Issue 259

1. Aviation India poised for M&A
The Indian aviation industry is poised for another round of consolidation as early as the first half of the current fiscal, with low-cost carriers like IndiGo and SpiceJet requiring significant capital and funds inflow, the Centre for Asia Pacific Aviation (CAPA) has said. "The next round of consolidation may be strategic in nature. For example, SpiceJet has indicated that it would be interested in participating in such a development," the CAPA said in its report titled "Indian Airlines Prepare for Consolidation Round Two". Stating that the market and investors will support sensible consolidation which is designed to restore profitability rather than pursuing scale, it said, "CAPA expects that activity will be seen on this front in H1 (first half) 2009-10". Though the report is silent on the specifics of the mergers and acquisitions expected, it says: "Low-cost carriers (LCCs) such as IndiGo and SpiceJet also have significant capital requirements and will need further flows of funding ...The next round of consolidation is therefore most likely to occur in the LCC sector." SpiceJet and Indigo officials were not available for comments on the CAPA report. The CAPA report further said consolidation was most likely to happen in the LCC segment, "especially as the full service carriers do not have the balance sheets to engage in further acquisitions". The paper notes that the earlier round of consolidation in 2007 with the Kingfisher-Air Deccan merger, Air India and Indian Airlines merger and Jet-Sahara acquisition took place against the background of an industry that was beginning to exhibit the first signs of distress. The bullish fleet orders placed by Indian carriers in that period saw capacity being introduced at the rate of 6 to 6.5 aircraft a month, whereas the actual growth in demand was closer to equivalent of three aircraft. Also, the rapid increase in capacity was taking place at a time when the airport modernisation programme was yet to deliver upgraded infrastructure which meant that airports and airways were highly congested, increasing airline operating costs, it added. The report further said in a period of boom, demand for skilled personnel such as pilots and engineers also outstripped supply leading to a sharp escalation in wages, and in some cases grounding of aircraft due a shortage of staff. As for the next phase of consolidation, the process would be more strategic in nature. Foreign airlines appear unlikely to be able to participate in any consolidation process in the short-term though, as they barred from holding any equity in Indian carriers .
Source: April 27, 2009, The Free Press Journal

