Issue 262

1. Aircraft service industry feels jolt
The general ill health of the aviation sector appears to have forced an “emergency landing” of sorts for the maintenance, repair and overhaul (MRO) service market for commercial aircraft. When the aviation sector in the country was growing at over 39 per cent, eight MRO companies were keen to set up shop in the country. Now, five have already decided to defer their plans. State-run Air India, GMR Malaysian Air Lines, and AirWorks are the only companies that are going ahead with their plans for an MRO in the country. “MRO’s are reworking their plans mainly because the sector is going through the worst times ever,” a sector analyst who did not wish to be identified said. “Aircraft maintenance is an expensive affair. Maintenance, overhaul and repairs of a 50 to 60 seat could cost about $80,000 to $1,20,000 and add another $40,000 for the fuel costs if the aircraft is sent to Malaysia,” said Fredrik Groth, chief executive officer, Air Works. “If similar checks are carried out in India, they would save 20 per cent cost and airlines can also save the fuel costs and time taken to have the aircraft repaired abroad,” Groth said.
Source: May 23, 2009, Hindustan Times

2. Singapore Air offers up to 55% discount
Singapore Airlines is offering up to 55 percent discount on fares to Singapore from seven cites in India for a limited period. The all inclusive economy class return fare costs Rs 11,000. Passengers need to book their ticket between May 25 and May 29 for travel valid till September 30, the airline said in a statement on Friday.
Source: May 23, 2009, Hindustan Times

3. Lufthansa faces court action over BMI stake
Sir Michael Bishop, chairman and controlling shareholder of BMI British Midland, resorted to legal action yesterday in an effort to force Lufthansa to take over his majority stake in the struggling UK airline. He is seeking to enforce a long-standing contract under which he had an option to require the German aviation group to take over his stake of 50 per cent plus one share in BMI. He exercised the option in October last year to sell the stake for around €400m ($551m). The deal had been expected to be completed by mid-January. The transaction was delayed, partly by the longer than expected time it took to gain approval from the European competition authorities, but Brussels finally gave the go-ahead last week. In the meantime, tensions have been growing between the two sides. Lufthansa sought to force Sir Michael to make a capital injection of around £100m into BMI to strengthen the airline's balance sheet ahead of a transfer of the shares. Sir Michael believes the demand for extra finance is a device by Lufthansa to try to force down the price, which had already been agreed in the original contract 10 years ago. His company, BBW Partnership, said last night it had issued proceedings in the High Court in London to declare that BBW had "fulfilled all the necessary regulatory requirements to complete the sale of BMI to Lufthansa and seek that Lufthansa be required ,to complete the acquisition of the shares". Lufthansa said last night it had not been informed of the legal action. "We have not received any communication," it said. The German group owns a stake of 30 per cent minus one share in BMI, while SAS Scandinavian Airlines holds the remaining 20 per cent. Sir Michael's decision to take legal action follows a warning by Stephan Gem-kow, Lufthansa chief financial officer in an interview with the FT this week, that the German group could walk away from the planned takeover unless Sir Michael agreed to inject more capital. Under European law, aviation regulators must be satisfied about an airline's business plan and its funding in order for it to keep its operating licence. The UK carrier is the second-largest airline operating at London Heathrow. Its main strategic asset is its control of about 11 per cent of all the take-off and landing slots at the airport.
Source: May 23, 2009, Financial Times

4. American Airlines head sees thawing in credit markets
American Airlines' chief executive said the credit markets were beginning to warm to the aviation industry, a timely development for a capital-intensive business in the throes of one of its steepest demand downturns in history. "We are seeing some liberalisation in the capital markets," Gerard Arpey said yesterday. "Last year no one would answer the phone. Now we're getting some interest coming to us." American and peers such as United Airlines have clambered to raise as much cash as possible in the past year to offset mounting losses caused by volatile fuel prices and a slumping economy, with mixed results. The financial services industry's descent into crisis in early 2008 cut off carriers from some sources of capital and limited others, leaving many executives concerned that the drop-off in demand would overwhelm the industry if airlines could not find fresh capital to purchase new aircraft, repay debt and fund pension plans. Eight months after Lehman's bankruptcy left Wall Street in disarray, pockets of the corporate debt markets have regained their footing. Some of the largest US groups such as General Electric, Wal-Mart and Microsoft have raised billions of dollars in recent weeks. "We're starting to regain some stability, though there's still a lot of weeds to constrain these green shoots," said Richard Peterson, director of markets, credit and risk strategies for Standard & Poor's. While few airlines' balance sheets would ever be confused with Microsoft's, the newfound demand for corporate debt has extended to the aircraft-finance market. American raised $174m through financings secured against aircraft during the first quarter and finished the period with at least $3.6bn in unencumbered aircraft, parts and other assets. "We are paying down a lot of debt, so we are freeing up a lot of airplanes," Mr Arpey said. "We will be in the capital markets refinancing the collateral that has been freed up." Mr Arpey said lenders had contacted American with offers to refinance its debt, using those unencumbered aircraft as collateral. "That doesn't mean we'll be able to refinance on terms that are acceptable," he said. "But it is an important first step." The group has been in talks to sell a block of frequent flyer miles to Citigroup, which issues a co-branded credit card that awards customers American miles with each purchase, people familiar with the matter told the FT last month. Such an arrangement could reap more than $lbn in cash. American had $2.9bn in unrestricted cash and short-term investments in March. The company said last month it needed to pay down about $lbn in long-term debt and make $94m in lease payments this year, and has budgeted $1.3bn in capital spending. Its fully drawn, $255m credit facility matures next month.
Source: May 23, 2009, Financial Times

