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karatecatman


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Airlines head for meltdown
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http://www.business-standard.com/compindustry/storypage.php?leftnm=lmnu1&subLeft=1&autono=259555&tab=r


Airlines head for meltdown





Bipin Chandran & P R Sanjai / New Delhi\\Mumbai September 25, 2006









India might be one of the hottest growing aviation markets. But are domestic carriers flying into bankruptcy as they face cut-throat competition and woo customers with rock bottom air fares?

 

The numbers tell a grim story. Naresh Goyal, founder chairman of Jet Airways, said airline companies together would lose a staggering Rs 2,200 crore this year, or Rs 6 crore every day, for flying over 75,000 passengers.

 

And last week, Air Deccan surprised most analysts when it announced a whopping Rs 340 crore loss for the 15-month period ending June 30, 2006, much higher than what they had predicted.

 

But the scenario could get worse. Industry experts reckon losses could double in the next two years and more than half of the start-up carriers may go belly-up, sinking over $2 billion worth of seed money.

 

Over-capacity due to the entry of newer players (IndiGo, Jagsons ,Indus Air One and Yamuna Air, among others), the unprecedented rise in fuel costs, hasty expansion by carriers, even in the international markets, and faulty business models have jeopardised bottom lines of many carriers.

 

To add to their woes, investors have been chary of putting their money in aviation, so raising funds is not easy either. This is reflected in the fact that the Air Deccan initial public offer (IPO) just about managed to scrape through and carriers like Jet Airways have postponed their GDR/ADR issues ,while Kingfisher postponed their maiden IPO slated for this year.

 

Experts say the next two years will delineate the losers. “There will be a bloodbath for the next two years as too many airlines are coming in,” said Kalpesh Parekh, assistant vice-president, ASK Raymond James.

 

Over-capacity has definitely prevented carriers, especially low-cost ones, from increasing their yields per ticket as new players come in with low fares to make a dent in the market.

 

“For most carriers, the initial low pricing was to woo customers. But competition from new entrants prevented them from increasing fares later,” said Kapil Kaul, chief executive, Centre for Asia Pacific Aviation.

 

This is why the current average fare of budget airlines at Rs 2,500, is about 25 per cent lower than what most carriers need to break even.

 

The over-capacity is stark. The number of seats offered in the domestic market has increased from around 80,000 seats a day in January 2005 to around 124,000 in March 2006, an increase of 55 per cent, while, the number of passengers has grown only about 30 per cent.

 

The average seat load factor of an Indian airline is just 62 per cent. This shows that most carriers are flying half empty.

 

Input costs have also gone up without carriers being able to increase fares. Salaries of pilots and engineers have virtually doubled in a year because of demand from new players.

 

And fuel prices are playing havoc — they rose over 30 per cent in the last quarter — and they constitute over 45-49 per cent of a budget airline’s total cost. However, most of them have been able to pass on only a part of the hike to passengers, eroding their margins further.

 

The softening in crude oil prices might help, but with most carriers planning to pass on the drop in fuel costs to passengers through lower fares, it will not be reflected in their margins at all.

 

Of course, the blame also lies in faulty business planning. Says an airline executive with a leading airline: “With a two aircraft configuration — Airbus and ATR — Air Deccan’s costs on spares, maintenance and engineering have all gone up. Air Sahara made the same mistake. Air Deccan also tried to get into too many routes in its expansion drive without the necessary aircraft. As a result, there were too many cancellations of flights and the brand took a hit.”

 

According to industry estimates, airlines can save as much as 20-25 per cent in aircraft cost if they have a similar aircraft fleet.

 

In the case of Jet Airways, however, a key reason for the squeeze on its bottom line is due to the forced discounting of a larger percentage (over 50 per cent) of its tickets to take on budget airlines. And it made substantial investments in its international operations, especially in London, which it has to recoup.

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HAWK21M


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Not surprisingly.The Bubble has started to Burst.


I guess Raising Salaries & lowering fares would hit profits.At the moment only Cargo operators seems comfortable,as Pax operators are struggling.Some will close shop soon if fares are not raised.


There is enough space in the Aviation bussiness for a limited no of operators.


regds


MEL



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the_380


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Mel cargo operators in india dont have much competition but what about global routes for DHL BDA UPS etc dont they face any competition?


The companies in Air Cargo are pretty less besides the demands are less COMPARED to pax so there is not much cut-throat competition.



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HAWK21M


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True International Ops Freighter competition does exist.However on the Domestic front.Cargo prices are never dropped,so the Profit margin is Larger.Also Pax loads fluctuate with Seasons unlike Freight.Delayed flights require Hotel Accomodation for Pax,no such thing for Cargo.


regds


MEL



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