2. Six months on, Jet­ Kingfisher alliance set to start rolling
The biggest operational alliance in India’s aviation sector, between Jet Airways (India) Ltd and Kingfisher Airlines Ltd, has finally taken off. Jet and Kingfisher, the country’s biggest private airlines by passengers carried, began cooperating at airport levels last month and are set to start code-sharing of flights, a top executive from Kingfisher and three officials from Jet said. The airlines are also working on their frequent flier programme so passengers can use points gained on one in the other. Code-sharing is a commercial agreement between airlines, under which they can mutually use their two-letter identification code to represent each other’s flights on computerized reservation systems. That way, the airlines get a larger network using fewer flights and potentially fly different legs of a journey by issuing a single ticket. Code-sharing and network rationalization were two key objectives before Jet and Kingfisher when they proposed the alliance in October. The two airlines and other Indian carriers have been straining under intense competition, slowing demand and high fuel costs, and are likely to have posted a combined loss of $2 billion (Rs9,920 crore) for the previous financial year, according to industry estimates. One Jet executive close to the development said the airline will withdraw some select flights to London as a prelude to the code-sharing agreement, while Kingfisher will slow its expansion in West Asia, Hong Kong, Singapore and other international destinations. “Instead of starting more flights, Kingfisher Airlines will code-share with Jet Airways for those destinations. The code-sharing was delayed due to internal issues and approval from regulatory authorities,” he said, asking not to be identified. The airlines are now in the process of getting regulatory approval for code sharing, he added. Vijay Mallya, chairman of Kingfisher Airlines, and Naresh Goyal, his counterpart at Jet, had in October jointly announced the alliance in Mumbai. Mallya had claimed the alliance would save at least Rs1,500 crore annually. The alliance ran into trouble after Jet announced layoffs of up to 1,900 of its workers, leading to protests in Mumbai, where it is based, and forcing it to rescind the plan to trim its workforce. Most analysts had then said the cooperation plan was as good as buried. Three months after the plan was announced, Mint reported on 14 January that the alliance had failed to take off, basing its reporting on delays in permissions sought from the civil aviation ministry and views of analysts. The airlines had declined comment then. The alliance included so called interline or special prorate agreements to leverage the joint network, combined purchase of fuel to reduce expenses, common ground handling, cross-selling of flight inventories using common global distribution, cross-utilization of crew on similar aircraft types, and sharing training and technical infrastructure. “But the deal could not make much headway initially because of internal issues and technical issues involved. It took lot of time because Jet and Kingfisher are two big airlines,” the Kingfisher executive said. “We have already started sharing infrastructure at airports as an initial step. For instance, Kingfisher Airlines is using Jet Airways’ security scanners and Jet Airways’ airport staff is helping Kingfisher Airlines’ passengers.” He did not want to be identified as he is not authorized to speak to the media. The executive said the two airlines are firming plans for code-sharing and mutual frequent flier programme benefits. “In a month’s time, we will be finalizing that. Apart from code-sharing, we are going to sign some more contracts in (the) next (few) months.” The two airlines are meeting this week to finalize associations in “critical areas”, he added. Saroj K. Datta, executive director, Jet Airways, confirmed that code-sharing of flights with Kingfisher Airlines is under consideration, but didn’t give more details. “I cannot put a definite time frame for this. We will (start) code-sharing as and when we are ready. Of course, this will be subject to approvals.” Aviation experts see the alliance as a temporary solution. An aviation-sector analyst with a global brokerage said though it made sense for the two firms to form an alliance, it would have a marginal impact. He too didn’t want to be named. Sudhir Nair, head of Crisil Research, a part of Crisil Ltd, said the alliance may mitigate some costs for the two airlines but would not bring profits. “It makes sense to put up own infrastructure for airlines when the domestic aviation is growing at 30%. But when there is negative growth prevailing, it makes (a) lot of sense to cooperate and share infrastructure,” he said.
Source: April 27, 2009, Mint

3. Aviation poised for M & A: CAPA report
The Indian aviation industry is poised for another round (if consolidation as early as the first half of the current fiscal, with low-cost carriers like IndiGo and SpiceJet requiring significant capital and funds inflow, the Cenirt- lor Asia Pacific Aviation (CAPA) has said. "The next round of consolidation may be strategic in nature. For example, SpiceJet has indicated that it would be interisied in participating in such a development" the CAPA said in its report titled "Indian Airlines prepare for Consolidation Round Two'.
Source: April 27, 2009, The Economic Times

4. DIAL's non -aero revenues surpass income from core biz
GMR group-led Delhi International Airport (DIAL), the company that operates India's second-busiest air­port, has witnessed more cash flow from non -aero­nautical activities such as sale of food and beverages than from its core business of aircraft landing and parking in 2008-09. DIAL'S non-aeronautical revenue has gone up to 65% in FY 2008-09 from about 45% in the previous year, DIAL chief executive BS Shantaraju said. "In line with the international benchmark, the revenue from the non-aero activities is ex-peeled logo up to 70% in 2010-11 with the opening of an in­tegrated terminal building," he said. Global aviation research agency Centre for Asia Pacific Avi­ation (CAPA) India head Kapil Kaul said the "non-aero revenues from Delhi and Mumbai airports was one of the major attractions for private operators who bid aggressively for them." Explaining the reason for relying on revenues from non-core business. Mr Shantaraju said: "We cannot depend only on airport charges. We have to utilize all our resources to be competitive" Domestic airport operators have been hit hard by declining traffics a result of slowdown in the econ­omy. With airlines reducing flights and frequency, airport companies are focusing on allied activities and airport retail to make up for the revenue shortfall. DIAL has invited bids from retailers to run duty-free shops at the airport. DIAL which had posted a net profit of Rs 57 crore on an income of Rs 875 crore in 2007-08. is expecting "a reasonable increase" in its re venue for 2008-09 despite the negative growth in the sector. Mr Shantaraju said.
Source: April 27, 2009, The Economic Times