5. Air France-KLM signs Delta pact
Air France-KLM and Delta Air Lines yesterday signed a transatlantic joint venture which will combine almost a fifth of the two groups' operations, making them the most powerful presence in the world's biggest long-haul aviation market across the North Atlantic. The two airlines have played a leading role in the consolidation of the aviation industry, most recently through Delta's takeover of Northwest Airlines last year. The joint venture is the next step in deepening the alliance between the leading European and North American carriers. The venture represents about 25 per cent of total transatlantic capacity and will have revenues of more than $12bn. The North Atlantic is the biggest interregional air travel market, accounting for 27 per cent of global long-haul air traffic. The venture does not involve any cross-equity holdings between the two carriers but is based on a long-term commercial agreement, which will allow them to operate as one group across the North Atlantic, sharing revenues and profits and losses on a 50/50 basis. The two groups have antitrust immunity from the US authorities, allowing them to collude legally in arranging networks and capacity, setting prices, and selling jointly in particular to corporate customers. The venture is still being investigated by the European competition authorities, but both Air France-KLM and Delta said they were confident of convincing Brussels of the advantages to consumers of the deal. Air France-KLM and Delta are leading members of the SkyTeam global airline alliance and the scope of the venture will give them a head start against rival alliances. Germany's Lufthansa already has antitrust immunity from the US for a transatlantic joint venture with United Airlines and Air Canada,, which Continental Airlines of the US has also applied to join, but these carriers - members of the Star alliance - have not yet been as ambitious as Air France-KLM and Delta in being prepared to share profits and losses as well as revenues. The other potentially strong rival is the joint venture planned between British Airways, American Airlines and Spain's Iberia, which are all core members of Oneworld, the third global airline alliance. The three Oneworld airlines have applied to the US authorities for antitrust immunity and a decision is due to be made by Washington by the end of October. This venture, fiercely opposed by Sir Richard Branson's Virgin Atlantic, BA's rival at London Heathrow, is also being examined by the European competition authorities. Pierre-Henri Gourgeon, Air France-KLM chief executive, said the joint venture would create cost and revenue synergies totaling about $300m, split evenly between the two groups. The venture will be governed by a long-term arrangement that can only be cancelled with a three-year notice period after an initial term of 10 years.
Source: May 23, 2009, Financial Times

6. American Airlines head sees thawing in credit markets
American Airlines' chief executive said the credit markets were beginning to warm to the aviation industry, a timely development for a capital-intensive business in the throes of one of its steepest demand downturns in history. "We are seeing some liberalisation in the capital markets," Gerard Arpey said yesterday. "Last year no one would answer the phone. Now we're getting some interest coming to us." American and peers such as United Airlines have clambered to raise as much cash as possible in the past year to offset mounting losses caused by volatile fuel prices and a slumping economy, with mixed results. The financial services industry's descent into crisis in early 2008 cut off carriers from some sources of capital and limited others, leaving many executives concerned that the drop-off in demand would overwhelm the industry if airlines could not find fresh capital to purchase new aircraft, repay debt and fund pension plans. Eight months after Lehman's bankruptcy left Wall Street in disarray, pockets of the corporate debt markets have regained their footing. Some of the largest US groups such as General Electric, Wal-Mart and Microsoft have raised billions of dollars in recent weeks. "We're starting to regain some stability, though there's still a lot of weeds to constrain these green shoots," said Richard Peterson, director of markets, credit and risk strategies for Standard & Poor's. While few airlines' balance sheets would ever be confused with Microsoft's, the newfound demand for corporate debt has extended to the aircraft-finance market. American raised $174m through financings secured against aircraft during the first quarter and finished the period with at least $3.6bn in unencumbered aircraft, parts and other assets. "We are paying down a lot of debt, so we are freeing up a lot of airplanes," Mr Arpey said. "We will be in the capital markets refinancing the collateral that has been freed up." Mr Arpey said lenders had contacted American with offers to refinance its debt, using those unencumbered aircraft as collateral. "That doesn't mean we'll be able to refinance on terms that are acceptable," he said. "But it is an important first step." The group has been in talks to sell a block of frequent flyer miles to Citigroup, which issues a co-branded credit card that awards customers American miles with each purchase, people familiar with the matter told the FT last month. Such an arrangement could reap more than $lbn in cash. American had $2.9bn in unrestricted cash and short-term investments in March. The company said last month it needed to pay down about $lbn in long-term debt and make $94m in lease payments this year, and has budgeted $1.3bn in capital spending. Its fully drawn, $255m credit facility matures next month.
Source: May 23, 2009, Financial Times

