1. Time for fewer flights and fewer bargains

Last year, Ms Nikki Frahm, operations manager at Carlson Wagonlit Travel in Forest Lake, arranged a February vacation for a family of four to Ixtapa, Mexico. They enjoyed the trip so much that last month, they called Ms Frahm and asked her to sign them up again for the same vacation this year. There’s just one catch: the vacation may be the same, but the price will not. Last year, the family paid less than $250 apiece to fly nonstop from Minneapolis to Ixtapa. This year, those same tickets are $504 a person, said Ms Frahm, raising the cost of the family’s vacation by more than $1,000. As airlines cut flights and add fuel surcharges, “this is the kind of thing we’re seeing over and over again,” said Ms Frahm. “Inventory is shrinking and the prices are escalating — supply and demand.” Planning your winter vacation? Be prepared for some sticker shock. Holiday travel is never cheap, but as airlines cut capacity, the reduction of seats to winter hot spots like Florida, Hawaii and the Caribbean is creating a flight crunch and allowing carriers to charge a premium on popular routes. Cities with significant cuts are seeing some of the biggest price increases. Overall airfares are up an average of 11 per cent between November and February, according to data from Travelocity, but fares to Honolulu, which lost a big chunk of seats because of the shutdown of Aloha Airlines and ATA Airlines, are up 21.7 per cent. Parts of Florida will see double-digit drops in the number of scheduled seats from domestic flights in coming months, according to OAG Back Aviation Solutions. And ticket prices are rising accordingly, with late fall and winter fares up 20.1 per cent to Tampa and St. Petersburg, where seats are expected to drop 11 and 84 per cent in the fourth quarter. Meanwhile, fares have risen 14.9 per cent to West Palm Beach and Fort Lauderdale, where seats are expected to drop seven and nine percent in the fourth quarter. Starting Sept. 3, Continental will no longer fly to the Florida cities of Sarasota or Tallahassee. Orlando, where scheduled seats are expected to drop 15 per cent in the fourth quarter, has seen a somewhat mild rise in fares. Why all the cuts to vacation spots? Leisure travel is often the first to soften in a weak economy as travellers curb their spending. “With today’s environment of low fares and high fuel, all airlines are having a difficult time justifying the economics of flying to leisure markets such as some destinations in Florida,” said Mr Michael Brophy, a spokesman for Midwest.

Source: August 11, 2008, The Asian Age

2. Lightening the load

Many airlines across the globe are holding brainstorming sessions to arrive at ways to reduce their operating costs. While several airlines have been grounded, many others are finding it difficult to stay afloat, given the soaring oil prices, falling demand and problems of overcapacity in certain markets. In India too, airlines are trying hard to bail themselves out of such turbulent times. With every increase in the price of Aviation Turbine Fuel (ATF), air-fares have also shot up. So much so that the passengers who had taken to air travel with the arrival of low-cost carriers in India are shifting loyalties back to rail and road. ATF forms 40-50 per cent of the overall cost of airlines in India. Hence, reduction in fuel bills is the most important task for them. While actual price reduction is not in their hands and will entirely depend on the course global oil prices take, efficient fuel consumption might help airlines in the short to medium term. Boeing, in its latest report India: 2008 Market Outlook, says that in a Boeing 737 type aircraft, fuel savings between 15,000-25,000 gallons per year per aircraft will result in a consequent saving of $92,250 (Rs 38.75 lakh)-$1,53,750 (Rs 64.58 lakh) per year per aeroplane. Similarly, for Boeing 777 type aircraft, saving of 70,000- 90,000 gallons per year per aeroplane would mean $3,29,000 (Rs 1.38 crore)- $4,23,000 (Rs 1.78 crore) saved on fuel. While for 747 types 1,00,000-1,35,000 gallons per year per aircraft would save an airline $4,70,000 (Rs1.97 crore)-$6,34,500 (Rs 2.66 crore) annually per aircraft. The US-based aircraft manufacturer has outlined suggestions for the airlines to achieve these numbers. At flight operations level, fuel burnt can be reduced through such steps as redispatch on longer flights to lower contingency fuel which reduces fuel burn and increases cargo revenue. Aircraft loading should be such that centre of gravity is maintained in the mid to aft range, which helps minimize cruise drag. Optimum flap settings and altitude selection to reduce drag. Slower cruise speeds reduce fuel burn. Use of tinkering, where appropriate, reduces fuel cost. Suggesting that airlines reduce operating empty weight (OEW), the manufacturer points out that they must cut down on passenger services and in-flight entertainment items, empty cargo and baggage containers and excess water. Coming to measures at the ATC level, Boeing lists out some more efficient terminal operations such as continuous descent approach and dynamic departures to minimize holding time at destination. Close watch on airframe aerodynamics for issues like rigging, gaps and clearances, sealants, air leaks, external patch repair and paint condition gets up to 0.5 per cent fuel burn improvement. Checks on airframe weight as a result of dry insulation blankets and accumulated dirt, use of light hardware in terms of seats and carpets, and carbon brakes improve fuel burn up to 0.25 per cent. In order to improve operating profitability, Boeing in its report has said that route network and schedule optimization could help airlines get short- to medium term benefits on passenger revenues. According to Dr Dinesh A. Keskar, Senior Vice-President, Sales, Boeing Commercial Aircraft: “At times airlines have to sell eight economy class seats to make one business class.” Therefore, reconfiguring with optimized business and/ or premium economy class could also show good results when it comes to revenues for a medium- term period. Participation in alliances and/or strategic code-share agreements could also boost passenger revenues for airlines. Cargo is another area where airlines need to greater focus, especially high-value freight, says Boeing. This could help carriers increase revenues in the short to medium term. At the operating levels too, airlines will benefit on fuel costs with practices such as hedging on fuel prices. Profitability can be improved by increasing the maintenance check intervals too. This will help reduce such costs by up to two per cent in the short term. Manpower optimization by adopting cross skill utilization, mechanic-on call and single certification system could also be looked at for a short- to medium-term period. Many airline companies are still bleeding, even after reducing the number of flights and putting in place efficient fuel consumption measures in the last couple of months. This means more aggressive cost cutting measures are called for. How Indian carriers manage these remains to be seen.

