Issue 261


1. Swinging summer for fliers as airlines rush into low-cost zone
AIR travellers could be treated with another round of fare cuts, as the country’s leading full-service carriers take a fresh aim at the budget-airline space amid worries about the deteriorating financials of the industry. The country’s oldest private carrier Jet Airways, which already operates a wholly-owned low-cost airline JetLite, has launched another low-cost service JetKonnect, while Kingfisher Airlines is increasing the number of flights on low-cost Kingfisher Red routes. There are early indications that the country’s largest budget airlines IndiGo and SpiceJet will respond aggressively to the development. “Given our cost structure, we can go down even further. Our assessment is that the introduction of this low-cost airline by Jet will increase the gap between revenue and cost further,” said an IndiGo official, requesting anonymity. The cost difference of operating a low-cost carrier and a full service carrier is to the tune of 30%. While Jet has started offering low fares, it has not reduced its cost except that of free meals on board. Their distribution cost, manpower cost and expenses of maintaining the aircraft are still the same, the IndiGo official said. Jet, however, disagrees. The cost difference of operating low-cost and full service airlines is not more than 10-15%. It hopes to play on the volume game and maximize its revenue by increasing the number of passengers and seats. An all-economy class configuration gives airlines more seats on each flight, Jet Airways vice-president (revenue management), Raj Sivakumar, said. SpiceJet chief commercial officer Samyukta Sridharan said it’s too early to react to the development. “They (JetKonnect) are still selling tickets at higher rates than ours. We have to wait before taking any step,” he said. Domestic airlines are suffering huge losses on account of excess capacity, irrational pricing and underutilization of resources. The losses for the industry for 2008-09 are estimated to be about Rs 10,000 crore. While a JetKonnect ticket from Mumbai to Ahmedabad for May 20 can be booked at Rs 3,128 (inclusive of taxes and surcharge) through its website, SpiceJet and Indigo offer tickets for the same date and sector for Rs 2,479. “We are doing what we believe is right for customer and shareholders. We believe that LCCs would not engage in a fare war that would go against the interests of the industry... We will take appropriate measure to keep our revenue flow intact,” Mr Rajkumar said. Jet Airways last week introduced an all economy service JetKonnect in the budget segment. The new service is being offered with two B737 and six ATRs on routes, such as Chennai-Coimbatore, Chennai-Madurai, Chennai-Kochi, Mumbai-Ahmedabad, Mumbai-Bhopal and Mumbai-Udaipur. According to a company official, the airline is in the process of identifying more routes where low fare service can be introduced. Meanwhile, Kingfisher will provide meal on board without charging additional cost. “We are shifting single-class configuration aircraft to Kingfisher Red routes. As these planes have in-flight entertainment systems even low-cost travellers would enjoy the service,” a Kingfisher Airlines spokesman said.
Source: May 14, 2009, The Economic Times

2. Air India for direct Ahmedabad-Frankfurt service
National air-carrier, Air India, will launch a direct air service between Ahmedabad and its new international hub, Frankfurt, from June 1.The airline would also connect the city with London via Mumbai from June 1, a company release said here on Wednesday. The Ahmedabad-Frankfurt service would provide a convenient connection to New York and Chicago, the release said, adding, "the new flight will be operated with a Boeing 747-400 aircraft." The Frankfurt-bound Air India flight, AM 21, will depart from Ahmedabad at 2.05 am and arrive Frankfurt at 6.50 am.
Source: May 14, 2009, The Free Press Journal

3. Air majors take on low-cost carriers
Look forward to cheaper air fares this summer. With full-service carriers (FSCs) Jet Airways and Kingfisher Airlines shifting over 78 daily flights onto their low-cost platforms this week, low-cost carriers (LCCs) say they will see fares going down by at least 10 per cent on specific routes. The two carriers have added around 9 per cent capacity on their LCC network through this move. Experts say the move will push the full service carriers further in the red, as they will be reducing fares without a commensurate reduction in their cost of operations. LCCs flew over 920 flights a day till recently. This has gone up with Jet Airways launching its Jet Konnect service, by moving eight aircraft to its new no frills low-cost service. Similarly, Kingfisher Airlines has shifted 24 flights a day to Kingfisher Red, its low-cost service. The fares offered are 15 per cent lower than the normal economy fares of FSCs. Of course, food will not be served free. This increase in capacity comes after LCCs hiked their capacity by 10 per cent in the last financial year, even while the overall market (in terms of passengers flown) fell 12 per cent. Simply put, LCCs gained at the expense of FSCs, the key reason why the latter are being forced to change tack. LCCs say they are ready to take up the challenge. Says Ajay Singh, director in SpiceJet: “It is a suicidal move, as FSCs have higher costs, which only means they will lose more money.” Asked if there will be a fare war, Singh points out: “Remember, we have more flexibility in reducing our fares, because we have lower costs than them. It depends on what they do.” Aviation experts say there will be a fare war, but FSCs will be adversely affected. “I see a short-term fare war, with LCCs dropping fares. However, with the operating cost of FSCs being 35 to 40 per cent more than the LCCs, the move cannot be sustained,” said Kapil Kaul, who heads Centre for Asia Pacific Aviation in India. Travel portals say they do not see FSCs being able to sustain the battle. “FSCs cannot compete with LCCs, as they have to follow different norms and standards. So, the most feasible way to compete with LCCs is to start shifting capacity to low-cost arms. That is a smart move,” said Bhawna Agarwal, co-founder & head of air business, Yatra.com. Agarwal says LCCs have already gone for aggressive pricing, not seen last year. “Every year, airlines come up with cheap fares in the summer season, but not like this year. I had never seen airlines offering 50 per cent cash-back offers. Now with Jet Konnect and Kingfisher Red, there are more flights to the routes where LCCs used to dominate,” added Aggarwal. At least for now, there is still a small difference between the two class of fares. While a JetKonnect ticket from Mumbai to Ahmedabad for May 20 can be booked at Rs 3,128 (inclusive of taxes and surcharge) through its website, SpiceJet and Indigo offer tickets for the same date and sector for Rs 2,479.
Source: May 14, 2009, Business Standard