7. Global airlines woo travellers with bargain fares
If you are planning a trip abroad, this is the best time to do so with airfares being offered at rock-bottom levels. For instance, Singapore Airlines (SIA) is offering a return ticket, inclusive of taxes, to Singapore for a knocked down price of Rs 11,000. In the case of China, SIA’s offer is Rs 22,000, for Perth Rs 25,000 and Rs 36,000 to the rest of its destinations Rs 36,000. Down under with the US being the highest at Rs 45,000. These promotional fares will be available from all the seven SIA gateways: New Delhi, Mumbai, Chennai, Bangalore, Hyderabad, Ahmedabad and Kolkata. Bookings for the ‘Exceptional Value Deals’ are open from May 25 till May 29 for Singapore and till June 12 for the US, China and Australia routes. The travel validity for all destinations is till September 30. Moving on, British Airways is offering its First and Club World passengers a 50 per cent discount offer for travel from India to London, Europe and the US. The return fares are valid for sale from May 22 to 25 on flights from New Delhi, Mumbai, Chennai, Hyderabad and Bangalore. First class fares exclusive of taxes and surcharges start at Rs 83,000, Rs 85,500 and Rs 1,35,500 respectively to London, Europe and the US while business class fares are Rs 44,500, Rs 47,000 and Rs 65,000 a piece. Sri Lankan Airlines, in its turn, offers a trip to Colombo for Rs 12,635, Rs 11,580 in the case of Bangkok, Rs 14,740 for Singapore/Kuala Lumpur, going up to Rs 16,845 for the Maldives and Rs 17,895 for Hong Kong .All these fares are ex-Mumbai and valid for booking and outbound travel till June 30. There is no restriction on the date of return. Sri Lankan Holidays, meanwhile, has also designed special packages for the two-week ICC World Twenty20 tournament beginning June 5. The three-night package (one person) in London is Rs 25,600 from Bangalore, Rs 29,600 from Chennai and Rs 31,600 from Mumbai. The offer is valid from June 1 to June 20 which includes return economy airfare, hotel accommodation (with bed and breakfast) on a twin-sharing basis. Cathay Pacific has also extended its current fuel surcharges for two-months. The surcharges of HK$52 ($6.7) for short-haul services in North and South East Asia and HK$239 ($30.6) for long-haul services will be extended from June 1 to July 31. Effective May 11, Malaysia Airlines has also reduced its fuel surcharge from India by 53 per cent on the Kuala Lumpur route and by 27 per cent for Australia and New Zealand. Post-reduction, the return airfare from India to Malaysia starts from Rs 16,528 including taxes. Both Australia and New Zealand and North America sector saw a reduction of $106 (approximately Rs 5,300) in their fuel surcharges for a round trip. The airfare for Australia will start from Rs 37,846.
Source: May 23, 2009, The Hindu Business Line

