1. AERA Bill passed
The Lok Sabha has passed the Airports Economic Regulatory Authority of India (AERA) Bill, 2007, aimed at ensuring the creation of a regulator to maintain a competitive and level-playing field in terms of services provided and fees charged by airports, whether government or private. The authority will monitor the performance standards of airports and also establish Appellate Tribunal to adjudicate disputes and dispose of appeals. The Bill, introduced by civil aviation minister Praful Patel, was passed without any discussion on Wednesday.

Source: October 23, 2008, Daily News & Analysis 

2. Jet, Kingfisher may reduce flights
Private air carriers Kingfisher Airlines and Jet Airways, which have entered into an operational alliance recently, may reduce flights as they tighten belts to overcome financial crunch. “We are not going to unnecessarily deploy capacity which we cannot fill...if in non-peak hours Jet flight is not full and Kingfisher flight is not full, it makes sense for us to co-operate and fly one aircraft instead of two. (With this) the economics of airlines will improve substantially,” Kingfisher Chairman and CEO Vijay Mallya told reporters here.

Source: October 23, 2008, Mumbai Mirror
3. Mumbo-Jumbo
What's the trouble?
The airline industry is expected to accumulate losses of around Rs 8000 crore this year. The two leading private carriers, Jet and Kingfisher, are losing Rs. 8 crore a day. To compound problems, the airline industry is a high-debt industry. The cost of a small passenger Boeing 737 or A-320 is close to Rs 250 crore. And employee unions tend to be very strong, given the specialized nature of work of some employees, like engineers and pilots. Negotiating lay-offs and pay cuts isn't, therefore, the easiest of tasks.

Why are they making losses?
The airline industry is going through a bust in the midst of a general economic downturn. The worldwide industry is, in any case, prone to a sharp boom-and-bust cycle. The latest figures from the Indian market suggest that all the airlines are operating at just about 50 per cent of capacity. The problem for airlines is compounded in India by the extremely high price of aviation turbine fuel, one of the highest in the world. The government levies high taxes on jet fuel to cross-subsidies consumers of petrol and diesel. Airlines are not allowed to import jet fuel from abroad, which would be a cost-effective solution in the current circumstances.

Why was there controversy over Jet sacking its employees?
In a free market economy, companies have to reduce costs when faced with a downturn, including on their wage bill. So pay cuts and lay-offs are perfectly reasonable in normal circumstances. The problem in the case of Jet Airways' action was the shoddy and hasty manner in which it was done. No due procedure (notice period, pink slip, salary compensation) was followed in the dismissal of 1900 employees. The arbitrary and quick decision followed the announcement of an alliance between Jet and Kingfisher, the two market leaders. There was more than a hint of collusive and anti-competitive intent in the merger, the first impact of which was borne by the fired employees. A rise in passenger fares might be the next step, as the only serious competition a Jet-Kingfisher alliance faces is from the state-owned airline, Indian. Unfortunately, the industry has no independent regulator to look into competition, and other consumer issues. The Competition Commission of India is dysfunctional for the moment.

What's the way out?
Broadly speaking, there are three options. First, the government can consider reducing the burden of high aviation turbine fuel prices by lowering taxes on it. This is different from a cash bailout for stricken firms, which is highly avoidable, but which is what airline bosses are clamouring for. Second, airlines must restructure their organization and operations and remove excess flab from their systems. Plenty of excess was committed (too much staff, too many planes, too many routes) during the boom of the last few years. Any government bailout will prevent this from happening. Airlines, though, must be careful to follow due procedure in restructuring. It would help if senior management also took the brunt of pay cuts and lay-offs along with more junior employees. The third option is the one which would be the least appealing to the private promoters of major airlines: to dilute their equity stakes to raise cash to ride over the difficult times. Promoters control 80 per cent of Jet Airways and 75 per cent of Kingfisher. So there is room for dilution of equity. The price will not be the best in these economic conditions, but entrepreneurs must take some blows in a well-functioning capitalist system.
Source: October 23, 2008, The Indian Express