4. Airlines cheer EU's waiver of slot rule
The Association of European Airlines welcomed the European Union's decision to waive the "use it or lose it" flight-slot rule for the summer season. A slot is a period of time allocated to, or reserved by, an airline for taking off or landing. The current rule states if an airline doesn't use its allocated slot at least 80% of the time, then it will lose it. Members of the European Parliament met and overwhelmingly supported relaxing the rules. Airlines will now gain further flexibility and will be able to retain slots for the following year, even if they use them less than 80% of the time. A total of 508 votes were cast in favor of relaxing the rules, while 20 voted against and seven abstained. The AEA, which represents 34 major airlines, said the economic downturn has created a temporary excess in capacity compared with demand. "Having to permanently give up a slot is an extreme option which the airlines will avoid if they can, but flying nearly empty to protect slots is neither economically nor environmentally responsible," said AEA Secretary General Ulrich Schulte-Strathaus. More than 80% of European airports have seen traffic fall since the beginning of the year, and the summer season is expected to continue this trend, the European Parliament said. The EU took similar action in the aftermath of the Sept. 11, 2001, attacks and in 2003 after the breakout of severe acute respiratory syndrome, or SARS.
Source: May 11, 2009, Wall Street Journal

5. Kingfisher to fly Bangalore to Dubai
Liquor baron Vijay Mallya-led Kingfisher Airlines will start flying daily from India's technology hub Bangalore to Dubai from June 25. The flight, using an A320 aircraft, will take off from Bangalore ' at 6.30 pm and land in Dubai at 8.55 pm local time while the return flight will leave Dubai at 11.30 pm and reach Bangalore at 4.45 am, the airline's officials said.
Source: May 11, 2009, Business Standard

6. Up to Rs10 lakh penalty for airlines flouting rules
Airlines flouting rules relating to safety and passenger comfort will now have to pay higher penalties with new laws coming into effect. The rules raise the penalty limit from Rs1,000 to up to Rs10 lakh and imprisonment of up to two years instead of a month earlier, officials close to the matter said, adding that the penalties would be imposed on an airline if it violates safety aspects such as aircraft airworthiness, security and issues relating to passenger comfort.
Source: May 11, 2009, Mint

7. ‘Fuel surcharge levied by airlines is not a tax’
A petition filed by the Air Passengers Association of India (APAI) in the Madras high court questioning the persistently high fuel surcharge levied by airlines despite the drop in prices of aviation turbine fuel, also raises other related issues. For instance, although the fuel surcharge is strictly speaking not a tax, the government allows airlines to club it with other taxes and add it to basic airfare. The petition seeks that the court  instruct the government to make airlines stop levying the fuel surcharge. That means that the price of a ticket should be only basic airfare plus taxes levied by the government. If the APAI is successful, the difference between basic airfare and full fare—that is, the ticket price inclusive of taxes—would be only about Rs 500 depending on the route. It need not mean that airfares would drop drastically, but would make basic fares realistic and would enable fliers to get a clear picture up front of the real cost of an air ticket. “In the past, we’ve succeeded in making air passengers aware of their rights and responsibilities, while at the same time making civil aviation authorities and airlines aware that there is a watchdog for the industry,’’ says Reddy, adding that the APAI was instrumental in bringing about changes such as increased compensation for lost baggage from Rs 160 to Rs 300 per kilo, and increased compensation to wounded passengers from Rs 40,000 to Rs 1 lakh.
Source: May 11, 2009, The Times Of India

