Airlines Deals

It’s about 2pm on a Tuesday. In a span of about thirty minutes, just seven cars and vans pull up in front of the departure gate at Sharjah International Airport. Some of the passengers are from Sharjah, others are driving in from Dubai. They are heading for different destinations Mumbai, Doha, Bahrain and Kuwait but all are taking Air Arabia, the budget carrier in the region that began flying in October 2003.

Inside the airport, however, the limited space looks fairly crowded. The two officials at the Air Arabia information counter are busy answering queries from a constant stream of passengers. The airline’s logo is displayed on several walls and columns inside, making its dominance felt.

In less than five years, Sharjah airport has come a long way from its previously forlorn look, and a budget carrier such as Air Arabia seems to be making a crucial difference to it. Today, the carrier flies more passengers than any other airline almost 60 per cent in and out of Sharjah airport.

It would not be an exaggeration to say that Air Arabia, a company floated by the Government of Sharjah but run as a commercial entity, has provided a much-needed fillip to the airport, so much so that there has been a continuous surge in passenger traffic over the past few years.

The first six months of 2006, according to the latest report by Sharjah Airport Authority, has seen an increase of 37.6 per cent. The $22 million airport expansion is going on at a rapid pace to handle increased passenger and cargo traffic.

With analysts predicting more such carriers to take to the skies, such secondary or alternative airports with improved infrastructure could provide the incentive of low airport costs.

As well as owning the airline, the Sharjah government also owns the airport. That was an advantage Air Arabia started with. Sharjah airport presents itself more like a secondary airport that provides the airline with the benefit of a quick turnaround. In more ways than one Air Arabia’s operations out of Sharjah International Airport closely resemble, on a much smaller scale the successful “no frills” budget airlines of Europe and the United States. Ryanair and EasyJet in Europe mostly operate at smaller secondary airports. But there’s a long way to go to carve out a success on those lines or Southwest and JetBlue in the United States.

Business is also being carried from bigger international airports. The two other low-cost carriers in the region, Air-India Express and Jazeera Airways, are flying to Dubai International Airport. In fact, Jazeera uses Terminal 1 and is still able to maximise efficiency and costs, while Air-India Express operates to and from the less-congested Terminal 2 of the airport to minimise costs and to maximise a quick turnaround of 45 minutes.

To sustain low fares, discount carriers need high loads. And for that they need to operate on routes between large population centres.

Business is really taking off, with Jazeera and Air Arabia continuously expanding their routes. Air-India Express has plans to fly to Amritsar and Mangalore, both in India. In fact, the carriers are satisfied with the volumes, with all three running to capacity on all their routes during what is considered the peak season between July and September and turning impressive numbers the rest of the year. While in terms of expansion of routes, Air Arabia and Jazeera Airways have been growing rapidly. In less than three years of operation, Air Arabia now flies to 28 destinations in 18 countries. Kuwait’s Jazeera Airways flies to 12 destinations in eight countries. For both, India and West Asia are strong markets, simply because of the demography.

Air-India Express, which started in April 2005, is part of the government-owned national carrier Air India. It operates flights between Dubai, Sharjah, Abu Dhabi and Al Ain in the UAE and three cities of Kerala, the southernmost state of India that has a large expatriate population. It also operates flights between Kerala and Salalah and Muscat, Oman. Air India now has very limited flights to Kerala. According to London-based aviation industry analyst, David Kaminski-Morrow, being a part of another entity always runs the risks of “contaminating your brand, cannibalising your network and ultimately confusing your passengers.”

Air-India Express’ operations on the routes of Abu Dhabi and Muscat to Mumbai and Delhi became early casualties. After flying on and off for about eight months, it stopped operating on those routes. “The numbers were not up to our expectations,” said Sanjeev Talwar, Dubai-based regional director of Air India. “We saw that the clientele for Mumbai and Delhi is more business oriented and so we reversed the trend back to our legacy carrier, Air India.”

Low-cost carriers need flexibility to develop a route network and operate with maximum efficiency with no room for overstaffing, under-utilisation of aircraft or unnecessary costs such as relying too heavily on distribution channels other than the internet. They should have the negotiating power to agree favourable rates for airport services and also have access to alternative or secondary airports.

