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Post Info TOPIC: Poor environment for LCCs --Economic Times


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Poor environment for LCCs --Economic Times
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Poor environment for low-cost airlines
HORMUZ P MAMA (The writer, a journalist, was earlier editor of International Aerospace)  


[ THURSDAY, JUNE 01, 2006 12:06:37 AM]  ECONOMIC TIMES
 
While full-service carriers attract passengers with the overall quality of their service, low-cost airlines offer a bare-bones service and compete primarily on cost.


They fly more sectors in a day than full-service airlines and usually operate from smaller, secondary airports that have lower charges, but may be very far from city centres.


Thus, passengers spend more time and money to get into town. Among typical European examples are London’s Luton, Rome’s Ciampino, or Stockholm’s Skavsta.


These services are generally aimed at eliminating the problems of connecting flights. They do not have code-sharing agreements with other low-cost airlines to minimise costs. They also generally avoid head-on competition with each other, and prey on full-service airlines.


Their staff are generally less well-paid and more intensively used than those of full-service airlines. Admittedly there are numerous exceptions to these broad generalities. EasyJet operates mainly from major airports, JetBlue offers live TV programmes free and some other airlines even offer free meals.


India is not yet ready for low-cost carriers. In the present environment, almost 70% of their operating costs are the same as that of full-service carriers. These include aircraft purchase and lease-rental charges, maintenance, repair and overhaul and fuel costs, airport and navigation charges etc. Thus low-cost airlines can juggle with only just over 30% of their overall costs to gain an advantage over full-service carriers.


Worse still, many of these major costs are way above global levels. The fuel cost in Delhi is over Rs 35,000 per kilolitre, and is much higher at other Indian metropolitan airports. This high fuel cost is mainly due to exorbitant state and central government taxes and duties.


These include a 10% customs duty on imported ATF, an 8.16% central Excise on the cumulative duty rate, as well as state sales taxes of 4-34%, according to data provided by Jet Airways.


Nikhil Garg of Edelweiss Capital points out that when low-cost airlines had started over two years back, no one had expected a 40-50% higher fuel cost . For Air Deccan, high fuel cost accounts for about 40% of its overall expenses. By contrast, for Ryan Air, it is only about 20%.


Thus, Air Deccan could require 3-4 years to break even, while some of the other airlines could even go under. All domestic airlines urge that the cost of ATF be lowered to that for international airlines in India, and that the tax level be reduced to about 5%.


Poor airport infrastructure and high charges hurt low-cost airlines more than others as they have to achieve more rapid turnarounds and higher fleet utilisation. These charges amount to a higher percentage of their overall cost structure. Also India has few secondary airports that could help to reduce costs.


Mr Garg recommends lower charges at non-metro airports and at off-peak hours, to help low-cost airlines to survive. Full-service airlines could have the peak-hour slots at higher rates. That would reduce the competition between them. He wants subsidies or incentives on the lean routes, or the grant of a monopoly status for a few years.


A good solution would be for government to invite bids from low-cost airlines to operate on certain marginal routes, with the airline offering to operate at the lowest subsidy being given exclusive rights for a few years.


These airlines generally have fewer staff, with lower salaries and heavier workloads. In the present environment of acute staff shortages at every level, the personnel can pick and choose, and command fancy salaries.


At peak hours, for flights between Mumbai and Delhi, about 80% of our passengers select the unrestricted full fare”, says Peter Luthi, COO of Jet Airways, adding that the remaining 20% would pay the check fares on offer. At off-peak hours, however, the situation could be reversed.
Globally, while low-cost carriers avoid competing among themselves, and hit at full-service carriers —at least till recently — in India, they are already bleeding each other. It could affect their survival. Moreover, their fares are falling faster than their costs.


That does not help them to recover their costs — which keep rising. Thus, these airlines may be able to break even at only about 85% load factors year-round system-wide — a figure difficult to achieve at best of times.


Air Deccan CEO G R Gopinath, has said that he would like his airline to match rail fares. That is inherently unattainable, because of the economies of scale that the railways enjoy. Also, the railways are fighting back for their high-yield traffic with a counter-fare war.


Clearly, low-cost airlines are doing badly, and the situation will get worse as capacities build up. Air Deccan’s loss of Rs 115.02 crore in its first 2.5 years, and its negative net worth of Rs 796.7 million is mind-boggling. It may find it difficult to attract investors for its IPO at the expected rate of Rs 320 to 340 per share.