8. The Penniless Maharaja
Even as Air India goes through a messy change in leadership, the airline’s financial position is becoming untenable — the financial losses for the year ending March 2009 are estimated at Rs 4,200 crore, according to top airline sources. The airline’s working capital limit is Rs 15,000 crore, of which Rs 14,600 crore has been exhausted and it will be seeking an increase in the limit from banks. The firm already has Rs 15,000 crore of long-term loans for its 21-odd new planes, which have arrived, that it needs to service. This will go up to Rs 25,000 crore soon as it securing another $2 billion loan to acquire more aircraft. However, there seems to be no way to repay even the existing debts, as there are no surpluses. The airline is running a monthly deficit of Rs 300 crore and a recent statement of the airline said the cash deficit in the first six months of fiscal 2009 will be Rs 1,380 crore. The statement, however, seems hastily prepared as it assumes a monthly collection of Rs 1,300 crore, which is impossible in the airline industry — seasonality ensures that revenues vary widely from month to month. “Air India is a time bomb awaiting the next government that comes into power,” says a top civil aviation ministry source. The government has removed Raghu Menon as chairman and managing director of Air India — he joined the airline in April 2008 for a three-year term. The removal has been ugly. According to sources, Union Civil Aviation Minister Praful Patel has not been happy with his performance, though the final trigger appears to be some trivial appointment of a regional head in Delhi. Bypassing the usual official procedure for appointments, Arvind Jadhav, a 1978 batch Karnataka cadre IAS officer, is now replacing Menon. But many feel that just installing a new bureaucrat may hardly be what the airline needs. Sources say that Air India does not need all the aircraft it has ordered — 111 planes for Rs 55,000 crore — since it is finding it tough to fill up seats in the existing ones. “There are flights that are not meeting cash costs, but even worse, there are flights that are not meeting even their fuel costs,” says a senior official of the airline. So the need of the hour is to discontinue or rationalize many routes, not being saddled with new aircraft. The merger of Air India with Indian Airlines has been one of the major grouses held against Menon by many. It has been felt that the HR integration has been a “disaster” as has been the information technology (IT) integration of the carriers. For instance, at the time of merger, there were around 60 general managers in both the firms, but now there are 108 of them. Similarly, there are now 48 executive directors whereas at the time of the merger there were around 20. “Instead of rationalizing, those vacancies have been filled up which are advantageous to them (Air India officials),” says an official. Amalgamation of deputy general manager-level officials has not happened at all. A common, unified incentive package is yet to see the light of the day. But perhaps the icing on the cake is the IT integration of the two carriers. The flights still go as IC (Indian Airlines) and AI (Air India) — a process which began one and half years ago when tenders were invited. “It is ridiculous to have destroyed the Indian Airlines brand — which in itself was quite a valuable brand — for nothing since the two are yet to become one,” says a former Indian Airlines official. This failure to integrate IT systems has delayed Air India joining Star Alliance, a step many feel will help boost Air India’s image if not its revenues. Will the bureaucracy be able to produce someone capable of pulling Air India out of this mess? The private sector CEOs do not think so but, as they say, “the bureaucracy would rather kill than let a private airline chief or a private sector professional take charge of Air India”. Maybe it is time to draw blood.
Source: May 13, 2009, Business World

9. HCL Axon inks pact with jet aviation
HCL Axon, a division of domestic software exporter HCL technologies said it has entered into an agreement with Jet Aviation to provide maintenance, repair and overhaul (MRO) solutions to the aviation company. As per the agreement, HCL Axon would offer its proprietary MRO solution 'IMRO' to upgrade and enhance the existing sap solution-based footprints of Jet, HCL Axon said in a statement. HCL had acquired uk-based sap consultancy firm axon for £ 440 million. "IMRO will provide enhanced usability features that will allow us to further optimize the use of our SAP solution," Jet Aviation director (IT solutions) Andreas Haller said. HCL had acquired UK-based SAP consultancy firm Axon for £440 million.
Source: May 13, 2009, The Economic Times

10. Air France in racism row
Indian passengers who travelled from Paris to Mumbai on an Air France flight that was delayed by 28 hours on Tuesday alleged that the airline staff ill-treated them and were racially biased. The passengers told reporters after arriving here that Indians were treated shabbily as compared to passengers of other nationalities. A woman claimed that barring Indians, all passengers were given good hotel accommodation following the announcement of the delay. The airline allegedly did not give any reason for the delay and dumped all Indians in a small room. Another passenger accused Air France of not providing Indians with proper food or water during the ordeal. Meanwhile, the airline on Tuesday claimed that the travellers were "taken care of by its ground staff at the airport there. “Needless to say, the passengers were taken care of by the Air France ground staff, who spoke fluent English, and they were also provided with food and water," the airline said in a statement, even as the passengers complained that the services were inadequate. "Air France regrets any inconveniences caused to passengers due to this incident. At all times, the main concern of Air France is to ensure the safety of passengers," it said. The pilot while en route noticed "some vibrations from the cargo hold" of the Airbus A-330. Carrying 169 passengers and 12 crew members. The plane returned to Paris where it was checked but "no abnormalities were found". While passengers with valid transit visas were put up at nearby hotels for the night, the airline staff "mediated" with the immigration authorities to issue transit visas to those who did not have them. This "turned out to be a lime consuming process", the airline said, adding all passengers were next day sent to Mumbai by another aircraft.

Source: May 13, 2009, Deccan 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