Bangalore Aviation News, Reviews, Analysis and opinions of Indian Aviation
Related Articles
Perfect storm
Shuchi Bansal
Airlines are blaming the rising ATF prices for their woes. But it is also a crisis of their own making. How are they coping?
The exasperation in Saroj K Datta’s voice is unmistakable. “We are doing whatever needs to be done — capacity rationalisation, maintaining aircraft fuel efficiency, and so on,” says the executive-director of Jet Airways, when asked about the innovative methods his airline is attempting to stay afloat.
His exasperation arises from the fact that the query is hurled at him quite often these days, just as it is at the other airline bosses. So often, in fact, that many of them appear to be on the point of throwing their hands up in the air.
The question, however frequently asked, is not out of place. IATA forecasts that the Indian carriers will lose a combined $2.3 billion (about Rs 9,900 crore) this year. This number, already large, appears even more ominous when one recalls that as recently as last March, IATA had anticipated a profit of $4.5 billion for the aviation sector in India.
“It no longer expects the industry to make a collective profit in 2008,” says Hitesh Patel, executive vice-president, Kingfisher Airlines. Patel isn’t as prickly as Datta on the survival strategies of his airline, but he’s not in high spirits either. “With the price of oil sitting at $135 a barrel, the world has turned upside down,” he says.
Kingfisher Airlines, which has been the mover and shaker of Indian aviation ever since it took flight, is believed to have run up a debt of Rs 4,000 crore. The airline, which is merging with Deccan Aviation, is understood to have a top line of around Rs 3,000 crore and is expected to make losses of Rs 900 crore on a yearly basis. This is in addition to the losses of around Rs 650 crore suffered by Deccan Aviation.
Flight for survival
“Airlines in India should be prepared to expect the unexpected while at the same time focus on achieving high utilisation,” says KPMG, the management cosultancy.
That sounds deceptively simple. Datta and his ilk are constrained by the fact that in this industry the obvious option of scaling down in the face of operating losses comes laced with complexities. Many airlines have cut flights, but they are breaking their heads over what to do with the idle aeroplanes.
The worldwide softness in the sector has ensured there are few takers for these aircraft; those who had leased the aircraft to Indian carriers will invoke a hefty penalty if the planes are sent back to them. According to experts, out of the 300 odd aircraft with Indian carriers, there is an excess capacity of 15 per cent, or roughly 45.
The airlines are therefore resorting to other methods to ride the storm. Nearly everyone is looking to raise money. The total capital required to be raised is $2 billion, says a report by Centre for Asia Pacific Aviation, or Capa, the airline consultancy and research outfit.
SpiceJet was lucky in its search. It found WL Ross & Co, the global private equity fund, which has promised to invest Rs 345 crore in the airline. “The details of the equity that’s been offloaded are still being worked out and are, therefore, confidential,” says Ajay Singh, director, SpiceJet.
WL Ross bought into SpiceJet’s growth story as it shares the airline’s faith in the low-cost business model. “We are very clear. We want to be a low-cost carrier and we want to be well-funded,” Singh adds.
State-owned Air India has asked the government for Rs 500 crore. It has also prepared a blueprint to save over Rs 1,000 crore a year by reducing capacity by 10-12 per cent from August. Kingfisher, Jet Airways and IndiGo, among others, also plan to raise money. Ernst & Young and even Capa are helping the airlines in their search for suitable investors.
Of course, infusion of funds is useful but airlines need to pilot themselves out of the mess through other measures. Kapil Kaul, CEO (Indian subcontinent and the Middle East) at Capa says the first golden rule for airlines is to fill their empty seats.
The low-cost airlines enjoy a passenger load factor of 70 per cent while the full-service airlines have a load factor of 60-65 per cent. The unused capacity must be filled by offering lower, last-minute fares – a measure made easy with the help of technology. “People are not flying because fares are high. If this capacity is used, it will stimulate their balance sheets. Money saved is money earned,” says Kaul.
Talking of savings, airlines must monitor their marketing expenditure closely. For most carriers, advertising has been the first casualty. Yet others are reviewing their contracts with their public relations agencies. On the revenue management side, the airline industry reduced its travel agent commission on tickets from 9 per cent to 5 per cent. However, it later declared that the industry would not pay any commission to the booking agents.
Some airlines have also abandoned the use of aerobridges at new airports which are charging a hefty fee for their usage. The carriers have deployed buses to ferry people to and from the aircraft.