4. Paramount, IndiGo may join Jet-KF club
IndiGo, a New Delhi-based low cost carrier (LCC), and Coimbatore-based business class airline Paramount Airways are in talks to join the Jet Airways-Kingfisher Airlines alliance to cut costs to overcome a downturn. While IndiGo has had detailed discussions with the liquor baron and promoter of Kingfisher Airlines, Vijay Mallya, Paramount is in talks with executives of Jet Airways for being part of the alliance. A Kingfisher spokesperson denied the meeting, though, sources at Jet Airways confirmed that Paramount is in talks with them for joining the alliance. "We are looking at having an agreement with Paramount. The south Indian carrier can act as a feeder for Jet Airways and in turn Paramount will get access to the mainland metro traffic which it does not have access to currently," said a Jet Airways executive not wanting to be identified. In an earlier interaction with Business Standard which took place a day after Jet Airways and Kingfisher Airlines announced the alliance, Paramount Airways promoter, M Thiagrajan had said that he is watching the situation and then will decide on joining the alliance. According to aviation experts, it makes sense for IndiGo to be part of the alliance, as it will result in substantial cost savings for the airline. Both, Kingfisher and IndiGo, have a common Airbus fleet and can maintain common engineering and maintenance facilities. The Jet- Kingfisher alliance has a market share of around 60 per cent and if IndiGo and Paramount join the alliance, the share of the combine, will be close to over 71 per cent. While, IndiGo has a market share of around 10 per cent, Paramount commands about one per cent share. However, Paramount’s market share in south is over 26 per cent.

Source: October 23, 2008, Business Standard

5. Travel economy class, i-banks tell top brass
Investment banks Merrill Lynch and Co. Inc., UBS AG and JPMorgan Chase and Co. are telling senior bankers in Asia to fly coach on short-haul flights and reduce non-essential travel as they step up cost cuts, officials at the firms said. UBS advised bankers this month to travel economy class for flights of up to five hours, two officials at the biggest Swiss bank said, asking not to be identified because it’s an internal policy. Merrill employees have been told to travel economy for flights of as much as three hours since mid-September, two executives at the firm said. The world’s largest banks and securities firms are trimming costs to survive the credit market meltdown that toppled Lehman Brothers Holdings Inc. and forced Merrill Lynch to sell itself to Bank of America Corp. The financial services industry has cut more than 140,000 jobs since a surge in subprime mortgage delinquencies began to roil global debt markets in 2007. “Investment banking has almost disappeared in this market, and with revenue shrinking severely, it’s sensible to cut every single type of cost they can,” said Renault Kam, a senior portfolio manager at Atlantis Investment Management Ltd in Hong Kong, which oversees $5 billion (Rs24,650 crore). “We haven’t seen the worst yet.” JPMorgan, the biggest US bank, has requested senior bankers fly economy on flights less than three hours since late August, said an official, who declined to be identified. HSBC Holdings Plc.’s Asia unit asked its Hong Kong department heads and branch managers to cut travel expenses by 15-20% next year, two officials at the bank said, citing a 23 September memo sent by chief executive officer Jon Addis. HSBC is recommending lower-cost China Eastern Airlines Corp. Ltd, the country’s third biggest carrier, over Hong Kong Dragon Airlines Ltd for business trips to Shanghai, the memo said, according to the people. Europe’s biggest bank by market value cut 1,100 jobs in its global banking and markets division last month. A round-trip business class ticket from Hong Kong to Shanghai with Dragonair costs HK$6,110 (Rs39,776) excluding tax, almost double the best coach fare. An economy class traveler at China Eastern pays HK$2,650. Cathay Pacific Airways Ltd, Dragonair’s parent, reported the first drop in traffic in 20 months and said demand out of Hong Kong “slowed significantly”. Singapore Airlines Ltd, the world’s biggest carrier by market value, also recorded declines in traffic. Merrill, following its emergency sale to Bank of America, plans to cut about 500 jobs in its trading division, three people with knowledge of the plan said on 21 October. About 75 of those positions will be in Asia, said a bank official, who declined to be identified. “UBS always seeks to control its costs,” said Chris Cockerill, a Hong Kong-based spokesman at the firm. “In the current financial environment, we are reviewing all potential areas where greater savings can be made, and travel is one of them.” He declined to elaborate. Rob Stewart, a Hong Kong-based spokesman at Merrill, declined to comment. London-based HSBC has asked its bankers to use video conferencing to replace business trips when possible. Travelers for corporate training or internal meetings are required to book economy seats, spokesman Gareth Hewett said.

