Issue 238

 

1. Will the relief mechanism give airlines the thrust they need?

Call it the fallout of the incidents that took place in the domestic aviation industry last month or the generosity of the Government towards airline companies and their employees, a small relief package has finally been presented to the bleeding industry. How long and what benefits the airlines would reap from it will be ascertained only over a period of time. But from a short-term perspective, it looks like the airlines should be able to curtail their mounting losses to some extent. As part of the much awaited respite, the Government has removed the basic Customs duty of 5 per cent on aviation turbine fuel (ATF). Also, the oil marketing companies reduced the sale price of ATF by 15-17 per cent across the four metros on Friday. Last month, the sector had already got six months to clear more than Rs 2,900 crore previously owed to the domestic oil companies. The domestic airlines have been given a 90- day grace period to clear their current fuel bills. On the one hand, skyrocketing ATF prices resulted in a tremendous surge in the operating costs of the airlines; on the other, it had a cascading impact on their bottom lines. Currently, cost of fuel contributes 40-50 per cent to the overall costs of the airlines in India. High jet fuel prices meant hikes in air fares which, in turn, led to depleting load factors. Good times, which were short-lived in any case, made Indian carriers place huge aircraft orders. And, when bad times struck, those planes became a liability. Excess capacity in the market, combined with slowing down of traffic from outside India as a result of the global economic crisis, eroded airlines’ profits much faster.

GLOOMY NUMBERS
While the benefits of the package will take some time to show up, the second quarter numbers of airline companies remained gloomy. And the prime culprit was the high price of ATF. Market experts say cooling of oil prices is likely to bring some cheer, at least in the short term. “The situation for Indian aviation industry remains the same as what it was couple of months back. The only silver lining is the falling crude oil prices which, in turn, have brought down the fares of Spicejet, Indigo and GoAir by around 20-40 per cent,” said Mr Hitesh Agrawal, Head of Research, Angel Broking. However, he said the drop in fare levels has come at a time when people are travelling less. This could hamper airlines’ prospects of reaping benefits immediately. “Travel plans for business and individual travellers have taken a back-seat,” said Mr Agrawal. Nevertheless the southward movement of fares should bring back passenger volumes, giving the industry a breather in the coming months. Kingfisher Airlines, Jet Airways and Spicejet all remained in red in the second quarter ended September 30. Jet Airways has partly withstood the loss and has done better than expected, according to analysts. Mr Mahantesh Sabarad, Senior Research Analyst, Centrum Broking, said the company achieved this on the back of year-on-year increase in the number of international fliers. Jet’s Revenue per Passenger Kilometre in its international business surged 139 per cent YoY to Rs 380 crore, he said. One of the airline’s revenue drivers was also the additional fuel surcharges that it was recovering from passengers. On the other hand, Kingfisher Airlines reported a net loss of Rs 483 crore in the quarter ended September 30, up 91 per cent from same period last year (Rs 253 crore). Spicejet registered a four-fold increase in its losses for the same period, which stood at Rs 198 crore, against Rs 38 crore in last year’s corresponding quarter.

RATIONALISING FARES
The high price of ATF remained a killer for all airlines. While for Jet the cost of fuel grew 143 per cent in the second quarter compared to the same last year, the impact on Kingfisher was Rs 640 crore in the quarter ended September 30, Kingfisher said in a statement. The average price of ATF increased by about 60 per cent between April and September 2008. However, since full-service carriers did not reduce their fares, their operating margins received a positive impact from it, said Mr Agrawal from Angel Broking. At the same time, experts also say that decent passenger growth can be sustained only through reduced fare levels. “Jet’s fares are currently 55 per cent up as against the industry average of 40 per cent on a year-on-year basis. It should look at reducing passenger fares in the future for a good passenger volume,” said Mr Sabarad from Centrum Broking. Kingfisher’s fares were also up in the same range. In the future, airlines are expected to post far lower losses as the domestic market looks good for the next three months. In addition to the recent sops, commencement of peak season should also improve the performance of the industry in the coming quarters. Cost-cutting measures are likely to result in optimizing airline operations. These include postponing aircraft deliveries, holding back route expansion plans and using smaller aircraft, such as ATRs, in place of wide-bodied planes on domestic routes. And, if not retrenchment, perhaps cuts in employees’ salaries and similar measures may bring in important savings too.