Source: August 11, 2008, The Hindu Business Line

3. Lakshmi Mittal winging into SpiceJet?

Lakshmi Niwas Mittal, the London-based billionaire who controls ArcelorMittal, the world’s largest steel company, is believed to have evinced interest in buying ailing low-cost carrier SpiceJet.?He (Mittal) would like to go for a full buyout,? a source familiar with the development said. This will require Mittal buying, apart from the promoters? stake, the $80 million (Rs 350 crore) foreign currency convertible bonds (FCCBs) that SpiceJet issued to Istithmar, the Dubai government’s investment arm, and investment bank Goldman Sachs. The Tatas hold around 7% stake in the airline. Mittal could not be reached for comment. Mittal’s interest is a surprise because the airline doesn’t have a strategic fit with his businesses. It doesn’t make any sense for Mittal to look at SpiceJet,? said an industry source. On the other hand, liquor and aviation baron Vijay Mallya remains keen on scooping the no-frills carrier to lift Kingfisher’s market share above that of arch rival Jet Airways. Meanwhile, Wilbur Ross, the US investor often called the ?King of Bankruptcy?, who is close to Mittal (he is on ArcelorMittal board), wants to rework the terms of his investment in SpiceJet. Ross had in July announced an investment of Rs 345 crore in the airline. SpiceJet sources insist that deal is not in danger, but they admitted it ?may not be sealed on original terms?. A source familiar with the development said Ross? return to the negotiating table came after the Airports Authority of India (AAI) issued an ultimatum to SpiceJet to pay up dues or be charged landing and navigational fees on a cash-and-carry basis from August 1. ?After this ultimatum, Ross set down certain conditions before he injected funds into the airline,? the source said. The conditions include writing down of dues to creditors and delivering operational performance within a specified timeframe. Ross is also believed to be trying to negotiate the conversion rate of the FCCBs to as low as Rs 10 a share from the Rs 25 per share discussed when talks for the deal had closed, the source said. ?Though Ross is keen on bringing in capital, he may not do it on original terms,? said the source. His fund has raised concerns over some legal issues too. Ross had completed due diligence of SpiceJet on July 31. A senior SpiceJet official confirmed that the AAI has extended the airline’s credit period till August 31. The official, however, was mum on whether Ross was renegotiating the terms of deal. Sources said Ross may eventually not go for conversion of bonds into equity. ?That is why there is no question of triggering an open offer (after breaching the 15% stakeholding as per Sebi rules) or hitting the ceiling of 49% on foreign direct investment,? said the source. Besides AAI, SpiceJet has to pay dues to private airport operators Delhi International Airport Ltd, Mumbai International Airport Ltd and Bengaluru International Airport Ltd too. And these are only mounting. ?It has started delaying payment of aircraft lease rentals to lessors due to paucity of working capital,? said a source.

