Issue 249

 

1. Airlines fail to benefit from fare fair

The gap between the average fares of a full-service airline and a low-cost carrier (LCC) for metro routes narrowed by a third in January, thanks to leading players cutting their fares quite dramatically to grab the market share. According to assessments made by aviation consultant Centre for Asia Pacific Aviation (CAPA), the average difference between the fares of an LCC and a full-service carrier, which was around Rs 1,500 in October-December 2008, has gone down to just Rs 500 to Rs 750 in January. Executives of Indian carriers think that the difference is even smaller than Rs 500. “While the average fare for LCCs have come down by around 45 per cent from Rs 3,800 to Rs 2,100, fares for full-service carriers are down by 55 per cent, from Rs 5,500 to Rs 2,500. The fares are back to the levels of 2005-06,” said a senior executive of a Delhi based low-cost carrier. In spite of the sharp drop in fares, the airlines could not increase the passenger traffic, which dropped by 10 per cent in January over the same month last year, according to an estimate by CAPA. While the market share of full-service carriers has improved, the widening cost-revenue gap will not be filled since the market is not growing in absolute terms. CAPA CEO (Indian subcontinent and the Middle East) Kapil Kaul said: “Even though the gap between LCC and full-service fare has come down, it has not led to growth in passenger traffic. In fact with their cost much higher, full-service carriers will face more losses while LCCs have a cushion in terms of costs. Experts said low-cost carrier SpiceJet, which achieved an operational break-even in the December quarter, has lost that status since January since its realization per seat has already gone below its costs. For instance, the yield per seat, or the realization from a seat, in the case of full-service carriers has fallen by Rs 1,000 to Rs 1,200 over the previous month compared to Rs 500 to Rs 600 in the case of LCCs. With costs of a full-service carriers nearly four times that of an LCC, the move to cut fares without any increase in passenger traffic will force them to bleed further. Also, the fare cuts in January would have built a 10 per cent gap between the cost and revenue structure for LCCs and a much higher one for full-service carriers. In its latest report on Indian aviation, CAPA estimates that the fourth quarter (January-March) could be the worst for the airlines. “Massive accumulated losses from the first three quarters of the financial year, combined with the current softening of demand and yield erosion will ensure the industry posts deep full year losses — as high as $1.6 billion. (Combined losses for the third quarter — the best quarter in the 2008/09 fiscal year, thanks to stronger yields — are expected to be around $300 million),” said the CAPA report. Not only that, the pressures from full-service carriers, which are cutting down fares so dramatically, might also impel LCCs to go for another round of fare cut so that the gap in pricing is maintained. LCC executives, however, say that a further fare cut is not possible. “I believe we have reached a position where we cannot afford any more fare cuts to build that gap between ourselves and full-service carriers. We are already selling below cost and thus subsidizing air travel,” said Sanjay Aggarwal, CEO of SpiceJet, a Delhi-based low cost carrier.
Source: February 06, 2009, Business Standard,