8. Corporates go to ECGC for cover against cross-border receivables
A clutch of corporates, including Jet Airways, Hyundai Motors Ltd and Wipro Infotech, has approached the Export Credit Guarantee Corporation of India Ltd (ECGC) for cover against cross-border receivables. ECGC provides credit risk insurance to policyholders against payment delinquencies of importers. This is the first time that aviation companies and foreign-owned automobile companies are approaching ECGC for cover against export receivables. Speaking to Business Line, the ECGC’s Chairman and Managing Director, Mr A.V. Muralidharan, confirmed the development. “We have received the requests from the companies and are processing them. Approvals of the requests would be subject to satisfactory financials. ”He declined to disclose the premiums for risk covers citing confidentiality. Jet Airways’ cover request is for its lease rental receipts from Turkish Airlines. Jet had last December wet leased four aircraft to Turkish Airlines. Wet lease implied the crew would also be provided by the lessor. In addition, sources said, Jet has sought ECGC cover for its aviation turbine fuel payments to Indian Oil Corporation. Such a cover would provide fuel suppliers insurance against defaults by the aviation company. Wipro’s cover, Mr Muralidharan said, was against IT exports. Wipro receives the bulk of its IT revenues from the US. Among IT majors, TCS has taken credit risk insurance from ECGC. But, he said, more IT companies were approaching ECGC for risk covers. However, Mr Muralidharan said, “Our exposure to the sector is less than 0.5 per cent.”

AUTOMAKERS ON HOLD
He said ECGC’s cover to Hyundai was for Rs 500 crore against its exports. Hyundai exports its small cars to Europe, Africa and South Asian regions. Mr Muralidharan said ECGC was restricting exposure to component suppliers of General Motors, Ford Motors and Chrysler that were teetering on the edge of bankruptcy. “We cannot provide risk cover to component exporters of these entities when they are in the process of being wound up. We can consider providing cover to component exporters of US auto company subsidiaries in Europe on a case-bycase basis.” He said there was no change in the risk covers to Japanese automakers, including Toyota, Honda and Mitsubishi. Only about 8 per cent of the country’s exports are covered by ECGC. But demand for ECGC insurance was mounting, Mr Muralidharan said. Asked about the resulting capital impact on ECGC, he said, “We will approach the Government when capital is required. The corporation is capitalised at Rs 1,800 crore, with a paid-up capital of Rs 900 crore. This translated into a solvency ratio of 19 times. Solvency is the excess of capital and value of assets over the insured liabilities. ECGC is also supported to reinsurance from the national reinsurer, General Insurance Corporation of India, and coinsurance arrangements with other public sector non-life insurers. In the last financial, ECGC had earned a premium of Rs 745 crore. The corporation also settled claims of Rs 225 crore. The total claims demand from ECGC last year was Rs 450 crore, Mr Muralidharan added.
Source: May 18, 2009, The Hindu Business Line

9. Jet Konnect enhances network
Jet Airways has announced five new flights to enhance the recently launched all-economy class ‘Jet Airways Konnect’ network. The five new flights starting from May 20 include four flights from Kolkata and one from Guwahati.
Source: May 19, 2009, Business Standard

10. EU airlines join online reformers
British Airways and Air France-KLM made llth-hour commitments yesterday to ensure their websites for online ticket sales did not mislead consumers, senior officials said in Brussels. Meglena Kuneva, EU consumer commissioner, said the carriers had ''expressed their commitment" to join about 50 other airlines that have agreed to end any misleading advertising or unfair sales practices on their websites. The commitments came after the FT revealed yester- day that dozens of other air-Vines had bowed to pressure from the European Commission to make booking tickets online cheaper and less confusing. These practices have been the subject of an 18-month campaign by European consumer authorities. They include unclear pricing - so consumers believe that they are buying low-cost flights but only later realize these prices do not include taxes and other charges - and optional expenses that are pre-selected, such as buying travel insurance, Yesterday, Ms Kuneva confirmed that, out of nearly 70 airlines, more than 50 now either had satisfactory websites or had agreed to bring these up to scratch, "It is a far cry from the pattern two years ago," she said, "Then, illegal practices were widespread. Worse, they seemed almost accepted as 'normal practice." But she said there were still about a dozen carriers giving cause for concern, including Emirates, Aeroflot, Air Baltic, My Air, Northwest Airlines (part of Delta Ait Lines), Olympic Airlines, Royal Air Maroc, Turkish Airlines and Wind Jet. The commissioner also stressed Brussels would want to see airlines that had agreed to make changes actually comply, But she said: "What we have seen is a tipping point." An early test could come from Ryanair's decision to start charging a £5/€5 fee for online check-in, which will become mandatory for all passengers but will not be included in the basic fare. Air France and British Airways voiced irritation ,at the way the Commission had handled yesterday's announcement. BA said' "We have written and spoken to the El! and feel the allegations made against us were not correct. We believe our website is fully compliant with Eli standards," Air France and KLM said they had confirmed their intention "to be in full compliance with all applicable legislation". They believed the content and presentation of their online booking sites complied "with almost all" the applicable legal obligations to provide information.
Source: May 19, 2009, 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