Asked about Air Deccan, Mr Garg says that new airlines would take a couple of years to break even. Services between metro and non-metro cities, of the type that Air Deccan has pioneered, generally take more time.


However, he adds that Air Deccan’s load factors are low, at around 70% for the last six months, while break-even could be at about 90% systemwide.


Also, it is not very efficiently run, and does not have a good business model, he points out. However, it may not merit investment until it sustains load factors of above 85%.


A lot has gone wrong with India’s low-cost airlines. These airlines, in their efforts to expand and achieve economies of scale, have been reckless, and have gone deep into the red. Except for Air Deccan, most other airlines concentrate on the saturated metro routes.


This writer feels that the industry will face complete saturation well before that. Low-cost airlines can help India’s economic development.


The present economic boom was just the right time to launch the low-cost revolution. However, so much has gone wrong that India may have to await second-generation low-cost airlines to deliver the goods.


(The writer, a journalist, was earlier editor of International Aerospace)
 
 
 



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Billing settlement plan to full-service carriers’ rescue?



Wednesday, May 31, 2006  22:37 IST



The scheme is set to roll out in a month’s time.


MUMBAI/ BANGALORE: Are the low-cost carriers (LCCs) about to lose a key edge in their pricing model? Looks like they are, with the billing settlement plan (BSP) all set to take off.


Amongst the areas where LCCs enjoy a cost advantage compared to the full service carriers (FSCs) is ticketing (no meals on flight, single class configuration and quick turnaround time are among the other areas).


LCCs put their entire seat inventory on the Internet and don’t issue any physical ticket. Customers take a printout of the ticket after booking them online.


FSCs, on the other hand, issue physical tickets that, say industry sources, cost Rs 23-35 ($0.5 -0.75) per ticket to print.


However, LCCs could see this cost advantage thinning as BSP, involving all the 2,000-odd travel agents registered with the International Air Transport Association (IATA), is rolled out in under a month. Under the ambitious plan, physical tickets would be completely done away with and the travel agents would issue only e-tickets.


Besides saving on ticket printing cost, the shift to e-tickets also frees working capital as these tickets are normally printed in bulk and stocked with travel agents across the country. Wastage, loss-in-transit and cancellation account for 3-5% of the ticket cost, which too can be saved.


BSP also does away with the need of individual travel agents to remit money to the airline. Instead, they would have to pay to IATA, which in turn would pay a single cheque to the airline on behalf of all the agents. This frees a lot of resources at both, the travel agent’s as well as the airline’s ends.


According to a Jet Airways official, the overall savings from BSP for the airline could be $2-3 per seat. And that’s not a small figure at all. A back-of-envelope calculation shows that about 15 million passengers flew last year, and between Jet and Sahara, if even a conservative 50% market share is considered, it translates into a total saving of Rs 65-100 crore for the two, which could straightaway reflect in their bottomlines.


The deadline for complete implementation of BSP is December 31, 2007, after which no physical tickets would be issued. Already, 150 countries have come under BSP and over 80% of worldwide airline revenues ticketed via IATA travel agencies are in the BSP system.


All the new airlines are e-enabled. Kingfisher Airlines, which launched its services in May, 2005, has been selling 100% of the tickets electronically from day one. "With e-ticketing, an airline is able to not only reduce its operational cost but it also improves efficiency. For instance, with the same ticketing staff strength, an airline can sell more tickets. Even the hassles of issuing a ticket are far less than paper tickets," says Kingfisher Airlines’ general manager, sales, Manoj Chacko.


If the FSCs pass the benefit back to the customers, they can narrow the gap between their fares and those of LCCs, and if they retain it, it helps in improving their margins.


Either way, they win. Budget airlines agree that the ticket cost differential would disappear as the FSCs move to 100% e-ticketing. However, since they do use the global distribution system (GDS) to sell their tickets, the distribution costs would still be lower by 10-15%, they claim.


"We sell most of our tickets through our websites, call centres and airport counter, while the full service airlines rely on domestic and international GDS and interline to distribute their tickets, besides travel agents. This way, their commission payout adds up to 11-12% (of the ticket price)," says SpiceJet’s CEO Siddhanta Sharma.


Jet is rolling out BSP next week and hopes to rope in "at least a few hundred" travel agents in the first phase. Jet officials say implementation would take under a week and no investment is required to be made at the agents’ end.


Anoop Kanuga, secretary of Travel Agents’ Association of India, says e-ticketing will also benefit travel agents as it would reduce their cost of delivery.
 