Source: August 11, 2008, Daily News & Analysis

4. Branson feels BA-AA tie-up may damage competition

Virgin Atlantic-owner Sir Richard Branson on Sunday wrote to US presidential candidates Barack Obama and John McCain warning that a link-up between British Airways and American Airlines would be anti-competitive. In the letter, Branson said the proposed alliance would “severely damage competition on major transatlantic routes and leave consumers worse off”. “Airlines everywhere are struggling with the current price of oil, but the solution to their problems should not lie in an anti-competitive agreement which will inevitably lead to less competition and higher fares,” he said. Virgin said, following BA’s planned merger with Spanish rival Iberia, BA and American Airlines would have nearly half of all take-off and landing slots at London’s Heathrow airport if the alliance takes place. A report in the Sunday Telegraph said Virgin Atlantic is poised to launch a £3 million ($5.78 million) advertising and lobbying campaign as it attempts to frustrate plans for the alliance. Meanwhile, the Mail on Sunday reported that BA is ready to surrender its right to hundreds of transatlantic flights in an attempt to win the backing of US authorities for the alliance.

Source: August 11, 2008, The Economic Times

5. AI likely to cut unviable routes

Reeling under crippling finances and a global aviation meltdown, government-run Air India is now planning to take several international cities off its network for want of passengers. The airline is planning to prune some of the “not-so-viable” routes like Osaka and Seoul. It might also take out its existing New York leg from the existing Delhi London-New York flight. Airline officials who did not want to be quoted said Air India is likely to reduce the number flights to Los Angeles also. In a recent meeting, chairman and managing director Raghu Menon and the top management have discussed the broad contours of a comprehensive “route rationalization” to maximize yields for the carrier. The new schedule would be announced next month. According to an industry source, Air India is confronting extremely poor passenger load in the once popular Delhi London-New York flight. The Boeing 777 flight with a capacity of 238 seats was reportedly carrying only between 55 and 60 passengers on any given day during the last one week. It is likely that Air India may terminate its Delhi-London New York flight in London and utilize the aircraft for a different sector other than the US. “Air India has been registering low passenger load on the Mumbai and Delhi to New York sector,” the official said. “This is also because the airline also offers a non-stop service on the same sector."

Source: August 11, 2008, Hindustan Times

6. All confidence no trick in Jet-age India

Three massive Jet Airways’ aircraft, all spanking new and freshly painted, stand in a line. No, not at an Indian domestic airport. This is Brussels I am talking about. Bleary-eyed and just off a flight from Delhi, I look out of the window and see this awesome sight. Lots of signage, uniformed personnel, and I think to myself…”Is this is an Indian airline occupying so much space in an international arena? Wow, it feels awesome.” The comfort of flying in a desi airline, albeit one that is far superior in quality to many a reputed offering, was the first in a long list of comparisons that I constantly made over the three weeks in Europe and the United States. While we have witnessed change galore on Indian terra firma, I noticed we have made great advances, on a comparative basis, even outside of India. Mobile telephony is another. Staying at my sister’s beautiful home in the posh suburb of Bethesda at Washington DC, which houses many private sector professionals, World Bank officials, etc, I was amazed to find connectivity very poor. We would often see no signal bars and if lucky just one, which meant no communication. So in the event of an emergency, we had to step out of the house to a particular spot in the garden to get connected. To put it in perspective, it’s like Napean Sea Road or Defence Colony facing such a problem. How comfortably we are placed, I thought smugly. The good old BSNL has connected Indian villages and small roads and therefore we will never face such problems. And we can beat any American at speed of texts or what we call SMS! After all we started much earlier. I will never complain about domestic airlines in India any more. Try taking a flight out of JFK. Nothing ever goes on time. Gates are changed all the time and multiple announcements, which are shrill and inaudible, are constantly being thrown at you leading to a state of unending confusion. And the domestic aircraft? Rickety, old and no sign of hospitality… I mean you are lucky if you get water. Compare this to the Jet terminal in Mumbai or even the IA one at Delhi…. And our Kingfisher flights with individual TV screens. Did anyone say we are Third World ? New York city is ritzy, glitzy and exciting. But what’s with the infrastructure? Myriad smells greet you in the subways, cab drivers abuse you if tips are not extravagant, connectivity to the suburbs is difficult at night unless you hire an expensive town car. I dream of the day our little bug invades the city. Perhaps, that’s what the city needs. Easy to park, fuel efficient and made in India. Yes it’s the Nano I am talking about. And what about the bylane in the Hague, where a huge poster of Shah Rukh Khan and his tour announcement was sharing space with everything European? What about the white cabbies and folk on the streets asking about our movies and our stars with excitement in their eyes? New age, song and dance, and fantastic, they are slowly but surely defining India. A long and serious discussion over tea on the problem of terrorism reached no conclusion, albeit being a great debate. I interjected at the end and said let’s wait for “My name is Khan” from the Karan Johar stable. It will probably make the emotional impact that intellectual drawing room conversations cannot make, for the sheer reach the Indian film industry has across the shores of India today. That these nations are advanced and give wonderful benefits to tax payers is not the contentious issue here. No debate on that. However, as an Indian who has travelled over two decades, I noticed the changes in myself. I was always intimidated with the west simply because I had no exposure to so much. The great Indian brigade travelling out has changed enormously. It consists of all kinds of people, not just the rich and famous. And more people like me who travel and feel we are genuinely superior in some aspects will result in leveraging the nation’s confidence. In that lies a true aspect of economic growth.