“These are tough times for the airlines and they must brace themselves up,” remarks Mark D Martin, senior adviser, KPMG. However, Martin warns against knee-jerk reactions. “Don’t cut back on the sandwiches and Coke, it does not help as a rival carrier could introduce it and grab market share,” he says.
In a smart, attention-grabbing move, Simplifly Deccan, which pioneered low-cost flying in India and is now a part of Kingfisher, has announced that it will offer food and beverage on its flights. Justifies Kingfisher’s Hitesh Patel, “When a common man pays for an air ticket or for an AC first class train ticket, he expects some level of service. Also being a UB Group company, our brand has to deliver a certain level of service while the cost is kept under control.”
Several airlines have also resorted to cutting down their unprofitable routes. SpiceJet’s Singh says that the airline industry has cut down 20 per cent of its capacity. Unconfirmed reports suggest that Kingfisher and Deccan combine have together cut back nearly 100 flights a day. Jet is said to have pruned about 10 per cent of its capacity while Indian and Air India, SpiceJet and IndiGo have also “rationalised” their routes. “We are down from 150 to 95 flights,” admits Jack Ekl, chief pilot, Spice Jet.
IndiGo’s president and CEO Bruce Ashby says the airline is “revising its schedule for the late summer, off-peak period to remove marginal flying”. However, just cutting down flights is not enough. The airlines must identify and develop new routes and focus on the emerging traffic destinations.
Airlines’ current obsession with fuel conservation, in pursuit of cost saving, is also understandable. At $135 a barrel, ATF does not come cheap. Besides, the tax on ATF is not uniform — it varies between 4 per cent and 36 per cent from state to state. But to conserve fuel, an aircraft must shed weight. Some international airlines, it is learnt, have stopped stocking newspapers for their passengers as it adds to the weight of the aircraft. Yet another airline has reduced the number of pages in its in-flight magazine. It is reported that Japan Airlines is using lighter seats, trolleys and tableware. The water in the rest room has also been rationed.
Back in India, instead of relying on sundry ways to save fuel, IndiGo has implemented an intensive computer system that indicates how much fuel should be carried, and the optimum speed and altitude for the aircraft. Says IndiGo’s Ashby: “From day one of IndiGo’s operations we have optimised fuel burn.” The airline uses sophisticated flight planning software, from a company called NavTech, that considers all of the trade-offs of climb, descent, cruise speed, fuel boarded and so forth.
“We monitor the actual performance against the flight plan and give and receive feedback to and from pilots when there are deviations,” says Ashby. He says that the airline was careful in developing its aircraft specification to avoid carrying extra weight, which in turns requires more fuel. “Finally, we fly only ultra-modern, fuel-efficient brand new Airbus 320,” he says.
Turbulence in the air
The airlines are in a tailspin for several reasons. For a start, the price of aviation turbine fuel (ATF), which constitutes 40 per cent of a carrier’s operating cost, shot up from $100 a barrel to $135 a barrel in a matter of weeks. To compound matters, ATF costs 80 per cent more in India than its price in the international market.
That is not all. Inflation is on the rise and passenger traffic is on the wane. According to Kuljit Singh, partner at Ernst & Young, domestic air traffic, which was clocking 25 per cent growth some months ago, has entered into a downward spiral. “It is in the negative now,” he says.
Jet Airways’ Datta, however, maintains that the airline industry is still experiencing marginal, single-digit growth. In his view, other than the ATF prices, excess seat capacity and economic slowdown have unleashed chaos in the airline market. “Growth has melted away and fewer people are travelling,” he says.
Fewer people are travelling because the cost of air travel has soared. Several airlines have raised the fuel surcharge and added congestion charges. Yet others have increased their base fares. Consequently, on certain sectors there is an almost 100 per cent increase in fares. As the fares rise, the new breed of travellers spawned by the arrival of low-cost carriers, dwindles. “The consumer got spoilt by very low fares and is finding it very hard to digest the revised fares,” says Ekl of SpiceJet, a low-cost carrier promoted by the Kansagra family.
Former Air India chairman and managing director V Thulasidas believes that airlines could have managed growth and competition better had they not resorted to under-cutting. The tickets were priced so low that airline yields took a severe hit. “The industry cannot attribute all its troubles to ATF prices. It has to accept the blame for the current crisis,” he says.