2. Low-cost airline has no space for frills’
Turning around an airline with a $40 million debt and just two planes isn’t the easiest of jobs. In seven years, Tony Fernandes, CEO, AirAsia, has made this bankrupt Malaysian airline into the fastest growing low-cost carrier (LCC) in Asia, serving 110 routes with 72 A-320s. He tells Shobha John that he now has his eyes set on India:What is AirAsia’s success mantra? Discipline, focus and a fierce determination to change things. We marketed our brand well and sell everything at the lowest cost good seats, food, extra luggage space. We used to sponsor Manchester United and now, referees from England and the Williams F1 team. And from this month, we’ll be offering half-a-million free tickets. We have the highest utilization each plane does an average of eight flights daily and flies about 14 hours. We do new routes mainly, like Kuala Lumpur-Tiruchy, which was started on December 1, 2008. Why Kuala Lumpur-Tiruchy? Was a market survey done? I’ve never done a market survey. All one needs is a city of 50,000 people to make a new route work. Some 19 million people flew my airline in 2008. I send teams to supermarkets, airports, etc, and get a feel of what people want. And i have never gone wrong. The Tiruchy route, our first in India, happened while i was attending a funeral and someone told me that all Malaysians were flying to Tiruchy. Today, it has 94 per cent occupancy. We’ll fly to Chennai, Delhi and Mumbai next. In a country of over a billion people, if i can’t fill up an A-320, i shouldn’t be in this business. Are low-cost carriers in India really low-cost? No, they aren’t. Even Air Deccan, which came closest to it, had a variety of planes turboprops, ATRs, A 320s. That means separate crew, training, seating plans, maintenance, etc. This complicates matters and translates into more costs. AirAsia, for example, has only A-320s. Simplicity is the mantra for an LCC’s success. Also, most LCCs are owned by rich men, who want to like it themselves, with some add-ons. The LCC model is a basic and good product, with no space for frills. AirAsia’s motto ‘Now everyone can fly’, which i got while taking a shower, is as simple as it can get. We’ve an efficient and fit cabin crew who clean the plane themselves, saving time. They’re also given incentives like better salaries than the national carrier, and 5 to 10 per cent commission on whatever they sell. Will AirAsia want to buy a stake in a domestic carrier in India? Which would it be? Yes, i would be interested. My father was an Indian citizen and i would love to be in India. But i don’t want to plan till regulations permit.
Source: February 06, 2009, The Times Of India

3. Jazeera Airways may pick up stake in domestic airlines
The Kuwait-based low cost airline, Jazeera Airways could look at picking up a stake in a domestic airline if management control is also handed over to the investor, a senior airline officer said on Thursday. "For us to be interested in an airline, the management right must rest with us. We should be able to exercise control over our investment. We will look at (investment) opportunities regionally including those in India, West Asia and North Africa," said the airline's Chief Commercial Officer, Mr Steven Greenway. He added that the airline Chairman was always on the look out "for all options" as more airlines close operations due to mounting losses. The airline which took to the skies three years ago has been reporting profits since its inception. The Jazeera Airways announcement comes soon after the Ministry of Civil Aviation initiated a move to allow foreign airlines to invest in the domestic airlines. The Ministry has proposed that foreign airlines be allowed to pick up a 20-25 per cent stake in domestic airlines. On the other hand, the Commerce Ministry is keen to allow foreign airlines to have a 49 per cent stake in domestic airlines. The Union Cabinet will have to give its nod before foreign airlines are allowed to pick up a stake in domestic airlines. Meanwhile, Jazeera Airways is to initiate talks with domestic airlines to expand its presence in the Indian market. "We will be meeting with a number of airlines to see whether a code share agreement can be worked out with an airline here. Such an agreement will allow our passengers arriving in Mumbai and Delhi to connect on to other destinations within the country," Mr Greenway said.
Source: February 06, 2009, The Hindu Business Line

4. Jet, Kingfisher square off on FDI
Differences have cropped up between the country’s two largest private carriers, Jet Airways and Kingfisher Airlines, on the issue of foreign direct investment (FDI) participation by foreign airlines in the domestic aviation sector. It was gathered that all was not well between the two airlines but it now appears that the issue is now out in the open. The tussle between the two carriers on the FDI issue may have a bearing on their alliance (Jet-Kingfisher) which was formed last October. This was to cut capacity, route rationalization and to agree on code-share arrangement. “We don’t see any value in the FDI policy currently as airlines globally are bleeding. Jet Airways is neither discussing stake dilution with any foreign airline nor is it putting the case to the government,” Jet Airways CEO Wolfgang Prock-Schauer told ET recently. Kingfisher Airlines chairman Vijay Mallya earlier wrote to the government to allow FDI in domestic carriers. Interestingly, Kingfisher is believed to be discussing a 25% stake sale with three foreign airlines. “At this juncture, a difference in opinion between them (Jet-Kingfisher) may hamper the alliance, which is yet to take off after three months,” said an analyst with Mumbai-based domestic brokerage firm on the condition of anonymity. Jet Airways promoter Naresh Goyal and Kingfisher’s Vijay Mallya had a closed-door meeting in London in December to look for ways to avoid duplicating flights on domestic and overseas routes. The meeting was not too productive and did not yield any concrete result. The Jet-Kingfisher alliance has not been progressing too smoothly and a difference in opinion on the FDI issue has not been the best piece of news at this stage. At present, India does not allow foreign carriers to hold equity, directly or indirectly, in domestic airlines. Importantly, it is the only country where the foreign institutional investors are allowed to invest in aviation sector with a FDI cap of 49%. Most Indian carriers are already sitting on significant debt and raising anymore may not be easy in the prevailing conditions. Meanwhile, UB Group company United Spirits (USL) has pledged its shares to fund Kingfisher’s expansion plans. Indian aviation companies have been hit by the global financial meltdown. Due to the slowdown, the passenger load factor has also come down on an average 15%.
Source: February 06, 2009, The Economic Times
 