5. Jet allowed to dry lease 3 aircraft to Turkish airline
The Bombay High Court on Monday allowed Jet Airways to dry lease three aircraft to Turkish Airline, following an application moved by Jet’s counsel. The permission for leasing the aircraft was sought from the court because Jet Airways had filed an undertaking in the court on April 3, assuring that it will not sell or lease out any of its moveable or immovable properties. Sahara plea This was in response to the court order of March 31, following a petition filed by Sahara Corporation seeking court direction to attach Jet’s properties. Sahara had claimed that Jet had defaulted on payment of the Air Sahara’s buy-out installment. On Monday, the court also asked Jet Airways and Sahara India Commercial Corporation to try and resolve their dispute between themselves. Commercial row According to Jet’s counsel, the court expressed the view that since it is a commercial dispute between two commercial entities they should sit across the table and sort out their issues. The next hearing will be on Wednesday. Jet’s counsel contended that the wet-lease for two of these aircraft was expiring on June 25 and for the other one on July 25, which needs to be renewed. Wet lease Wet lease refers to an agreement under which aircraft is leased with crew, insurance etc, whereas under dry lease, just the aircraft is leased out. In the last hearing, Sahara filed a chamber summons stating that Jet was liable to pay Rs 2,000 crore instead of the renegotiated amount of Rs 1,450 crore for the buyout of erstwhile Sahara airline (now JetLite).
Source: April 28, 2009, The Hindu Business Line

6. BA in talks to forge alliance with Indian carriers
British Airways on Tuesday said it is in talks with Indian carriers to forge an alliance, but will not make any equity investment in domestic airlines. “We have held talks with Indian carriers, but talks so far have been inconclusive,” said Judy Jarvis, who has recently taken over as regional commercial manager, South Asia, of British Airways. She said talks are on, but didn’t disclose the name of the potential partner and whether the airline is negotiating with a full-service or a low-cost carrier. Ms Jarvis declined to give details of the proposed partnership, but said it will not involve any equity investment by British Airways. At present, Indian rules don’t allow foreign airlines to hold equity in domestic airlines or operate on domestic routes directly. A government panel is currently considering the civil aviation ministry’s proposal to allow foreign airlines to hold up to 25% stake in domestic airlines. Usually, a non-equity alliance between two airlines involves sharing of seats, complementing routes and technical collaboration, which together help airlines rationalize costs and offer fliers better value. In October, Jet Airways and Kingfisher had announced an alliance that would involve sharing seats, staff and infrastructure. British Airways, one of the largest foreign airlines operating in India, recently pulled out of Kolkata, where it operated three international flights a week. Ms Jarvis said the airline had no plans to further cut routes or flights but is watching the market demand for reducing the number of seats being made available to the travellers to India. Following its exit from Kolkata, British Airways operates 45 flights a week from India. The global manpower rationalization plan announced by British Airways may also affect its Indian operations, said Ms Jarvis but added that it will take more than a month to fathom the extent of the impact. The Indian aviation industry, like other world markets, is going through a turbulent phase. The economic downturn has resulted in decline in air travel and many travellers have migrated from the pricier business class to economy class. The industry is estimated to post a loss of $2 billion for the year ended March 2009.
Source: April 29, 2009, The Economic Times