Source: October 23, 2008, Mint

6. Airlines get relief package to stay in the air
The cash-strapped domestic airlines that have defaulted in payment of jet fuel bought from the PSU oil marketing companies (OMCs) can continue to fly without any fears of their wings being clipped for want of oil. A relief package announced on Wednesday allows the airlines to repay their present cumulative outstanding dues in six monthly instalments and a 90-day grace period to clear current fuel bills. Besides, the oil companies will now revisit the aviation turbine fuel (ATF) price on a fortnightly basis so that the impact of global oil fluctuations is felt instantly. These decisions were taken at a meeting called by the Ministers of Petroleum and Civil Aviation along with the industry representatives and Government officials here to resolve the issue. Both the Ministries are also seeking duty rationalization on ATF and giving the product a declared goods status which will bring in a uniform sales tax. Speaking to reporters after the meeting, the Minister for Civil Aviation, Mr. Praful Patel, said, “For current uplifting, the OMCs will give a 90-day credit period. This arrangement will be on till March 31, 2009 after which they will revert to their individual commercial agreements. The ATF prices will be revised every 15 days instead of the current 30 days. Besides these, other mechanisms are also being looked at, including provision for guarantees.” The credit period varies from one airline to another. The airlines owe the OMCs – IOC, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation — Rs 2,926 crore on previous ATF purchases. The outstanding will have to be cleared by March 31, 2009 in six monthly instalments. While Jet Airways owes Rs 1,057 crore, Kingfisher Airlines’ dues are Rs 983 crore, and Air India, which does not have any credit period, has to fork out Rs 886 crore. Revision of ATF prices fortnightly instead of the current monthly practice would in effect mean that any upward or downward movement of global prices would have an immediate impact on travelers. Both Mr. Patel and the Petroleum Minister, Mr. Murli Deora, have taken up the issue of tax rationalization on ATF with the Finance Ministry. Mr. Deora has sought a ‘declared goods’ status for ATF so that a uniform four per cent central sales tax is levied on the fuel instead of tax rates as high as 30 per cent in Gujarat. While 17 states charge over 20 per cent sales tax, only three states levy less than 20 per cent local tax.

Source: October 23, 2008, The Hindu Business Line

7. Goyal meets FM, seeks tax concessions on ATF
Jet Airways chairman Naresh Goyal on Monday met finance minister P. Chidambaram to seek tax concessions on aviation turbine fuel (ATF) as part of measures to overcome the crisis that has hit the civil aviation sector. Goyal is understood to have asked Chidambaram to consider the demand of airlines to rationalize taxation and levies on ATF, which has become one of the biggest issues for carriers in India.

