A Need for speed
Dec 20 2013
Like the phoenix, Indian aviation is ready to rise again from its ashes
And all of them are running scared, for next year will see the entry of new airlines, guaranteeing poaching of passengers, not to speak of staff (mainly pilots, not a very populous tribe in India, anyway). Be ready for the worst kind of aerial dogfights in which the downing of a few more carriers is very likely.
Everyone knows India is market full of promises. The civil aviation ministry never fails to tom-tom that by 2020 India will have the third largest aviation market with 336 million domestic and 85 million international passengers, and $120 billion invested.
Where do we stand today? Between January and November this year, airlines carried 55.8 million passengers, a traffic growth of 4.52 per cent over the same 11 months last year. In November domestic carriers flew 5.14 million, just 2.33 per cent more than in the same month last year. Those are official data from the directorate-general of civil aviation.
If this is the state of the aviation business now, the 2020 dreamland being pictured by the government surely looks more than just seven years away. Maybe the blame rightly lies with the state of the larger economy. But knowing it barely helps.
Civil aviation minister Ajit Singh admitted to Financial Chronicle that air traffic performance in 2012-13 was the worst and growth dropped to 5.38 per cent. But there’s hope. April to October this year has seen a recovery; growth rose to 5.13 per cent over the same period last year.
With the expected recovery of the overall economy, air traffic performance too should rise above 6 per cent in 2013-14. If the projections prove true, air passenger traffic will double by 2020. “India will then be the third biggest civil aviation market in world,” said a confident Singh.
In the meantime, most carriers continue on their turbulent course. Air India reported a net loss of Rs 5,702 crore in 2012-13 (Centre for Asia Pacific Aviation, or Capa, estimates).
Stock market- listed Jet Airways and SpiceJet lost Rs 485 crore and Rs 186 crore, respectively. JetLite lost Rs 299.4 crore. Then there is the tragic case of the flightless bird, Kingfisher, which lost Rs 4,311 crore without having to try very hard to lose.Together, Indian carriers were Rs 10,098 crore in the red in 2012-13.
Come to the current year and things do not look any brighter. Jet Airways lost of Rs 891 crore in July-September; SpiceJet lost Rs 559.49 crore.
The two carriers that bucked the trend are IndiGo and GoAir, and they did so primarily by being prudent about costs.
In the current year the balance sheets of most carriers will again be awash in red. Gary Toomey, Jet’s CEO, put the problems in perspective while announcing his carrier’s second quarter results: “Increasing cost challenges, mainly due to the rupee depreciation, high aviation fuel prices and increases in airport charges.” The bottom line, naturally, shrank.
SpiceJet in an earlier release had much the same factors to blame. The rupee, in particular, cost SpiceJet Rs 42 crore despite measures it took to protect itself from currency vagaries.
Capa apprehends both Jet and SpiceJet may be headed for larger losses in 2013-14, which may be mitigated by “one-off adjustments” like sale and leaseback and other non-operating income and benefits.
Yet, the market has drawn in new players and investors. Abu Dhabi’s Etihad Airways picking up 24 per cent in Jet Airways for $900 million is one instance. Another is AirAsia, and the third is Singapore Airlines joining hands with the Tatas to start a carrier in India.
Singapore’s low-cost Tiger Airways has a three-year interline pact with SpiceJet, and, according to experts, Emirates and Qatar Airways are also scouting for partners in India.
Why are they rushing in? GR Gopinath, the man who brought low-cost flying to India (he was the promoter of Air Deccan, remember?), has an answer: “The civil aviation industry in India is under-penetrated and it is important to increase the connectivity.”
He cites the number of unused airports and the tourism potential waiting to be tapped. “The players will stimulate the market. It will be good for consumers.”
Clearly, all this points to a shake-up. Amber Dubey, KPMG partner, expects the arrival of Etihad, Air Asia and Singapore Airlines to stir things up for domestic and international traffic. He sees the inter-line agreement of SpiceJet and Tiger Airways helping both capture a larger share of the fast growing India-Asean-China traffic. “It may even lead to code-sharing and equity investment. The increased competition will boost regional and international connectivity, improve services and bring down fares,” says Dubey.
According to Kapil Kaul, Capa CEO for South Asia, Air Asia’s entry will put pressure on fares on some routes, but it will need time to scale up. “It’s Tata-SIA that will be a game-changer with a big strategic impact on the aviation sector. But even they will take time to scale up. Their full-service carrier model will address a different market segment,” says Kaul.
Survival and expansion are possible, according to Peeyush Naidu, senior director at Deloitte (India), if travel by smaller planes to and from tier-I and -III cities can be incentivised. That’s a huge market to be explored. “The opportunity could be immense,” he said.
