http://www.hindustantimes.com/news/181_1794961,00020016.htm
Airlines fly into Rs 2,100 cr loss; shake-up looms large

Ranju Sarkar

Mumbai, September 12, 2006
 
Domestic airlines are flying into turbulence. Plagued by higher fuel prices, infrastructure constraints, declining yields and load factors, the domestic airlines — both full-service and low-cost — are together losing nearly Rs 6 crore a day. This means they could together tote up losses of Rs 2,100 crore, or $486 million, in the next one year.

This was the estimate of losses by experts at the Indian Travel Congress, which was held at Hyderabad in the first week of September.

Jet Airways reported a loss of Rs 45 crore in the quarter ended June, despite a 25% increase in revenue. Low-fare airline Air Deccan reported a loss of about Rs 35 crore for the year ended March this year while another budget carrier SpiceJet reported a loss of Rs 41 crore for year ended May.

Air traffic has been growing at a scorching 40 per cent per year. But airlines have also been adding capacity at a frantic pace. Four years ago, Indian operators had 121 aircraft. Today, there are more than 200. In the next two years, the country will have 400 civilian planes, and 550 planes by 2010.

Is the market ready for it? “If the market grows at 30-40- per cent, the airlines may manage to keep their heads above water. But if the market doesn't grow at the same pace as capacity, airlines will be forced to discount. They are caught in a vicious cycle of declining yields and declining load factors,” says a Mumbai-based aviation expert, who does not wish to be named. The airlines have also been hit by higher fuel prices and congestion at airports like Delhi and Mumbai, which is forcing them to burn more fuel.

Airline CEOs are not hassled as they have budgeted for some of the losses. “Our cost structure is designed to compete with AC II railway fares. It will be only get better with outsourcing,” says GoAir CEO Jeh Wadia, who’s banking on outsourcing of services like engineering and ground handling which can bring down costs by 25 per cent. “'In the normal course, it takes three years to break even. In India, it will take time for the shift in consumer spending to happen. Even if people have money, it takes four-five years for people to adopt a lifestyle,” says Air Deccan CEO GR Gopinath. What has compounded the problems for airlines is that the stock market is giving more realistic valuations to airline stocks.

A few months ago, the Jet scrip slipped below Rs 500, after listing at Rs 1,100; it is now trading at Rs 630. Jet’s success in raising money encouraged other airlines to place orders for aircraft. “'New players hoped that they would do an IPO in four to six months and raise Rs 1.000-1,500 crore to fund the acquisition of aircraft. After Air Deccan’s experience, nobody wants to enter the stock market. They are all stuck,” says an observer. To survive, they will have to look at private sources, sell out or fold up.

The mounting losses of domestic airlines could force a shakeout in the industry. It could see a full-service airline buying a budget carrier. “Every airline is looking at some option or the other. Jet could buy Air Deccan. You see the two getting closer with all kinds of alliances,” says an observer.

Of course, the government could come to the rescue of the airlines and allow FDI in airlines — this could happen sooner than later. Industry sources say that Richard Branson had shown interest to pick up a stake in Air Deccan while gulf carriers are keen to have a slice of Jet.