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Revenue of non-metro airports in full throttle 
 
Growth in low-cost airlines shoots revenue over 50%
 
ATREYEE DEV ROY
Posted online: Tuesday, May 30, 2006 at 0030 hours IST
 
       
 
 
NEW DELHI, MAY 29:  Rapid growth in low-cost airline business has increased 2005-06 revenue of non-metro airports like Hyderabad, Coimbatore, Ahmedabad, Cochin and Pune by more than 50%, although on a smaller base. In comparison, the revenue of the Airports Authority of India (AAI) — which manages 126 metro, non-metro and international airports — grew just 12.78% in 2005-06.
While airport-specific revenue numbers are still unavailable, growth in aircraft movement confirms the spike in revenue. Domestic aircraft movement in Hyderabad, for instance, has grown 64.9% in 2005-06, followed by Coimbatore (59.7%), Cochin (54%), Ahmedabad (52.8%) and Pune (50.6%). Aircraft movement in Delhi grew 31.4%. Hyderabad alone handled 40,875 domestic aircraft in 2005-06.



 
Other airports registering high growth in revenue were Jaipur, Udaipur, Srinagar, Amritsar, Ambala, Thiruvananthapuram, Visakhapatnam, Mangalore, Nagpur, Goa, Varanasi and Trichy.


According to Kapil Kaul, CEO, Indian subcontinent and Middle East, Center For Asia Pacific Aviation, smaller airports like Ahmedabad, Nagpur, Jammu and Amritsar have largely benefited because of the start of operations by low-cost carriers. Several airlines have also made non-metro airports hubs of their operations. SpiceJet, for instance, has Ahmedabad as its hub, while Air Sahara’s hub is Lucknow. “When we started operations we had many flights connecting Ahmedabad and Pune to the metros. It takes time to develop traffic on new routes, but so far we have had a positive experience,” Spicejet director Ajay Singh said.


Similarly, Air Deccan connects many non-metros like Ahmedabad, Jammu, Vijaywada, Goa, Visakhapatnam and Vadodara. Passenger traffic during 2005-06 grew 27.9% with all airports together handling 5.1 crore domestic passengers, up from 3.98 crore in 2004-05.
 



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INTERVIEW - Jagson to sell 20-25 pct equity

June 1, 2006

NEW DELHI (Reuters) - India's Jagson Airlines Ltd. said on Thursday it planned to sell 20 to 25 percent of equity to domestic and foreign investors as it prepares to begin scheduled flights of its first Airbus aircraft.

Company officials said stake sale talks with a foreign investor were at an advanced stage.

"It would be to a foreign venture capital investor and a consortium of domestic investors," Uttam Kumar Bose, Jagson's president and CEO told Reuters in an interview.

"About 51 percent is currently held by the promoters. We will also have a follow-on public offer in late-2007."

New Delhi-based Jagson, which currently operates three Dornier aircraft and three helicopters on charter flights, placed a $1.3-billion order in February for 20 Airbus A321 aircraft.

The company's first Airbus will arrive in June, and the first commercial flight is scheduled to take off on the Chennai-Bangalore-Delhi sector on July 15.

The start-up firm may also look at acquiring another airline as part of its growth strategy in a booming domestic aviation industry, Bose said. Air travel is forecast to grow by more than 20 percent a year over the next 5 years in India, boosted by higher incomes and lower fares.

Jagson Airlines, part of the Jagson group whose interests range from trading to offshore drilling, will use the cash raised to help finance its operating costs including the buying or leasing of 10 to 15 more planes between 2008 and 2010.

The airline plans to deploy one small plane for every two Airbus aircraft as part of a strategy linking small towns with regional hubs.

"The biggest problem is infrastructure and this means less connectivity," Bose said.

India, Asia's third-largest economy, has embarked on a drive to upgrade its creaking infrastructure of ports, roads and airports as it aims for double-digit GDP growth.

NEW LAUNCHES

The country's nascent airline industry saw four airlines launched last year, and consolidation appears inevitable as cut-rate pricing puts pressure on profit margins.

"I see lot of consolidation and mergers happening in the next 8-12 months. But no closures as airlines need to boost capacity."

Asked if the firm would consider an acquisition, Bose said: "Why not? We will look at it."

He expects the company to break even within the first year of scheduled operations as it will sell both discounted and full-price tickets leading to "higher revenue yields".