Source: October 21, 2008, Mint

8. Airlines see load factors fall despite capacity cuts
Airlines continued to fly in turbulent zone despite oil prices easing, airfares rising and massive capacity cuts in the last few months. In September, most domestic airlines flew half empty with their seat factors ranging between 50% and 65%. Data released by the ministry of civil aviation (MCA) on Monday showed that all the local carriers have seen their load factors tumble in the month of September compared with the previous month. Kingfisher-operated Deccan was the only one which has seen its load climb 18.7%, from 39% in August to 57.7% in September. Budget carrier GoAir's seat factor slumped the maximum by 13% to 57% from 70% in the previous month. Load factors of Air India (domestic), Jet Airways, JetLite, Kingfisher Airlines, SpiceJet, Paramount and IndiGo dropped 2.9%, 4.2%,4.2%,2.3%,6.3%,7% and 6% respectively. A budget airline executive said that airlines were not able to fill their aircraft in spite of aggressively cutting seat capacity in the last few months to bring supply in line with demand. "Discount airlines have slashed around 25-30% capacity in August and September to remove excess capacity in the market but that has not helped us," said the executive. A Kingfisher Airlines spokesperson said the full-services carrier has pruned its routes network by 20% in the summer schedule. As load factor slip, it is becoming increasingly difficult for airlines, which are steeped in huge losses, to become profitable. A local broking house analyst said at the current levels, no airline must be achieving the breakeven load factor. "Break-even load factor continues to be elusive as fares soar," said the analyst. An airline executive said that at current fares, budget airlines need to register at least 67-70% load factor to break even on a flight. He, however, added that he would not read much into the low load factor as March and September are the worst months of the year. "These two months always see bottoming out of load factor. This year, it has gone down more than the other years because of the non-availability of low fares," said the executive. Together, domestic airlines carried 8% lesser passengers in September at 26.76 lakh compared with 29.22 lakh passengers in August. Jet Airways, along with JetLite, maintained its domination in the market with a 32.5% share. The Naresh Goyal-promoted airline was way ahead of the second largest airline Kingfisher Airlines, which with Kingfisher Red, had a market share of 27.6% in September. Air India (domestic) was a distant third at 18.1%. IndiGo was at the fourth position with 10.3% share. SpiceJet, GoAir and Paramount were at fifth, sixth and seventh positions.

Source: October 21, 2008, Daily News & Analysis

9. Air Astana increases Bangkok services
Air Astana, the flag carrier of the Republic of Kazakhstan, is increasing service frequency on the route from Almaty to Bangkok in response to increasing passenger traffic from Kazakhstan to Asia and Australia. The winter schedule being introduced on October 28 will see the introduction of a fourth frequency on Monday operated by Boeing 767-300ER. Overall weekly seat availability on the Almaty - Bangkok route will increase by more than 35% as a result of the additional frequency. Existing services on Wednesday and Sunday are operated by Boeing 767-300ER in 30 business class/ 190 economy class configuration and Friday by Boeing 757 in 20 business class / 150 economy class configuration. Scheduled services between Almaty and Bangkok were launched with two weekly frequencies in October 2006, with a third frequency introduced in November 2007. Other service frequencies being increased in the Winter Schedule include Astana-Urumchi (up to two per week) and Almaty – Bishkek (up to four per week). Said Air Astana president Peter Foster, ”Air Astana continues to enjoy significant passenger growth during 2008, with traffic on services to the dynamic Asia region making a major contribution. “Passengers carried across the entire network during the first six months of 2008 increased by 16% to 1.3 million. Passenger revenue increased by more than 26% and cargo revenue was up by more than 30%.” The Air Astana fleet grew to 21 aircraft during the first half of 2008 following the delivery of three additional Airbus A320 family aircraft. The airline confirmed orders for six A320 family aircraft during the first half of the year, with the fleet on track to grow to 34 aircraft in 2014 and 63 by 2022, Air Astana is a joint venture between Kazakhstan’s Samruk State Holding (51%) and BAE Systems (49%). The airline commenced regular flight operations in May 2002 and currently operates a network that serves 25 domestic and 21 international destinations from its hubs in Almaty, Astana and Atyrau. Air Astana is a full member of the International Air Transport Association and is the only airline in Kazakhstan with EASA Part 145 aircraft maintenance certification.

Source: The Wall Street Journal,22.10.2008

10. IATA sees trouble ahead in Middle East
IATA has urged Middle East and North Africa (MENA) airlines to focus on an agenda of efficiency and expanding commercial freedoms. “The oil price is falling, but what we save in fuel, we lose in revenue,” said IATA director general and CEO, Giovanni Bisignani, in a speech at the annual meeting of the Arab Air Carriers Association (AACO). He added, “This industry will lose US$5.2 billion this year. Even the Middle East is not immune. The region’s carriers posted 18.1% traffic growth in 2007. This year, August growth plummeted to 4.3%,” he said. “Profits of Middle East carriers will fall from US$300 million in 2007 to US$200 million this year. Only a handful of carriers will be profitable, while the majority bleed red ink. “The region’s fleet is set to double to 1,300 aircraft over the next decade as we enter a period of global economic uncertainty. The challenge of matching capacity to demand will be difficult,” said Bisignani.

Source: The Wall Street Journal,22.10.2008

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