5. Jet’s the way for Srinivasan
M&As are an integral part of this man’s genetic make-up. After getting into an acquisition binge in the late 1990s and then clawing out of the CDR hole (an abyss for many hugely indebted Indian corporations in the early part of the decade) to become the largest profit-making, listed company from Chennai, the feisty chief of India Cements — N Srinivasan — has purchased, what a little bird calls, “a small airplane”. Under India Cements, Srinivasan runs seven production units spread across two southern states. But he also wears another hat, that of the secretary of the Board of Control for Cricket in India (BCCI), the richest sports body in India and also the richest cricket association in the world. When someone has to mange two such important roles, one is usually airborne most of the time, which translates into revenues for commercial liners. That itself is a valid reason for Srinivasan flying around in his own jet.
Source: February 02, 2009, The Times Of India

6.Air France says no secret Alitalia takeover pact
Air France-KLM has not negotiated a secret pact to acquire control of Alitalia at some future date, the French group’s chairman said in an interview in Italian newspaper Il Sole 24 Ore on Sunday. “There is no secret pact, no side letter,” Jean Cyril Spinetta was quoted as saying. After a failed takeover last year when the Italian national airline was riddled with debts and losses, the French carrier came back less than a year later to secure a better deal, paying less than a fifth of its earlier offer.
Source: February 02, 2009, The Economic Times

7. Kingfisher turns in Rs 413 cr loss
The Aviation industry's big crunch, pushed by an economic slowdown and aggravated by jet fuel prices, is making the glamorous Kingfisher Airlines bleed a deep shade of its trademark colour, red. Losses more than doubled in the latest quarter over the year-ago period, as the cost of launching international operations and the digestion of the ailing Air Deccan that it acquired showed up on its books. Baron Vijay Mallya's Kingfisher reported a loss of Rs 413 crore for the quarter ended December 31,2008 at the weekend, with the red blob more than doubling from the Rs 191-crore loss reported by the carrier in the quarter ended December 31, 2007. The airline showed a loss of Rs 1,054 crore for the nine months ended December 2008 against a loss of Rs 617 crore loss reported for the same period last financial year.However the figures are not comparable since the losses this year are for Kingfisher-Deccan's integrated operations, whereas last financial year's losses reflect only Deccan Aviation's operations. Kingfisher got listed on the exchanges through the Deccan buy According to a statement issued by the airline, these losses also include Rs 174 crore of initiation costs to launch international operations. "The airline was also affected by the exchange rate impact of dollar denominated expenses to the tune of approximately Rs. 60 crore and interest expenses during the third quarter which increased by Rs 103 crore as compared to the same period last financial year," the statement said.
Source: February 02, 2009, Hindustan Times