All three have to deal with one or more of these challenges as an operational hazard of any discount airline. But it’s especially challenging to maximise efficiency by lowering the cost of sales in a region that has low internet penetration and where credit cards are not always available to the target population.

In the three years Arabia has been operating, direct online purchases have gone up from a minuscule 2 per cent of the total bookings to about 25 per cent. All hope that the growth will be faster in the coming years. “In the next two to three years, I expect (direct) online booking to go up by 30-40 per cent,” said Adel Ali, chief executive officer of Air Arabia. The share of direct online booking in Air-India Express and Jazeera Airways is currently 30 per cent.

Although they have to deal with these challenges, the emerging low-fare airlines have a strong advantage in some cases there is little competition in their home market. “Jazeera Airways, for example, was the only home-base competitor to Kuwait Airways when it started operations. That’s a huge advantage,” Kaminski-Morrow says.

The three are, however, not directly competing, except for Air Arabia and Air-India Express which have flights to Kochi, India. Air-India Express, however, has flights to Kozhikode and Thiruvananthapuram too. The sheer volume on the Kerala route provides enough business for both carriers and until now have not posed a threat to each other. While Jazeera operates from Kuwait, Air Arabia operates from Sharjah. “I think there’s plenty of room for both at the present time,” Kaminski-Morrow added.

On its home turf, Jazeera Airways is in direct competition with Kuwait Airways and the national carriers of countries it operates in. In a recent interview with Gulf News, its chairman Marwan Boodai, citing Kuwait’s Directorate General of Civil Aviation figures, claimed that in its first four months Jazeera gained up to 50 per cent market share on more than half of its routes, flying 100,000 travellers. This was achieved with just two aircraft. Consequently, though it’s uncertain by how much, it’s eating into the profits of its competitors.

Air Arabia has started flying to Delhi, and Jazeera to both Delhi and Mumbai, pitting the carriers against Air India and Emirates Airlines. It’s quite possible that the bigger airlines might lose some numbers to the smaller carriers.

The budget sector, says Kaminski-Morrow, is likely to enlarge the population of travellers and not necessarily damage the bigger carriers. “There will certainly be a degree of cross-over by price-sensitive travellers, but budget carriers have a habit of generating additional passengers rather than simply stealing them from other airlines.”

Air Arabia’s Ali dismisses suggestions of competing with the bigger airlines, such as Emirates Airlines, and denting their profits. “We came in as a regional airline and we intend to stay that way,” Ali says. “Emirates is a successful, global airline.”

The market segments the two cater to are different, he elaborated. “Within the region, we are attracting people who use surface transport to travel. Also, we have been getting passengers who were not able to travel earlier or who travelled once every two years. Now they are travelling every year or even two or three times a year.”

Talwar of Air India agrees. “We have increased the cycle of travel. Our frequency has improved and so our numbers have improved and there is enough scope for all.”

In case of the bigger airlines Emirates, Qatar, Eithad they are all fighting among themselves to become bigger carriers, he added. They are all concentrating on bigger segments in different markets. Moreover, he points out, the operations of the low-cost carriers will not affect the bigger ones because they are not looking at much traffic from Dubai to India.

“They are looking at through-traffic from Europe and USA all those coming here. Their basic carriage is perhaps not more than 20 to 30 per cent. Eighty per cent is all through-traffic. Most of the big airlines (of the region) are relying on that.”

But it’s passengers such as Dhiraj Balani, a young software professional based in Dubai, who took an Air Arabia flight home to Mumbai that would bring a smile to Ali’s face.

Balani did not mind driving all the way to Sharjah to catch a flight on Tuesday that was priced, one-way, at Dh450, which he said was close to 50 per cent less than a bigger carrier would have offered.

“It’s a two and a half-hour flight, and I don’t care whether food is served or not. Or for that matter the comfort. It’s much cheaper.”

With the region witnessing an economic boom over the last few years, all industry insiders and analysts believe that there is room for more players. There is enough liquidity in the market to launch more budget airlines.

