1. Kingfisher cancels orders for three A340 aircraft

Private domestic carrier Kingfisher Airlines has cancelled orders for three Airbus A-340 aircraft, a top Airbus official said here Thursday. Airbus chief operating officer (customers) John Leahy told reporters his company held talks with Kingfisher on the issue. This was the only cancellation from India, he said. Asked if Kingfisher was deferring deliveries of A-320s, he said: "There is nothing new in it." Kingfisher, which announced a cost-saving alliance with Jet Airways this week, has deferred deliveries of 32 narrow-bodied A-320 aircraft.
Source: October 17, 2008, The Free Press Journal

2. Govt nervous about Jet pink slips

On A day when Union Civil Aviation Minister Praful Patel said he would talk to the airline managements to "accommodate as many people as possible," leaders of the ruling alliance expressed nervousness at Jet Airways' 1,900 job cuts. With Parliament resuming its session and election campaign in five states about to begin, job cuts in a sector that is a symbol of India's middleclass aspirations are politically uncomfortable. The labour ministry has called a meeting of Jet Airways management and employees' representatives. "We will inspect work contracts of the employees to decide if action can be initiated against the airline," an official said. "There is a problem in the aviation industry, specifically Jet. We are looking into the matter," said Labour Minister Oscar Fer-nandes. "This is India, not America. ...We are against the hire-and-fire policy of the aviation industry. You cannot have such a policy in a democracy. People's livelihoods are at stake," said Congress spokesperson M. Veerappa Moily Steel Minister Ram Vilas Paswan said: "The hire-and-fire policy is most obnoxious. The private sector's concerns should not merely be about making profits. Losses and gains are part of any business. The steel industry went through a bad patch recently, but we did not allow employees to be sacked." He said the labour ministry should explore whether the government should intervene in the matter. According to Petroleum Minister Murli Deora, this is not the right time to retrench people, particularly before Diwali. "I do not approve of such a move, you cannot just do such a thing," he said. Jet Airways owes oil companies Rs 259 crore. Minister P.C. Gupta said his party - Rashtriya Janata Dal — would like the private sector to make an effort to retain employees. "But I don't think the government can make any intervention in the matter," he said. Science and Technology Minister Kapil Sibal told reporters that the government's job was to run the country and not interfere with airline companies' individual decisions. "If our airlines are not competitive and are trying to become efficient, it's their call," he said.
Source: October 17, 2008, Hindustan Times

3. Jet lag hits Air India!

Air India on Thursday said it was exploring leave without pay option for employees, even as Civil Aviation Minister Praful Patel said there would be no retrenchment by the national carrier. The separate statements came a day after Jet Airways, fresh after a strategic and operational pact with rival Kingfisher Airlines, said it was terminating the services of 1,900 employees in a bid to cut losses. "There will be no retrenchment in Air India," Patel told reporters in Hyderabad on the sidelines of an aviation conference. The statement came minutes after his ministry spokesman said in New Delhi that the airline would instead offer three to four years' leave without pay to about 15,000 employees. Those who took up the offer will be taken back if they wished at the same designation and the last pay drawn. Air India, which has merged with Indian Airlines, has a total staff of around 23,000. To further confound the confusion, Air lndia's executive director of corporate communication Jitender Bhargava said later in the day that the reports of the airline mulling a leave without pay option for 15,000 employees were not correct. "Air India is not laying off anybody and all we are doing is to revive a scheme that we had in 2002 and 2003, whereby any employee who wants to voluntarily go on leave without pay will be allowed to do so," he said. He said a journalist had asked Air India's chairman and managing director Raghu Menon on Wednesday about cost-cutting measures and Menon, in turn, had talked of reviving a voluntary leave scheme the airline had introduced six years ago. According to Bhargava, Menon had said only employees in the non-operational areas would be eligible for the scheme. "So, when the journalist asked how many non-operational employees Air India had, our chairman had mentioned the figure 15,000." He said when such a scheme was introduced about 300 employees had availed of it, adding that this time too, 300 to 500 employees were likely to opt for the scheme.
Source: October 17, 2008, The Free Press Journal