Whether or not airlines admit to their role in perpetrating the meltdown, the fact is currently each one of them is reworking its business plan and chalking out fresh strategies to keep its head above water.
Datta’s been extremely tied up managing his 15-year-old, award-winning airline that was profitable till last year. Jet Airways posted a Rs 221 crore loss in the fourth quarter of 2007-08 compared to a Rs 88 crore profit in the same quarter a year ago. It registered a net profit of Rs 28 crore in 2006-07, which has begun to look even better in comparison to the Rs 253 crore loss in the last financial year.
SpiceJet’s Ekl says that his airline was profitable before the ATF price hike. Patel refuses to share the details of his company’s financial performance but says that airlines worldwide, not just in India, have been suffering due to rising crude oil prices. Aviation is predominantly a low-profit-margin business. According to IATA, the industry earned an estimated $5.6 billion in 2007, which represents a wafer thin 1.1 per cent net margin on sales of $490 billion.
“The situation is serious. But what it has done is to ensure that airlines take dramatic measures to lower their cost of operations,” says Ajay Singh of SpiceJet. Clearly, airline managements are working towards finding ways to cut costs, increase revenue and raise funds to cruise through the turbulence.
Looking beyond passengers
Often, even minor innovations help increase revenues. Or, at least, save money. International carriers such as Ryan Air of Ireland and EasyJet in the UK have proved that. Low-cost carrier Ryan Air functioned without tickets (and saved money) as almost 95 per cent of its bookings were done online. Another low-cost airline, Jet Blue, changed the uniform of its employees from formal to casual. The airline saved money as fewer uniforms had to be issued to an individual in a year since casuals were low on maintenance. Secondly, people productivity went up as a result as they worked more efficiently. “You need out-of-the-box thinking to save money,” says Martin of KPMG.
Low-cost carriers must focus on non-passenger revenues. This includes selling food and beverages, merchandise, and even insurance on board. Airlines following the classic LCC model chase non-passenger revenue. “However, India’s low-cost carriers have shied away from doing it,” says Kaul. SpiceJet does not share the details, but admits that to save money, the summer vacations of some of its expatriate executives have been extended and they have been allowed to stay home longer.
Ashby says “innovation” is not merely jargon, “but we are not doing anything that we were not doing a few months ago”. In his view, IndiGo may be a bit different from the typical airline because it is fairly young. “We launched operations barely two years ago. So we commenced operations with the world’s best practices that airlines worldwide are implementing,” he claims.
Jet Airways’ Datta and E&Y’s Kuljit Singh are not for passing off minor tweaking in operations as innovation. “We need practical solutions and not management jargon,” says Datta. E&Y’s Kuljit Singh agrees. “How much innovation can the airlines do when 60 to 70 per cent of their operating costs are fixed. And cost cutting in this manner does not make you profitable. It only helps in saving some money,” he adds. The most that airlines can do is to resort to fuel hedging. Says Hitesh Patel: “We are closely monitoring our costs but nothing material can be achieved till certain big ticket items are addressed in India.”
Clearly, the big ticket items are fuel price and other airport charges. Airlines’ plea is that the tax on ATF should be reduced and made uniform. Thulasidas says that Air India, too, made a representation to the government to recognise aviation as a basic infrastructural requirement rather than luxury travel. SpiceJet’s Ekl says that at least the Indian government is open to the industry’s suggestion and willing to help. “In the US, the situation is very bad and the government does not come to the rescue of the airlines,” he says.
Whether or not the government rescues the airlines, will some of them fold up in any case? Of course, airlines do not admit that they are up for sale, though industry insiders say that some of them are looking for buyers. However Ashby is not convinced about consolidation. “Consolidation in itself means nothing. We had a round of consolidation last year and it all resulted in the same airplanes flying to the same places but with different paint jobs. However, we may see some additional capacity reduction and possibly further consolidation as a result of the high fuel prices,” he says.
Indian entrepreneurs have a huge appetite for losing money. So Kapil Kaul does not see too many casualties in the short run. Besides, things can only look up from here. Travel is integral to the economy, which is still growing at 8 per cent a year or thereabouts. The sector’s prospects beyond 2010 are bright. ATF prices are stabilising. Key airports will be modernised and taxes on fuel may be lowered. That’s not all. “We expect Indians to take to air travel in a big way,” says Kaul.
That sounds like just the balm to soothe Datta’s nerves.
For more on the politics and impact of ATF pricing please read my article Fuel populism killing air transportation
