, for instance, are 30 per cent-50 per cent higher than what it sells internationally for mainly on account of taxes and government levies. Given that escalating fuel prices make up for up to two-fifths of operating costs of an airline, says Siddhant Sharma, chairman of SpiceJet, this is hardly good news.

The government seems to be listening. Expressing concern over ATF prices, civil aviation minister Praful Patel said recently that he would take up the high incidence of tax on fuel with finance minister P Chidambaram. Says Saroj Datta, Jet Airways’ executive director, “The policy should proactively tackle the factors that affect the viability of the civil aviation industry such as high taxes and duties on ATF, high landing and navigation charges and inadequacy of infrastructure, which adversely impacts operating costs.” If ATF is brought under the Declared Goods list (which caps sales tax at 4 per cent), the savings for SpiceJet would be around Rs 200 crore, says Sharma. The sales tax on fuel is as high as 39 per cent currently in some states.

Another major concern of the airline industry relates to the paucity of infrastructure to cope with the huge increase in traffic, both on the international and domestic sector. Air Deccan’s managing director G R Gopinath suggests airport infrastructure be developed on a war footing, especially in the non-metro sector. “Otherwise growth cannot be sustained,” he says. Airports are so crowded that planes often hover over airports or wait in queue on tarmacs for up to 30 minutes before they get clearance for landing or take-off.

Minister Patel also said the modernisation of 35 non-metro airports would be completed by 2009 but a final decision has not been taken regarding the modalities for beefing up the airports at Kolkata and Chennai. Broadly, he said the Airports Authority of India would take up modernisation of the aeronautical facilities of the airports while private participants would be invited to develop the non-aeronautical parts. Third on the priority list of the airlines is the desire to have an independent regulatory authority for the sector. “The sector needs an independent regulator on the lines of the Telecom Regulatory Authority of India,” says SpiceJet director, Ajay Singh. “The telecom sector is better administered and saw major growth after TRAI was set up.”

Gopinath too feels that the regulatory authority should be responsible for rationalisation and monitoring of services and fees and the use of other airport resources. “This is pertinent in monopoly situations where an airport authority can charge high rates. The regulatory authority should be responsible for arbitration as they are in UK,” he says.

Full service airlines such as Jet Airways also argue for a better allocation of routes among Indian carriers. “The new civil aviation policy should energise the government’s reform process further by framing equitable policies for the allocation of traffic rights and frequency/capacity entitlements between publicly-owned and privately-owned eligible carriers and eliminate current restrictive policies whereby certain routes like the India-Gulf routes have been made available only to government-owned carriers,” says Datta. India currently allows carriers to fly to the US, Europe and Southeast Asia but bars them from plying crowded Gulf routes.

It’s not just allocation of international routes that irks the airlines; it is also the non-remunerative sectors that the government forces them to fly to under its ‘route disbursal guidelines’. Says Singh, “The government should apply category specific restrictions. Carriers with large aircraft should not be made to follow the route disbursal guidelines because the load factor on such routes tend to be low.” Therefore, operations on such routes are unviable. Patel counters that unless such routes are mandated to the airlines, remote areas like the northeastern states will not figure on the airline map.

Gopinath suggests that India should benchmark airworthiness, training and maintenance to developed markets. He says that rules and regulations of training requirements should be brought in par with European Union’s Joint Airworthiness Requirement to ensure India keeps pace with technology and aviation practices.

Lighter regulation regime for airport handling is another demand by some large carriers. The new civil aviation policy, Datta says, should allow private carriers to self-handle their flights and allow ‘third-party handling’, that is provide handling facilities to other Indian and foreign airlines operating flights to and from India. He also wants the policy to take a liberalised approach to marketing alliances between Indian and foreign carriers, and freely allow inter-carrier arrangements as code-sharing, frequent flyer partnerships, joint operations, among other such arrangements.