4. Is Jet-Kingfisher deal anti-competition?

It will help bring stability in the industry
At present it would be incorrect to call the Jet-Kingfisher alliance anti-competition. The reason for this is that the Indian airline industry is going through unprecedented turbulent times. It has been a matter of just a few months as the market sentiment has turned from positive to negative. Costs for the airlines are at a peak, which has led to a serious dip in demand. This, coupled with the global financial crisis has also made the raising of capital almost impossible. When two principal competitors come as collaborators, this can only be as a means to survive. If the situation was normal, this alliance could be called anticompetition, more so as both together have a market share of around 60%. But in the given circumstances this alliance is a need of the hour, a rescue plan to bring stability in the industry. There is also a pressure from the market players and the stakeholders to survive. The indications are that this alliance seems to be a deep engagement. And if it is successful, it would have strategic influence on the industry and the market. The government and the regulator should encourage the alliance, but also be alert to the eventuality of the market turning around in the next couple of years, which would then give cause to term the alliance monopolistic. Both the airlines need to cut capacity, and bring it in line with demand, increase the fare regime and quickly return to profitability. In the immediate term, there might be a 10%-15% reduction in capacity and fares might be increased by 20%. If the alliance works, we would see less red ink in balance sheets in the next two quarters. Since both the players have stated global ambitions the success of this engagement depends on how both protect their long-term interests. When the engagement is deep, if one player opts out at a later stage, this would mean one of them losing out. The alliance also means a body-blow to Air India’s domestic operations, and it needs to look at its strategic objectives. Indeed, the rest of the LCCs also need to come to the table to arrive at a working alliance to meet this challenge.

It can hit competition in the markets

Worried stakeholders have expressed concern about the possible effects of the Jet-Kingfisher alliance on consumers and on the level of competition in the aviation industry. The reported alliance could be a desperate step in the effort to improve their bottom line. But while airline alliances can shed costs, these can adversely impact competition in the markets. They reduce choice for the travelling public and increase tariffs. For this reason, airline alliances and mergers have been the subject of investigations by competition authorities, and there are many such cases from across the world. Such alliances could be treated either as a merger or as an anti-competitive agreement, or as both, depending upon the facts of the case. If the alliance is a ‘full function joint venture’, it could be treated as a merger and examined ex ante by the competition authority, otherwise it could be treated as an agreement and scrutinized ex post. If the JV has spillover effects on competition between the parent airlines, it could be examined under both provisions. The anti-competitive effect is generally examined on the basis of the impact on ‘city pairs’. The reported alliance cannot be exempt from examination under the competition lens. The possible adverse effect of the cooperation on the markets, especially on important ‘city pairs’, and the consequences for consumers have to be analyzed. According to the Competition Act, 2002 (as amended) if such an alliance has the characteristics of a ‘combination’, it would require a pre-merger notification to the Commission, and the alliance could be effected only after clearance from it. If it would not fall in the definition of a ‘combination’, no pre-notification would be needed, but the alliance could be examined by the Commission either suo motuor on the basis of ‘information’ provided by any party. For the sake of certainty and finality, enterprises often prefer to have their agreement treated as a merger and notify the competition authority for its approval. Regrettably, in our country, the Competition Commission has still to be made fully functional by the government, and it is not therefore in a position to take legal cognisance of such transactions.
Source: October 17, 2008, The Economic Times

5. 100% FDI for new airports

The Union civil aviation minister, Mr Praful Patel, on Thursday announced 100 per cent FDI for all greenfield airports, which will come up in the country. Apart from this, he also announced the development of 35 non-metro airports. He expressed willingness to provide cross-subsidy in the form of land to the companies. Speaking at a conference here, Mr Patel assured that aviation infrastructure technology will be developed. On the issue of bail out for the airlines companies, he said that out of total 84 airports in the country, 70 are incurring losses. “But as it is the government’s duty to provide air connectivity, we are bearing the burden. That does not mean everything is in the right track,” the minister explained. He however, expressed his sympathies to employees laid-off by private airlines, and said that he would see if something could be done. “I sympathise with those who lost their jobs. I will talk to the airlines to see that such large scale job-cuts do not happen and try to find a way out,” said Mr Patel. By transferring the management of some important airports like Delhi, Bengaluru and Hyderabad, he said the government has reduced the burden to some extent. Referring to the din over closure of the Begumpet airport, the minister pointed that Hyderabad and Bengaluru have potential to run two airports. “Air traffic in both these cities is increasing and I do think that [the demands for] two airports [in these cities] are just justifiable,” he said.
Source: October 17, 2008, The Asian Age