Source: August 11, 2008, The Economic Times

7. FDI in sensitive sectors may go off auto route

Flow of foreign direct investment (FDI) into sensitive infrastructure sectors such as airports and ports may be taken off from the automatic route once the proposed umbrella law for scrutinizing FDI from the national security angle is put in place. The home ministry has suggested that clearance for FDI in such projects should be provided only after thorough verification under the proposed National Security Exception Act. It has asked finance ministry to identify such sensitive sectors which are on automatic route. As of now, FDI in airports is allowed to the tune of 100% through the automatic route in case of greenfield projects. In case of ports, 100% FDI is allowed through the automatic route. The move is significant since FDI has flown into the new international airports at Bangalore and Hyderabad as well as the companies managing two of the busiest international airports in the country –– Delhi International Airport and Mumbai International Airport. In case of existing airports, FDI up to 74% is allowed on the automatic route. The proposed law would work on the lines of the Exxon-Florio provision in the US, implemented by the Committee of Foreign Investment. This provision enables US authorities to stall foreign companies from acquiring any local asset if it is seen to be compromising national security. National Security Advisor M K Narayanan is working on a legislation with this objective, but the initiative has been delayed due to resistance from various ministries. However, policy makers have now begun a review of their stand in view of increasing security apprehensions. Concerns with regard to these sectors is not so much about building the infrastructure but about its operation as also inflow of capital from tax havens like Cayman islands, Cyprus and Mauritius. These largely stem from the fact that some of these sectors are on the automatic route and thus the proposals are not vetted by ministries concerned. The finance ministry has been against such law as it maintains that existing laws have adequate provisions to deal with such concerns. It is of the view that instead of bringing in an altogether new law, it would be preferable to strengthen existing laws. The department of industrial policy & promotion is also wary of new provisions restricting FDI flows, but the ministries of home and defence are keen to put a fool-proof system in place. Security agencies are also in favour of strong checks to prevent national security from being breached.

Source: August 07, 2008, The Economic Times

8. Airlines run charters to plug the leak

How do you shore up the top line when a good chunk of your customers is unable to afford your key product or service and much as you would like to, you just can’t bring down prices for them? Well, sell more to the chunks which can afford it. That’s precisely what the airlines seem to be doing at the moment. As the load factors on scheduled flights dip, many carriers are turning to the charter segment to prop up earnings and offset losses from scheduled operations. New Delhi-based regional carrier MDLR Airlines has exclusively deployed one of its three Avro-RJ-70s for charter services. Koustak Dhar, executive director - commercial, MDLR Airlines said, “Since early this year, one of our three aircraft is being used for only charter services. We have altered our business model to cover up losses that we were making on scheduled flights.” The regional airline, which began operations in April last year, has been logging negative yields on its commercial flights since inception. In contrast, margins in charter services are as high as 70- 80%, giving the carrier a healthy revenue mix. “We launched structured charter services to improve our margins. Yields on scheduled flights are dependent on how many passengers you fly, while for charter, we charge by the hour. This gives us assured returns on every charter flight,” said Dhar. Budget carrier SpiceJet has also been utilizing its spare aircraft for operating charter flights as and when requests comes in. Samyukt Sreedharan, chief operating officer, SpiceJet Ltd said, “This year, during February- March period, we flew 10-12 charter flights. Last year, we did not have the luxury of spare aircraft to offer charter services.” In the last few months, the no-frill airline has operated only 2-3 charter flights because of the lean season. But Sreedharan said unlike scheduled flights, returns on charter flights are always cost-plus. “It is an additional opportunity that we look for, but we do not disturb scheduled operations for that. (As per DGCA rules, airlines cannot cancel a scheduled flight to book charter services.) We do charter flight only if an aircraft is idle. Also, since we operate a larger aircraft like the Boeing 737, we cannot do charter flights as easily as airlines with smaller aircraft such as Avro, ATR and Embraer,” he said. Even Capt Gopinath, former owner of Deccan Aviation Ltd, was making profits in his general aviation business when his commercial aviation business was bleeding profusely. Sources said Jet Airways’ value airline, JetLite, is also operating charter flights. Over the past year or so, charter operators have raised tariffs by around 40% from Rs 2.5 lakh per hour to Rs 3.5 lakh per hour. Tariffs for charter services are over 10 times the cost of operation. In case of scheduled flights, airlines have to invariably sell below cost to fill up seats. “At a time when demand is slowing down, it is difficult for scheduled airlines to sell seats. This is hitting their yield. But in charter services, even when fewer passengers board the aircraft, the earnings remain unchanged,” said the source. Noel Swain, vice-president - marketing, Cleartrip said airlines prefer charter services because they don’t have to worry about the load factor there. “Though, we do not do charters, there are times when we get requests for a large number of seats. Then we book the entire flight,” he said. According to him, demand for group air travel from corporate sector has also shot up lately. “Earlier, companies were giving gold coins as performance incentives. Employees, however, appreciate travel incentive better. This is the reason we are seeing more and more companies booking in bulk to offer travel incentives to their employees.” Ankur Bhatia, managing director, Amadeus agreed. “Even though there is scope for general (charter) business in India, there isn’t sufficient infrastructure in place to give it full flight,” he said.