Kuwait, for example, witnessed a 4 per cent increase in total air traffic growth in 2005 over 2004 and passenger traffic more than doubled to 8.8 per cent during the same period.

The population in Kuwait in the corresponding period grew 7.7 per cent, GDP 19.4 per cent and the stock market index shot up 106 per cent. Young people were joining the workforce in increasing numbers. There were more people with disposable income to spend and many chose to fly.

The vibrant economic conditions aided by a policy of liberalisation in Kuwait help to account for the successful launch and continued success of Jazeera Airways, which was launched in 2005.

It is difficult to estimate how many budget airlines the region can sustain. Kaminski-Morrow suspects there will be more start-ups jostling to take a share of the market. The Middle East and intra-Gulf region currently has one of the highest rates of traffic growth in the air transport industry, Kaminski-Morrow confirms. And Middle East-India routes, he believes, are going to be one of the most competitive battlegrounds over the next few years.

“The market has yet to become fully liberalised something which has helped the rapid growth of Ryanair and EasyJet in Europe but it is not saturated. And this means that there is probably still room for other prospective budget airlines to catch up and flourish.”

Comments(0)

An Air India A-310 plane recently created a major scare at the Bahrain airport when it landed on the wrong runway and not the one the ATC there had asked it to touch down on. The incident happened earlier this month.

The airline has since asked the erring pilot to remain “on ground” till an inquiry into this serious lapse gets over.

“There was no risk to passengers. Bahrain airport has two runways and our plane did not land on the one it was earmarked to touch down on.

The A-310 was till allowed to land on the other runway as there was no risk (meaning other plane landing or taking off there),” said an airline spokesperson. “The pilot will remain in Mumbai till the probe is over,” he said.

Sources pointed out that the industry is facing a severe shortage of pilots because of which the DGCA recently raised the retirement age of pilots for commercial airliners from 60 to 65 some months back.

“Many airlines are now hiring retired pilots and inducting them after re-training. Since they have been out of practice for a while, mistakes can certainly take place,” said an aviation industry insider.

In fact, on Thursday Union civil aviation minister Praful Patel told Parliament that apart from India, other national carriers were facing shortage of pilots.

Alliance Air had a shortage of 10 pilots each for its Boeing 737 and ATR Turboprop fleet. AI and Air India Express have a shortage of 85 and 22 pilots respectively.

Comments(0)

Singapore Airlines (SIA) is in talks for an interline agreement with Kingfisher Airlines, reports Business Standard.

This move is aimed at offering the international traveller of Singapore Airlines more routes on Kingfisher`s domestic network. At present, Singapore Airlines has a similar arrangement with Indian Airlines.

Singapore Airlines General Manager (India) B K Ong said that the airline`s passengers could be filled in Kingfisher at the destination where the airline does not fly. He further added that the airline was looking for special domestic fares from Kingfisher.

Singapore Airlines operates 47 weekly flights to eight destinations in India, including Mumbai, Delhi, Chennai, Bangalore, Kolkata, Hyderabad, Ahmedabad and Amritsar.

Kingfisher operates 86 flights a day covering 18 cities. The airline is keen on starting flights from more secondary cities of the country.

Comments(0)

ING Financial has upped shares in DIY retailer Kingfisher to “hold” from “sell” following its second quarter figures released yesterday.

The broker noted that gross margin was flat, as opposed to falling while profits also appear to be stabilising. ING proposed a price a target of 220p from 180p previously.

Dutch broker ABN Amro started coverage on miner Antofagasta with a “buy” recommendation and a price target of 470p per share.

The broker advised it was taking a more conservative stance on Antofagasta than it peers as a result of its reliance on copper.

WestLB dropped AstraZeneca to “hold” from “add” citing concerns that second quarter results released yesterday could be the bets it has to offer this year.

The German broker also lifted its price target to 3,500p from 3,300p, citing increased revenue estimates by 1% and EPS by 8% for this year.

UK lender Alliance & Leicester came off lows following its second quarter results after DKW stuck with its “add” advice on the shares noting that profit was ahead of forecasts.