Source: November 03, 2008, The Hindu Business Line

2. BA’s bid for GoAir hits air pocket
British Airways' (BA) planned an audacious and multi-million pound takeover of one of India's leading airlines, was derailed as unexpected problems in form of industry-ownership laws take off. The target was GoAir, a rapidly growing domestic carrier based in Mumbai. BA wanted to take a controlling or significant minority share, with senior industry sources saying it was ready to pay up to $600 million (pounds 371.2 million) for the stake. Such cross-border deals are normally out of the question in commercial aviation, which has tough rules preventing foreign nationals owning or taking control of airlines. BA aimed to get round the restrictions by setting up an Indian intermediary company to hold its investment in GoAir. Legal difficulties overwhelmed the deal within the past few weeks, however. It is understood BA may negotiate a marketing alliance with GoAir instead, with the Indian airline using BA flight codes on its domestic network. BA declined to comment on Saturday. Revelation of the plan comes at a crucial time for BA. This week it is likely to unveil some grisly quarterly results. Q2 pre-tax profits could fall to about £50 mn, as against £304 mn.
Source: November 03, 2008, The Times Of India

3. No cuts in air fares before December
With around 20 per cent reduction in aviation turbine fuel (ATF) prices along with lifting of customs duty, airlines can now easily pass on some benefits to the passengers, but it does not seem to be happening till at least December. Domestic carriers including Air India, Jet Airways and GoAir have decided not to go on any fare war. The carriers will wait before they take a call on price cut. Jet Airways, the country’s leading private carrier, though welcomes the abolishment of customs duty and says the airline will not make any change in its present fare structure. “With respect to our surcharge and pricing policy, we are waiting for the final figures to be communicated to us by the oil companies. After receiving these figures, we will assess the situation. So no change in the surcharges and fare structures for the time being,” said a Jet spokesperson. One of the reasons why there will be no reduction in the air ticket prices is also the lack of the competition now. “Airlines offered tickets even below their costs because of competition. Now, they have learnt their lessons and would not go for any price cut out of competition,” Vishwas Udgirkar, executive director of PricewaterhouseCoopers (PWC), said. There are indications that the low-cost carrier such as SpiceJet, IndiGo and GoAir may cut prices. However, the reduction may not come before December. “There will be no immediate relief for the customers. The airlines may announce some cuts towards December because that is the peak season and the carriers would like to push up their load factor. But as of now, they need to catch up with their accumulated losses,” said Gurinder PS Arora, senior manager, KPMG. Mumbai-based budget carrier GoAir agreed. “It is a trifle early for the airline to decide on any further reduction, given the monetary exchange rate impact that is being experienced (Rs versus the dollar) and the economic downturn,” the airline’s spokesperson said. National carrier Air India is also waiting and watching the situation. “We have to look at everything. The dollar recession has also affected our margins. We will wait and watch before making any announcement on fare reduction,” Jitendra Bhargava, Air India spokesperson, said.
Source: November 06, 2008, Financial Chronicle

4. Global air traffic dips 2.9% in September: IATA
Early signs of global air travel slowing down are evident from a recent IATA (International Air Transport Association) report which says that air travel across the globe has dipped 2.9% for September 2008, as compared to previous month. However, IATA has taken up the issue with various governments on finding a solution to this grim scenario. Over 230 airlines from across the globe are members of the IATA, a trade body that deals with air traffic related issues. Taking a peek at the traffic slowdown figures revealed by IATA, African carriers posted the largest decline in traffic at -7.8%, followed by Asia-Pacific carriers with a 6.8% drop in the month under preview (September) and European carriers sawatrafficdropof-0.5%. Simultaneous to a slowdown in passenger traffic, even cargo movements have recorded an alarming dip in September 2008. For instance, Asia Pacific earners- the largest players in the market have reported a 10.6% decline followed by Europe and North American carriers with a fall of 6.8% and 6% respectively. Says, Giovanni Bisignani, director general, and CEO, IATA, 'The deterioration in traffic is alarmingly fast-paced and widespread. We have not seen such a decline in passenger traffic since SARS in 2003." He further adds that even the good news that the oil price has fallen to half its July peak is not enough to off-set the impact of the drop in demand. "At this rate, losses may be even deeper than our forecast $5.2 billion for this year." However, Bisignani points out at the banking sector which is taking government aid is able to access global capital. "Airlines across the globe are not asking for any government handouts. But the current crisis highlights the need for airlines to be able to run their businesses smoothly," says Bisignani. Aviation analysts also feel that the current traffic decline is the worst in the past five years. 'The rules of the game have been tweaked. Premium airlines which charged a moon for any long haul flights are now offering attractive air fares to bring in load factors," says an analyst adding that the airline industry is clamoring for a government aid amongst other options or else many airlines with a weak balance sheet will have to fold up in quick time.
Source: November 06, 2008, The Financial Express

5.SAS launches Delhi-Copenhagen flight
SAS, Scandinavian Airlines launched the first ever Delhi-Copenhagen service, the only non-stop route between India and Scandinavia recently. The new service will operate three times a week, with a flying time of 7% hours. The service will provide connections via Copenhagen to all of Scandinavia and the home markets of Scandinavian airlines.
Source: November 06, 2008, Hindustan Times