8. SpiceJet's online discount scheme angers fliers
Be Careful when you buy air tickets online through an ostensible discount scheme. Last week, Customs agent Ritesh Bhalotia (29) bought two tickets to Bangalore from Mumbai through discount carrier SpiceJet's 'Happy Hour' scheme advertised on its website. The scheme offered customers a free ticket for every ticket they bought online on January 19 and 20. The airline was to e-mail the customer the PNR or confirmation number of the free ticket as soon as they bought the first one online. But Bhalotia received no such e-mail. "I was shocked," said Bhalotia. "I tried phoning the call centre, but no one picked up. I have now e-mailed a complaint to the airline's customer care department. The only reason I booked tickets on SpiceJet was the discount. I will move the consumer court if the matter is not resolved. "A spokesperson for SpiceJet admitted that Bhalotia had booked two tickets on January 20, when the scheme was valid, but said he had not booked the tickets under the 'Happy Hour*' scheme. Asked why anyone would not take advantage of a discount prominently advertised on the site, he said: "This kind of aberration is not possible in our system. But our IT department is looking into it." Anandrao Bokka was another customer who bought two return tickets from Mumbai to Guwahati through this scheme on January 20, expecting two free tickets. He too did not receive any e-mail with PNRs. When he phoned the call centre, a customer executive told him the flight was full. "They should have told me before I booked the first two tickets," said Bokka. "I was getting a cheaper deal from another carrier. I booked the tickets only for the free ones." The spokesperson for SpiceJet confirmed that Bokka too had booked two tickets, but said: "The system does not offer you a ticket (through this scheme) if the flights are full."
Source: February 02, 2009, Hindustan Times

9. Air France to trim seat capacity
AIR France-KLM Group, Europe’s biggest airline, said its Air France will scale back flights in the October-to-April season, the first time in at least five years that the division hasn’t offered more seats. The carrier will trim capacity by 1 per cent to 2 per cent compared with the year-earlier summer schedule, said Brigitte Barrand, a spokesperson at Paris-based Air France, confirming comments chief executive officer Pierre-Henri Gourgeon made to travel agents that were reported on Monday by Les Echos. The company joins Atlanta-based Delta Air Lines, its partner in the SkyTeam marketing alliance, and London based competitor British Airways in cutting capacity in response to declining traffic. Air France-KLM Group said last month that its fiscal third-quarter operating loss was about ¤200 million ($255 million). Les Echos on Monday cited Gourgeon as saying the fourth-quarter loss may be comparable. “The environment is becoming more and more adverse for airlines,” Chicuong Dang, a Paris based analyst at KBL Richelieu Gestion, which has about $5 billion under management, said in an interview. Air France-KLM fell as much as 45 cents, or 6 per cent, to ¤7.06 and was down 4.7 per cent as of 10.56 am in Paris trading. The stock has dropped 62 per cent in the past 12 months, valuing the airline at about ¤2.15 billion. The company said on January 21 it wasn’t in a position to project earnings in the fiscal year ending March 31, adding that, even so, the aim is to have a “positive operating result.” Gourgeon said the goal hinges on how traffic develops in coming weeks, Les Echos said. The company is scheduled to report results on February 13 for the third quarter ended December 31. Separately, Air France canceled 30 domestic and intra-European flights from Charles de Gaulle airport in Paris on Monday because of snow. No long haul flights were affected, the company said in a statement.
Source: February 03, 2009, Financial Chronicle

10. Branson offers double pay to miracle pilot to move to Virgin
It hasn't taken Sir Richard Branson long to cash in on the fame of Chesley Sullenberger, the US pilot who saved his 155 passengers' lives after performing a crash landing in the Hudson River in New York last month. The tycoon boasts, "We'll make him the best-paid pilot at Virgin — we'll give him double the salary of anybody else. He can also become one of the astronauts in my intergalactic spaceship company. The man can write his own ticket for me." Branson added, "Every single thing he could have done right, he did right — from the second he made that decision not to go to that local airport, to put the plane down in the water, to the way he looked after everybody." When he heard about Branson's offer, Sullenberger (57) said, "That's amazing." Sullenberger, a former fighter pilot who currently earns around £95,000 (Rs 67 lakh) a year, has been inundated with offers. "I will be happy to entertain all the things that are coming my way," he says. The pilot's heroic actions earned him telephone calls from US President Barack Obama, who invited him to his January 20 inauguration and offered to fly him on Air Force One.
Source: February 03, 2009, Mid-Day

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