Overall, India’s airline companies expect the new civil aviation policy to rationalise taxation on fuel, set out a clear roadmap for better infrastructure, seed an independent regulatory authority and lay the foundation for an equitable platform for both the public and private players in the market. The government, on the other hand, has to juggle between an easy source of taxes and social obligations of an increasingly important transport industry. Whether the industry and government meet on common ground will be known in the coming months.

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High aviation turbine fuel (ATF) and low yields are likely to impact profitability of major airlines in this quarter. With a market share of 31.2% in June, the net profits of Jet Airways is expected to dip by about 70% in the quarter ended June 2006 as against the last quarter, according to the analysts. Jet’s turnover for the quarter is pegged at Rs 1,650 crore while it is Rs 160 crore for SpiceJet. Aviation experts feel that SpiceJet, whose fiscal ends May 2006, is set to make a loss of Rs 45 crore. The operational loss of the company is expected to be Rs 13 crore on account of spiraling aviation turbine fuel prices. According to an analyst with a brokerage firm, SpiceJet will break even in the current fiscal. Interestingly, SpiceJet started operations in May 2005.
Meanwhile, the newly listed Deccan Aviation is expected to make a higher loss than SpiceJet as the passenger load factors are below SpiceJet and the ramp up expenses of Deccan Aviation is also very high, add analysts. While ATF prices have gone up by 15% this quarter, major airlines have initiated a fuel surcharge on the tickets. Cess recovery by way of fuel surcharge has given a breathing space to the airlines and has reduced the loss to an extent, said an analyst.

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On the BSE, the Jet Airways stock continued its fall, losing more than 8% or Rs 44.15 on Monday to end the day at Rs 494.65. The stock has been losing ground in the recent past and has lost more than 26% or Rs 173.85 in the last one month since June 16, 2006. Deccan Aviation Ltd also ended the day in the red with the stock price falling by 4.33% or Rs 3.35 to settle at Rs 74. On the other hand, Spicejet Ltd gained a marginal 1.32% or Re 0.55 to close at Rs 42.15.

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A fresh bout of fare wars has just taken off. With the lean season (August-October) around the corner, full service carrier Jet Airways and budget airline Air Deccan, which are leaders in their respective segments, have come out with attractive fares to push up their load factors on some sectors.

While Jet has relaunched its Superfare scheme by offering one lakh tickets at fares which are close to those of no-frills airlines, Air Deccan has lowered the prices of its air tickets to Rs 99, Rs 299 and Rs 500 on routes services by ATR aircraft. And as things stand today in the aviation sector, which is plagued by intense competition, other airlines may soon follow suit to save marketshares.

“Our tickets are already priced at rock-bottom prices, but if the fares of Jet and Air Deccan hurt our market then we will be forced to cut it further,” laments an airline official.

In June, SpiceJet Ltd had offered 24,000 seats at Rs 99, Rs 299 and Rs 499 for travel between July and September on some sectors - and these have been filled up.

“We have been able sell most of these lean season tickets,” says SpiceJet Ltd chairman and CEO Siddhanta Sharma.
Traditionally, air traffic during these months (especially in the leisure segment) dips because schools are open. Many airlines are also bracing themselves for the entry of a new budget airline, the InterGlobe Enterprises-owned IndiGo, on August 4. They expect the new player to be aggressive in its pricing.

IndiGo has opened bookings for major cities in the country’s eastern and western regions from Delhi. Surely enough, as was feared by existing airlines, its fares are around 50% lower than other low-cost airlines on the same sector.

SpiceJet, which could be most affected by IndiGo, is not reacting to the threat as yet. “Since these are promotional fares we will not counter it as it is funded out of promotional budgets,” says Sharma.

Analysts, however, believe that sooner or later SpiceJet, and also other airlines, will have to give in to price war. If they don’t, they stand to lose marketshare in a price-sensitive market. So, even as airlines may hike fuel surcharge to absorb the impact of rising fuel prices, the aviation picnic for Indian flyers is far from over. And they can expect ever-low fares to stay till the competition stays intense.

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