The broker set a price target of 1,050p on the shares, which it said includes 100p takeover premium on the basis that Santander could bid in 2008. Conversely WestLB stuck with its ’sell’ recommendation and 850p price target.

HSBC started coverage on London Clubs International with a “neutral” stance advising that the disposal of its Les Ambassadeurs casino should help to smooth out earnings.

The broker also set a price target of 107p on London Clubs, adding that the more relaxed gambling legislation and a move towards a more mass market audience should help underpin growth.

Comments(0)

Kingfisher (KGF.LN) is expected to open broadly flat or slightly lower following 2Q sales trading update, says a trader. As expected, Kingfisher reported a poor performance by its core UK business B&Q while the group’s sales operations booked good numbers. However, a trader notes company comments about “early signs of progress at B&Q in the UK,” but says it’s still too early to call a recovery. Kingfisher closed at 236.50p Wednesday

Comments(0)

Indian companies seem to have realised that there is a lot in a name after all — and even more so in a brand name — if the spate of name changes in recent times is anything to go by.

In many of these attempts at an image make-over, the brand has become the corporate identity or been added to the existing name of the company.

The latest to join the rank is Satnam Overseas Ltd, which sells and exports rice under the Kohinoor brand name. Come September, the company will start calling itself Kohinoor Foods Ltd.

Earlier this year, millions of Airtel subscribers realised that their service provider was no longer Bharti Tele-ventures but Bharti Airtel. Airtel, of course, is the brand that is more easily recognised than Bharti in several pockets.

Vijay Mallya’s Kingfisher Airlines had its origin in air-taxi operator UB Air, branded after the parent company, liquor-maker United Breweries.

But somewhere along the runway, perhaps as an acknowledgement of the brand loyalty to his best known beer, Mallya opted for the name of Kingfisher Air when the time came to take off.

Similarly, Asahi India Glass Ltd, the country’s largest glass company, identifies itself as AIS, the same as its flagship brand. “We want the brand identity and the corporate identity to be the same,” sources close to the company said.

Much before this spree, seeking a more dynamic image than suggested by the unwieldy Birla-AT&T-Tata, the cellular service provider renamed itself as Idea, which is also its brand.

Calling Satnam Overseas’ plan sensible, Jagdeep Kapoor, chairman and managing director of Samsika Marketing, said, “What is the point in having a solid asset in a trusted brand and not incorporating that in the corporate name.”

Comments(0)

ING Financial has upped shares in DIY retailer Kingfisher to “hold” from “sell” following its second quarter figures released yesterday.

Comments(0)

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.

Comments(0)

Attention passengers: Your air carrier would like to thank you for paying more for your ticket - and sitting in a middle seat - this summer.

Despite a huge rise in fuel prices, airlines made more money in the second quarter than any time since 2000. Strong demand for travel allowed them to raise fares as they cut the number of flights and available seats. Also helping were sharp reductions in labor costs and in debt for airlines that are or were under Chapter 11 bankruptcy protection.

Yesterday, US Airways became the latest carrier to report a second-quarter profit, a feat even United Airlines says it will achieve just five months after it emerged from more than three years in Chapter 11.

US Airways Group Inc., which made $305 million in the three months ended June 30, joined AirTran ($32 million), American ($291 million), Continental ($198 million), Southwest ($333 million) and others in reporting quarterly profit. United is scheduled to report its earnings Monday.

W. Douglas Parker, US Airways chairman and chief executive officer, said in announcing its earnings that while other carriers were making money, “no other airline has experienced an improvement as dramatic as US Airways’.”

US Airways is Philadelphia’s dominant carrier, with more than 60 percent of the flights and passengers and more than 5,000 employees based here.

US Airways executives said they expected to make money in the third quarter, which typically is the industry’s best because of heavy summer travel, and for the full year. A full year in the black would be US Airways’ first since 1999.

The carrier recorded second-quarter net income of $3.25 a share on revenue of $3.19 billion. Because US Airways emerged from bankruptcy in September after a merger with America West Airlines, its financials are not directly comparable with the previous year’s results for the two predecessor airlines.

Increasing airfares has been the airlines’ ticket to profitability.