6. Travel agents association to boycott airlines
Continuing its protest against airlines’ decision of not giving any commission to travel agents, the Travel Agents’ Association of India has decided to boycott Air France, KLM and Northwest Airlines. The decision was taken recently in a meeting where the TAAI managing committee decided to up the ante by boycotting the three airlines. “Travel agencies are staunchly protesting the decision of zero commission by 14 airlines, who claim they need to cut costs to remain competitive in the increasingly challenging industry,’’ said Rajji Rai, president, TAAI. “At this critical juncture when the industry is in heavy turmoil and posting huge losses, it is not the right time to push zero percentage, especially when the agents contribute 80 to 85% of the business to airlines,’’ Rai said. He said any further loss of load factor would be a potential disaster for these airlines, which could easily happen because of non-cooperation by agents. However, with many airlines implementing zero commission from November 1, TAAI has been asking them to include a ‘transaction fee’ in the ticket given to the travellers. “This would protect the agents by giving them a fixed amount of income for all their services in spite of zero commission. With over three months of discussions, airlines like Air India, Jet Airways, Kingfisher Airlines and Singapore Airlines have started including a transaction fee in their published air fares from November 1,’’ Rai said.
Source: November 06, 2008, The Times Of India, Language

7. Aviation secretaries to take stock of sops
After handing out a slew of incentives to the aviation industry over the past fortnight, a committee of secretaries, led by Cabinet secretary KM Chandra- sekhar, is scheduled to meet on Monday to assess the impact of these measures on the sector and the need for additional measures. Income tax benefits to the aviation industry and reduction of sales tax on aviation turbine fuel were some of the additional proposals discussed by the CoS in its meeting in August. Other proposals, such as preparing a package for financial relief to airlines over the next two years, reducing customs duty on ATF and asking airlines to import the fuel at least to Mumbai and Chennai, were also discussed. These could be looked into once again, if it is felt that the aviation sector needs more help, a source said. CoS had earlier sought the revenue department’s views on allowing private airlines to carry forward accumulated losses and unabsorbed depreciation upon being merged, for a limited period. With most private carriers making losses, setting off accumulated losses and unabsorbed depreciation for eight years will encourage consolidation in the industry. The issue was also taken up at the time of this year's Budget, but the finance ministry did not go ahead with it. Such a provision had been added to section 72 A of the Income Tax Act for public sector aviation companies and had helped ease the merger of Air India and Indian Airlines. Since then private airlines too have been seeking the benefit. The civil aviation ministry too had earlier pointed out that this provision deterred mergers and acquisitions in the airline business and had sought extension of the provision to other carriers for at least five years. Sandeep Chaufla, partner Ernst & Young said, “Considering the way the sector is going and the consolidation that is happening in it, extending section 72 A to it would be a good move.” Meanwhile, CoS had also asked the department of revenue and the ministry of civil aviation to impress upon states, at least where major airports are located, to bring down sales tax on ATF to 10-12% from the current rates averaging at 25-30%. Incidentally, the empowered committee of state finance ministers is also meeting on Monday, but the issue does not feature on their agenda. States have so far not been keen to rationalise the duty structure on the fuel. The government in recent weeks has given a number of sops to the sector. Last Friday, the finance ministry withdrew the 5% basic customs duty on the fuel. On the same day, prices of the fuel were also slashed by 17%-- for the third time in the month. Prior to that, the sector was also given a bailout package when private carriers were allowed to clear their outstanding of Rs 2,962 crore by March next year. Their credit period was extended to 90 days from 60 days. Rising fuel costs and lower passengers on account of the global slowdown has hit revenues of airlines. For instance, Jet Airways, India's biggest domestic airline, reported a second-quarter net loss of Rs 384 crore from a Rs 2.84 crore profit in the same period a year ago. Similarly, Kingfisher Airlines reported a consolidated operating loss of Rs 1,081 crore in the first half of 2008-09, after its merger with Deccan Aviation in March this year. Overall, the domestic aviation industry is expected to face losses of nearly $2 billion this fiscal, the highest globally.
Source: November 03, 2008, The Financial Express