7. IATA fears Swine flu may weaken industry even more
The timing of the swine flu outbreak, along with an economic crisis that was pounding the airline industry, "could not be worse", the head of the International Air Transport Association (IATA) said Tuesday. "It is still too early to judge what the impact of swine flu will have on the bottom-line. But it is sure that anything that shakes the confidence of passengers has a negative impact on the business," Giovanni Bisignani said. "And the timing could not be worse given all of the other economic problems airlines are facing," he added. He made the remarks along with the release of the latest airline data, which showed that March was another bad month for the industry. "The global economic crisis continues to reduce demand for international air travel," Bisignani said. Year on- year, March saw a 9 per cent drop in passenger travel.
Source: April 29, 2009, The Free Press Journal

8. Air India Express to link Tiruchirapalli and Abu Dhabi
Air India Express, the international budget airline of Air India, will link Tiruchirapalli with Abu Dhabi, with introduction of twice weekly flights from April 30. The flight would leave Tiruchirapalli on Thursdays and Saturdays at 1430 hrs.
Source: April 29, 2009, Financial Chronicle

9. Aviation . hotel stocks
Punters on Dalai Street used reports of swine to trip aviation and hotel stocks — sectors linked to tourism. Sensex shed 370.10 points or 3.25"o Co close at 11.001.7S points. Stocks of Jet Airways was down 4.3-. at Rs 192.50. King­fisher Airlines saw a drop of 7.58'i to close at Rs 36.60 a share. Discount airline Spice-Jet counter witnessed a 8.61% drop to close at Rs 14.1Z. "Markets are very sen­sitive to such news. If you recollect the avian flu scare sometime back, even though there wasn't any casualty in India, markets took a beating. Today, people used the swine flu to sell." Ajay Parmar. head of research, Emkay Share and Stockbrokers, said. The fall in aviation stocks is bound to have its impact on Fund raising plans. "Every time, there is some semblance of thin^ falling in line for the avi­ation sector, trouble brakes out. Every airline in the country is cash strapped and with stock prices showing signs of recov­ery over the past month, com­panies were looking at fund raising more seriously With news of Swine Flu and the like, investors will tend to be more careful about the sector," a mu­tual fund manager said. Hotel stocks look a beating at the bourses too. IndianHo-tels, brand owners of Taj group of luxury hotels, saw a 6.111 fall in its stock price to close at Rs 48.40. Hotel Leela Venture skid by 4.8S"4 at Rs 21.60. while Taj GVK Hotels closed 2.33% lower at Rs 56.50.
Source: April 29, 2009, The Times Of India

10. Main runway to be shut for 5 months from May
Get ready for some major chaos at the IGI Airport in the coming few days. The main runway will probably be closed for recarpeting in the first week of May, leaving airlines with no option but to depend on the ‘jinxed’ new runway and a smaller secondary runway for the about five months. Combined with an Airports Authority of India’s (AAI) indefinite strike from May 1 and a swine flu scare, passengers will have a tough time coping with the confusion. In a bid to reduce the total closure time of IGI Airport’s main runway, the Delhi International Airport Pvt Ltd (DIAL) has scaled down its grand plans for modernizing this airstrip. The earlier plan envisaged closing the runway for eight months and rebuilds it completely. Following advice from aviation ministry that DIAL must reduce the total closure time, the airport operator has now submitted a new plan to the government. Under this the top 50-cm layer of the runway would be removed and relaid. This work is proposed to be completed in five months. DIAL has sought permission to begin the work maximum by mid-May so that runway 28 — which has the most reliable CAT III instrument landing system — is back in use by the time foggy winter sets in. ‘‘Ideally they want the work to begin in first week of May as the five month includes two months of monsoon when no work will happen. They will put a glass grid under the 50-cm layer. The runway surface has indeed deteriorated and after being scaled down, the new plan seems justified,’’ said sources. The new plan is going to be considered at the earliest as a delayed approval may mean risk missing the winter deadline. Runway 28 has the most reliable ILS as IGI’s newest airstrip (29) also has CAT III but its lights malfunction routinely.
Source: April 29, 2009, The Times Of India
 

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