6. Despite the lull, industry sees hope in aviation expo

Even as airlines struggle to negotiate air-pockets in the form of dwindling passenger numbers, the aviation industry is bracing up for a four day spectacular show in Hyderabad, beginning Wednesday. Notwithstanding the unfavorable weather, the India Aviation-2008, an aviation conference and expo, promises to the stakeholders a peep into the shape of things to come. It’s really going to be a feast to the eye. If you are an avid aviation buff, it’s much more. Ranging from Snap-on Tools (a precision tool-making company) to the likes of Airbus, Boeing, Bombardier, a huge number of players in the industry have set up stalls on the tarmac of the Begumpet Airport. The airport, which ceased to operate commercial operations in March 2007 after the launch of the Rajiv Gandhi International Airport at Shamshabad, is now a beehive of activity. Aircraft manufacturers, including helicopter makers, have lined up the latest from them on the runways. Over 25 aircraft of different makes would be on display. Asked about the prospectus of the aviation industry keeping in view the lull across the globe, Mr Niel Proctor of PPG Aerospace, a global leader in sealants, paint strippings and coatings, feels that it would be a temporary lull.“See the crowd (stalls). They are here from across the globe, though it is a low-key event this time,” he said, pointing out that there is hope for the industry. Earlier, addressing a press conference, Mr Arun Mishra, Joint Secretary (Ministry of Civil Aviation), said the event could help India become an aviation hub. Hyderabad would become the permanent venue for the biennial event. While the first three days of the event would focus on business-to-business meetings, the last day would allow the public to have a look at the exhibition. They could drop in by paying Rs 150.
Source: October 15, 2008, The Hindu Business Line,

7.Jet-Kingfisher deal: May not boost pricing power

The wide-ranging alliance between the two of the country’s leading private sector airline Jet Airways and Kingfisher Airlines announced this week would have had a significant positive impact on both the players had it been forged last year, amid growing demand for domestic air travel. Now, with domestic air passenger traffic registering sharp declines over the last few months and the prospect of excess capacity looming, even an alliance between two of the leading players in the sector may not result in significantly better pricing power for domestic airlines. The number of players in the domestic aviation sector has shrunk dramatically over the past two years with the Deccan-Kingfisher and the Jet-Sahara mergers.

PARTNERSHIP CHALLENGES
Theoretically, such consolidation should lead to better pricing power for the players. Indeed, airlines were able to pass on a good portion of the fuel price hikes last year to passengers through increases in the fuel surcharge on fares. But the trends in domestic passenger traffic growth over the past three months suggest that fare increases will be much more difficult to put through now. The number of domestic air passengers has shrunk by 12.4 per cent, 17.4 per cent and 22 per cent, respectively, in the three months to September. With players already having lined up plans to add capacity over the next couple of years, the need to maintain load factors and retain passengers may take precedence over any move to improve profitability through concerted fare hikes.

POSSIBLE SYNERGIES
Having said this, with pricing power curtailed, the only avenue to improve margins may lie in containing costs. In this respect, the joint selling, code sharing agreements, route rationalization, sharing of infrastructure and crew — all proposed in the recently forged alliance — may bring in cost advantages for Jet Airways and Kingfisher Airlines. How the two rivals implement their fleet expansion plans and whether they manage to recalibrate them to curtail excess capacity may hold the key to a sharp improvement in profitability over the medium term.
Source: October 15, 2008, The Hindu Business Line 

8.Low-cost airlines may go the Jet-Kingfisher way

The Jet Airways and Kingfisher Airlines alliance on the operational front could pave way for a similar move by low-cost carriers (LCCs). Industry analysts feel that though it is too early to determine if LCCs such as SpiceJet, Indigo and Go Air will also jointly look at the means of reducing cost, an alliance barring equity investments can't be ruled out. With domestic carriers expecting to post over $2 billion losses this fiscal, the LCCs could adopt collaborative stand instead of fiercely competing with each other. Kapil Kaul, CEO (Indian Subcontinent & Middle East), Centre for Asia Pacific Aviation (CAPA) said, "It is inevitable for consolidation phase to be followed by strategic alliances among airlines. LCCs will need to work out an alliance to face the mounting challenges, as the idea is not to compete with each other and to try sharing resources instead of duplicating. Collaborations will help in moving from a loss making environment to a more profitable one." However, LCCs are yet to discuss any such alliance. Indigo feels that the alliance between Kingfisher and Jet would not lead to any change in their fare, product and future plans. "Currently, Indigo is not engaged in any discussions around alliances with any other airlines. While there may be opportunities among domestic carriers, whether they be full service or LCC, to reduce relatively small amounts of cost by coordinating items such as airport ground handling, these sorts of measures tend to be very airport-specific (for example, it is only practicable if both carriers fly to the same airport but at different times of day), and would fall into what we would consider the normal course of business between airlines, as opposed to an alliance," says Bruce Ashby, outgoing CEO of Indigo. An email query sent to SpiceJet and Go Air did not evince any response. Jet Airways and Kingfisher Airlines have announced that the scope of alliance will include codesharing on domestic and international flights and cross utilization of crew on similar aircraft types and commonality of training as also of the technical resources, subject to DGCA approvals. DGCA is yet to receive formal communication from the airlines. The alliance will also see joint fuel management, common ground handling, cross selling of flight inventories, reciprocity in Jet Privilege and King Club frequent flier programmes. The finer details of the alliance are expected to be announced at the Indian Aviation- 2008 summit in Hyderabad on Wednesday.
Source: October 15, 2008, Financial Chronicle