8. Foreign air cargo players upbeat about industry, to add capacity
Indian air cargo industry does not seem to suffer from the kind of tumultuous upheaval that air passenger industry is subjected to now-a-days. In fact, air cargo movement in the country is going to gather further momentum with international airlines planning to increase their capacities into Indian market. Carriers from the Middle East like Emirates are expanding to India and are also offering onward connections from the Gulf. Egypt Air, British Airways and some carriers from China are also expected to increase their connections to India. As part of its expansion, Emirates is stepping up frequencies to New Delhi, Mumbai, Bangalore, Hyderabad, Chennai and Kochi in a phased manner. Effective October 26, 2008, Emirates has introduced four additional flights per week between Chennai and Dubai and in the next phase of expansion, one more flight will be added to the route from February 1, 2009, bringing the total count to 19 flights a week. From its 10 flights per week schedule from Kochi, Emirates has introduced two additional flights per week from Kochi to Dubai effective October 26, 2008. It has announced another two flights from December 1, 2008, taking the total count of weekly flights to 14. Cargo capacity, accordingly, will increase from 176 tonne to 221 tonnes per week. Thanks to these capacity augmentation programme of airlines, industry sources expect, cargo movement will gain momentum with increased capacity to support export of pharmaceuticals, vaccines, garments, chemicals, meat, fruits, vegetables, etc. to Middle East, Africa, Europe and America. Emirates has recently announced a second round of expansion for India, adding 31 weekly flights to its existing 132 weekly flights by February 2009. It will be able to increase air cargo capacity to 389 tonne per week. Significantly, the enhanced capacity will position the airline as the single largest international carrier in the Indian skies, operating 163 flights per week to 10 Indian gateways. In Mumbai, Emirates will add 7 additional flights per week to its current 28 flights per week schedule effective February 1. Correspondingly, the cargo capacity will increase to 641 tonnes per week. From Bangalore, its cargo capacity will increase to 302 tonnes per week. The increase is expected to provide significant thrust to goods movement from the garden city which exports electronic hardware, engineering goods, chemicals and pharmaceuticals, fruits, vegetables, and readymade garments to the Gulf, Middle East, Africa, Europe and America. Chennai is also set to receive enhanced capacity to accommodate its large cargo export base of textiles and garments, electrical and electronic goods, machinery and spares, leather and leather products, pharmaceuticals, perishables, valuables and mobile phones. According to aviation sources, several established dedicated cargo carriers are also increasing capacity to India. However, Indian carriers are now not focusing on cargo much as they are in the process of cutting down the capacity. Leading carriers such as Air India, Jet Airways and Kingfisher Airlines which were projecting cargo as one of the main sources of revenue are now pulling out capacity by 15% from the international routes. Despite the downturn in the economy, according to industry analysts are bullish about air cargo traffic which is adequately fuelled by economy. They are also believe that the advent of dedicated cargo aircrafts at international and domestic routes will reduce the share of traffic transported by railways and ships. Contrary to the general perception, commercial activities and a rapidly growing food processing sector will help drive the surge in cargo traffic, they said. The government measure of allowing foreign carriers to take up to 74% stake in cargo airlines is also expected to keep the momentum, they said.
Source: November 03, 2008, The Economic Times

9. Fly Hyderabad-UK at Rs 90 on British Airways
Here is some good news for those worried about the depressed aviation industry. British Airways has announced a limited period inaugural fare of just Rs 90 (plus taxes) from Hyderabad to London and any other destination in the UK. Passengers can fly to any of the 22 destinations in the US at Rs 990 (plus taxes). BA is going to add Hyderabad to its route network in India from December 7, a press release said. The tax component on a Hyderabad-London return ticket (two-way) is put at Rs 19,477 and Hyderabad-New York return at Rs 34,729. BA would operate five flights a week from Hyderabad to London. This would take the total number of flights it operates from six Indian cities to 48 flights a week. The move comes close on the heels of the airline offering a fare of Rs 9,990, plus taxes, fees and surcharges, on all flights to London from Delhi, Mumbai, Kolkata and Chennai.

WOOING THE CITY
Several airlines seem to offering promotional fares to woo the Hyderabad market. In September this year, Singapore Airline offered tickets to Singapore, Kuala Lumpur, Penang and Bangkok at discounts varying from 33 per cent to 39 per cent. Industry watchers feel that the move by the global airline industry is an attempt to get certain sections of society, which would otherwise not look at international travel. “Traditionally, it has been elderly persons or the IT sector people who have been travelling from Hyderabad to Europe and the US. But now with international airlines adding capacity, attempts are being made to expand the international travel market segment,” an industry source said.
Source: November 03, 2008, The Hindu Business Line

10. Lufthansa sees India as strong market
Even as domestic aviation companies have been facing the heat due to the double whammy of volatile fuel prices and a slowing economy, foreign players have been making gains in India. German carrier Lufthansa is one of them. The airline continues to see India as a market with strong growth potential, Werner Heseen, who recently retired as director, South Asia, said. “India is a strategic market for us from a global perspective,” he said. In the past five years, the airline has taken the number of daily flights from India to 55 from 23. So what has helped the company grow even as its Indian counterparts have gone to the government for help? “We have the first mover advantage in India. In the aviation business, speed to the market is a decisive factor,” Heseen said. “Also, we have done thorough spadework before allocating our resources.”
Source: November 04, 2008, Financial Chronicle

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