Source: August 08, 2008, Daily News & Analysis

9. Jet launches new Apex fares for domestic travel

Jet Airways recently an­nounced the introduction of Apex-21, special advance purchase fares, for pas­sengers travelling in economy class on several of the airline's domestic routes. Bookings for these fares must be made at least 21 days prior to departure date. In case of cancellations, the basic fare will not be returned but the applicable tax component is refundable For Bangalore-Kolkata route, for example, the fare struc­ture will be as follows: apex fare Rs 2400, fuel surcharge Rs 3100, passenger service fee Rs 225 and traffic congestion fee Rs 150. Total fare is Rs 5,875 and in case of cancelation, the passenger gets back only the tax amount of Rs 225.

Source: August 07, 2008, Deccan Herald

10. Global airlines to offer 60 million fewer seats for Christmas

The global airline industry will fly 60 million fewer seats in the run-up to Christmas – equivalent to a 7 per cent cut in flights – as high oil prices and the economic downturn force carriers to cut services. Experts predict even deeper cuts in 2009 as part of a prolonged retrenchment of an industry that has expanded rapidly in recent years. Airlines will offer 59.7 million fewer seats between October and December compared with the same period last year, according to flight information company OAG. Britain’s biggest carriers have already confirmed significant capacity cuts, with Ryanair, easyJet and British Airways all reducing services. Mr Chris Tarry, a leading industry consultant, said the worldwide cuts, led by US carriers including Continental and American Airlines, will be followed by further reductions next year as airlines pay the price for expanding their fleets by nearly 1,700 aircraft since 2005. According to Boeing, the global commercial airline fleet stood at 19,000 planes at the end of last year. ‘‘As we move into the later part of this year, airlines are taking a view on just how difficult the market is going to be. I don’t think we have seen all the likely capacity adjustments at this stage. For airlines, 2009 is going to be even more difficult than 2008,’’ said Mr Tarry. OAG echoed comments by BA chief executive Mr Willie Walsh last week that the airline industry faced its ‘‘worst ever’’ trading environment. Mr Steve Casley, OAG’s chief operating officer, said: ‘‘From our statistics, it looks quite possible that we may be facing a far more severe global downturn than we have experienced before.’’ He added that routes will be cut at 275 airports around the world in the final quarter of the year. BA has dropped six European short haul routes from London Gatwick, while Ryanair dropped a number of destinations in Croatia and France from its London Stansted schedules. A third of the global capacity cuts are taking place in the US domestic market, but the transatlantic market is moving in the opposite direction with a one per cent increase in seats owing to the Open Skies treaty that has liberalised air travel between the US and Europe. The Asian market, one of the brightest performers, is making a 13 per cent reduction in flights. The capacity decline is even worse than the reduction that followed the September 11 terror attacks, when the number of seats flown fell by 5 per cent.

Source: August 08, 2008, The Hindu Business Line

Prepared by
Jennifer Kumar, BBA (NAU) Alumni
Skyline Business School
Hauz Khas Enclave, New Delhi 110 016
Tel: 2686 4848, 2652 4399
http://www.skylinecollege.com