9. Air China expresses optimism

Air China, facing its first drop in full-year domestic traffic since 2003, forecast an increase of as much as 10 percent next year, saying the country’s growth would shield the carrier from a global economic slowdown. ‘‘The demand for air travel in China is still out there,’’ the board secretary Huang Bin said during an interview in Beijing. ‘‘We are concerned about the current situation, but we still have the ability to cope with it.’’ Air China said it had not pared routes or expansion plans and expected continued access to financing from Chinese banks even as the credit crisis tightens lending worldwide.
Source: October 15, 2008, Financial Chronicle

10. Gopinath weighs Deccan buyback

GR Gopinath, vice-chairman of Kingfisher Airlines, is believed to be considering an offer to buy back Air Deccan as he is reportedly unhappy over the alliance Kingfisher has struck with Jet Airways. Some sources said he might even offer to buy Kingfisher itself at a meeting of the airline board on Wednesday. Some overseas investors are reportedly backing him in this effort. That, however, is not easily possible. For starters, UB Group chairman Vijay Mallya has 65% share in Kingfisher, making it impossible for anyone to make a bid unless he is willing to sell out. He is not. “I spoke to Capt (Gopinath) out of courtesy about the alliance with Jet. He was in Andamans. He said he was happy with the arrangement (with Jet) and the synergistic benefits,” he said. “I hold 65% stake in the airline. If there is a so-called bid, we will see it off when it is made,” Mr Mallya told ET. According to the latest stock exchange filings, Mr Gopinath has 5.58% stake, and may control about 9- 10% shareholding along with his associates. "The deal with Jet is beneficial for shareholders of both the airlines, as it would result in a synergistic benefit of roughly Rs 1,500 crore a year. And, as the two airlines co-operate to rationalize costs and improve profits, both the airlines will pass on the benefits to the consumers as well," he said. When contacted, Mr Gopinath de-dined comment on the possibility of a buy back. He, however, confirmed he would meet Mr Mallya and discuss specifics of the proposed alliance with Jet. Mr Gopinath, according to some sources, was upset that Mr Mallya had abandoned the low cost model post merger with Kingfisher and that, because of that, Kingfisher Airlines (formerly Deccan Aviation) had lost on passenger volume and a significant proportion of market share. Kingfisher countered this by pointing out that the total number of passengers carried by Kingfisher Red the rebranded name for the low cost airline, in September was 3.29 lakh, which was higher than JetLite at 2.43 lakh and SpiceJet at 2.13 lakh. Further- Kingfisher Airlines, as an entity, carried 7.38 lakh passengers, more than 7 lakh carried by Deccan Aviation in the same period last year. It is understood that the potential investors backing Mr Gopinath include aircraft leasing companies and private equity players. They are willing to bankroll the Air Deccan founder in case he could negotiate a deal with Mr Mallya for buying back the low-cost carrier. Since valuations have hit rock bottom following the Wall Street meltdown, it is felt that Air Deccan would be an attractive buy now. Industry leaders are of the view that the potential for an aggressive budget carrier are bright following the Jet-Kingfisher consolidation."In case, Mr Mallya doesn't have a good plan for Kingfisher Red (formerly Air Dec-can), Mr Gopinath may propose to buy back the country's first budget carrier," the sources said. About six months ago, a Middle East-based NRI businessman, who holds a permit to operate regional airline, approached Mr Gopinath to spearhead his aviation venture. Citing pre-occupation with his proposed cargo airline and a cargo hub in Nagpur, the Air Deccan founder turned down the offer. Deccan Cargo, the company floated by Mr Gopinath for air cargo business, plans to invest around $25 million in the first phase to set up its base in Nagpur.
Source: October 15, 2008, The Economic Times

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