This week, the older hub-and-spoke airlines raised their one-way fares an additional $5, the seventh time this year they have increased prices. Low-cost carriers, including AirTran and Southwest, have also pushed up fares in several steps, usually by a little less than the older airlines.

The U.S. Bureau of Transportation Statistics said this week that its air-travel price index, which measures changes in ticket prices on identical routings each quarter, rose 10.3 percent in the first three months of the year, the largest increase since the start of the index in 1995.

Analysts estimate that airlines this year will take in 11 percent more in revenue per passenger mile flown than a year ago, while filling more than 80 percent of their available seats. Historically, planes have taken off with 70 percent to 75 percent of the seats occupied.

US Airways Group’s revenue per passenger mile increased even more than the industry average, at 29 percent on the US Airways portion of its route system, and 19 percent on the America West portion. The two parts of the airline are still largely separate, awaiting new labor agreements on how the workforces will be merged.

Roger King, an airline analyst with CreditSights in Norwalk, Conn., predicted earlier this year that airlines would continue raising fares and squeezing more people onto each flight “until passengers cry uncle and call Greyhound.”

But that point has not been reached, King said this week. “At some point, at a certain price, people are going to stop flying,” he said. “What that price is is to be determined.”

US Airways’ profit, which slightly beat analysts’ estimates, did not lift investors’ spirits. Shares of the airline, based in Tempe, Ariz., fell $3.14 yesterday, or 6 percent, to close at $47.99.

The industry’s profits in the quarter come despite oil prices that are more than a third higher than they were a year ago. Jet fuel now is the largest expense category for US Airways and some other carriers, in large part because of deep pay cuts, the elimination of pension costs, and staff reductions at airlines reorganizing in Bankruptcy Court.

Much of the industry’s ability to cope with the higher fuel bills is due to cutbacks in the number of available flights and airplane seats by airlines that have been through bankruptcy, analysts and airline executives said.

“It’s not great management,” Parker said in a conference call with analysts, referring to the whole industry. “As seats have gone away, you’ve seen fares go up.”

Analysts and other industry observers said that it was too early to know if business travelers, who have also seen their hotel and car-rental costs rise this year, would cut back on travel in the fall because of the higher fares.

Kevin P. Mitchell, chairman of the Radnor-based Business Travel Coalition, said it was heartening to see that low-cost airlines had expanded so much since 2000 that competition was setting ticket prices on most routes. In the late 1990s, the older carriers had more pricing power, in part because they kept newer airlines at bay on many of their most lucrative monopoly routes, he said.

“Low-cost carriers are offering very broad market discipline,” Mitchell said. “True supply and demand is setting prices, not anticompetitive behavior.”

For leisure travelers, resistance to higher airfares is likely to depend on other economic factors, including whether spending on new automobiles and other consumer durables slows down, and whether interest rates continue to rise.

“If that happens, that’s going to be a signal consumers are running out of borrowing capacity,” said airline consultant John V. Pincavage of Pincavage & Associates in Westport, Conn. “And if that happens, what’s the easiest thing to curtail? A trip.”

Comments(0)

The low-cost airlines had nearly 3m passengers in the first six months of the year. It may be hard for them to repeat the growth rates.

The first half of this year was the best in the history. Low-costs had nearly 3m passengers. In 2005, they had 3.2m passengers (12 months). This year they will more than double their results.

WizzAir remains the leader. It had 1m passengers in the first half of the year, nearly two times more (92.08 percent) than in the same period of last year. The Hungarian company plans to have 2m clients in the year. It has a big rival however. Irish Ryanair, the most expansive airline in Poland, is also planning to have 2m passengers this year. In the first six months of the year, it had 920,500 passengers, or 2,722 percent more than a year earlier. Centralwings, the low-cost owned by LOT, the Polish flag carrier, increased the number of passengers by 137 percent to 329,000. Germanwings and SkyEurope have over 15-percent growth rates (they had 101,000 and 260,000 passengers respectively). EasyJet, which globally is Ryanair’s rival, was the only airline to have the same number of passengers (210,000).

Comments(0)