Bose said the company would target the economy class passengers of full service airlines -- who constitute 60 percent of all people who fly in the country -- as well as business travellers.

"Only 5 percent of the estimated 300 million middle-class flies so there is a huge potential."

Jagson will compete with domestic airlines like state-owned Indian, Jet Airways, Paramount, Kingfisher which is backed by United Breweries and discount carriers like SpiceJet Ltd., Air Deccan and GoAir.

Jagson shares were trading at 33.0 rupees at 0802 GMT, down 2.9 percent in a weak Mumbai market.



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Airlines net high gains on lease and sale planesAdd to Clippings
AMIT BHANDARI

TIMES NEWS NETWORK[ THURSDAY, MAY 18, 2006 02:02:42 AM]


Non-Aeronautical income for airlines is not just the money made from selling advertising space or water bottles, but also the profits recorded on sale and lease-back of aircraft.

Jet Airways, Air Deccan and SpiceJet have all recorded significant gains from sale and lease-back in the last fiscal. While Jet has sold old aircraft, the other two players have sold new aircraft just off the assembly line.

On a per aircraft basis, Jet has also recorded significantly higher gains. Given the large number of aircraft on order with the Indian carriers, this could be a significant revenue stream, going forward, and see the share of non-aeronautical income increase. For some foreign carriers like Ryan Air, ancillary income is as high as 23% of the turnover.

Jet Airways, Air Deccan and Spice-Jet have all recorded profits on sale and lease-back of aircraft in the last fiscal. The aircraft that Jet has sold are old, depreciated aircraft. Air Deccan and SpiceJet have sold new aircraft that have seen a price appreciation from the date of order to the date of delivery. Investec, GE and the Royal Bank of Scotland are amongst the agencies that are in the aircraft purchase and leasing business.

Jet Airways recorded a gain of Rs 271 crore on this account, which allowed the airline to post a 15% increase in bottomline during FY06 to Rs 452 crore. Jet sold a total of five Boeing 737s, which it has then leased back. The approximate profit per aircraft thus works out to about Rs 52 crore.

This is higher than the gains recorded by the other two companies, because the aircraft sold by Jet are five years old. The company depreciates its aircraft at a very high rate, as a result, after 5-6 years, the depreciation benefit is not so high and there is a substantial difference between the book value and the market value of the aircraft.

Jet Airways currently has a fleet of 53 aircraft, of which the company owns 19. It plans to carry out sale and lease-back transactions on 3-5 aircraft annually. The company also has 30 new aircraft on order.Low cost carrier Air Deccan also recorded an income of Rs 35 crore through this method in the earlier part of FY06, on two newly delivered Airbus 320s. SpiceJet recorded a net of Rs 4.3 crore for the Q4 FY06, which was due to a Rs 17.7 crore gain on the sale and lease-back of a newly delivered Boeing 737.



-- Edited by karatecatman at 19:18, 2006-06-02

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India set to become world’s leading LCC market: CAPA
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India set to become world’s leading LCC market: CAPA


New Delhi, Aug 7 (UNI)


The low cost carrier (LCC) market share in India will reach 70 per cent by 2010, the Centre for Asia Pacific Aviation (CAPA) said today.


This will make it one of the world’s leading LCC markets in terms of total market penetration.


Given the growth potential of market and penetration levels already achieved by LCCs, the CAPA said India could see the establishment of a home-grown LCC in the next five years with the size and scale approaching that of easyJet or Ryanair.


The launch of IndiGo in the past few days will keep the market growing strongly in the months ahead, said its CEO for Indian subcontinent and Middle East Kapil Kaul.


Full service carriers are on average bleeding a remarkable 1.5 percentage points of market share every month to LCCs.


‘‘We do not expect this rate to slow in the short term, given the profile of current fleet orders. LCCs could therefore control over 35 per cent of the domestic market by this year-end and pass 50 per cent some time in second half of 2007.’’


The Indian domestic market has been growing at almost 50 per cent so far this year. ‘‘The emerging untapped leisure/VFR sector will drive the domestic market to more than double over the next five years (growing at 25 per cent annually) to around 60 million passengers by 2010. And the LCCs will gobble up most of the new traffic growth,’’ said Mr Kaul.


‘‘But high fuel costs, low yields and congested airport infrastructure pose major risks to the sector going forward and have the potential to place a major strain on airline finances. While we are not predicting a bloodbath, airlines will need to be careful with capacity and ensure they are well funded,’’ he added.


 



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