Maybe, but it will be some job to get to fly people who have never flown. Dubey’s statistics suggest the extent of the task: The number of domestic flight tickets sold every year is a mere 5 per cent of India’s population. That includes repeat fliers and foreigners flying within India. “In reality 99.5 per cent Indians never fly,” Dubey adds.
So the long-term potential is intact, says Rashesh Shah, aviation analyst at ICICI Direct, about the entry of new players. But he admits this will pose a challenge to the existing carriers in the immediate short to medium term.
Any new player poses a challenge to the existing airlines, agrees Dubey. When three international carriers enter India, the challenge is so much greater. “The over-regulated and over-taxed Indian market cannot sustain seven pan-India airlines,” he says.
In lay terms, this means some will have to be in ICU before their final demise. India has been there, done that.
Airlines have come and gone. The procession has seen ModiLuft, Damania, East West, Paramount, Air Sahara, NEPC, Air Deccan and Kingfisher fly into the sunset. Mostly inept running of the business did them in.
Ajay Prakash, ex-president of the Travel Agents’ Federation of India, says high taxation and costly fuel certainly led to higher mortality but the trouble is “all airlines try to make a quick buck whenever the opportunity presents itself”. Airfares are priced unrealistically with occasional cuts. “But… the market hasn’t expanded…. When there is reluctance to make such discretionary spends as travel, the only solution lies in expanding the market.”
In a static market, companies also fall back on ‘strategy’. No exception with airlines. Sanjiv Kapoor, SpiceJet CEO, says their strategy is to beat them before they get here. “It means that we need to get smarter. It means more innovation. We need to pull up our socks as an industry and not just us. The new competition will be positive for the system. It will spur us to deliver and be competitive. The consumers will have a wider choice.”
Standard marketspeak. Cutting out those platitudes, what his strategy basically aims is to bring in world- class standards and systems before the world-class players get here. “When they get here, we are already there to match them.”
Brave words those, their worth to be known only when they face competition. More bravado from Kapoor: “No market, even the US, China and Brazil, can have 12 airlines of equal size. There will always be three to four big airlines and others small. We intend to be in the three-to-four category… We are confident we will be there.”
Rahul Bhatia, group MD of InterGlobe Enterprise, the parent company of IndiGo Airlines, was modest by comparison when he recently told PTI: “We are not shying away from competition; we will take them head on. India is an underserved market and there is room for everybody.”
But a smug Air India official says new players will get their space but not at the cost of existing carriers. Why Air India need not worry is explained by him thus: “Air India is continuing despite many difficulties. We have increased our market share and expanded connectivity to cities where private airlines do not go.”
Of course, he is quiet on how Air India has been bailed out time and again by the government like a benevolent uncle does a troubled nephew.
Prakash is sceptical about the new players. Air Asia and Tata-SIA may come out with offers but will those be sustainable? Maybe the offers will bring high growth for a month. But for the residual seats fares are likely to rise. “Must watch how things go once the offers end.”
That said, the new airlines are coming in a more congenial year (2014-15). The market itself will have improved by the end of 2013-14: the full year will see domestic traffic growth of 5-7 per cent and international growth of 9-11 per cent.
According to Dubey, 2014-15 will be better because of expected reforms in ATF and MRO taxes, growth of regional no-frill airports, lower airport charges, more seats and abolition of the 5/20 rule.
With new players, the market may or may not expand. But a price war is certain, resulting in consolidation, which the industry anticipates will begin by December 2015.
Dubey only hopes that the price war does not force airlines to sell tickets below cost for long. If that happens, he would rather have the Competition Commission step in to eliminate what he calls predatory pricing. “Ticket fares have to rise since airlines cannot sell tickets below operating cost forever. If reforms do not happen, there may be more airline failures…. Indian aviation may go back 10 years in time,” Dubey adds.
Naidu says if new players operate, say, on existing routes it won’t expand the market but will lead to more competitive airfares. But if they connect newer cities, it will not just create a market but will contribute to future growth. When SpiceJet ordered Bombardier Q400s, the idea was not to compete with Airbus and fly on established routes, but to connect new cities with lower demand with a single flight and get those passengers to take onwards flights on regular network. Naidu believes different airlines will adopt different strategies but low fares are inescapable in our price-conscious market.
Kapoor of Spicejet knows that fare wars help nobody. “The industry needs to do tactical stimulation rather than start price wars. All carriers have empty seats; only 75 to 80 per cent are full and loads can be increased with tactical offers not cheap fares. He calls it yield management. “If you think there is already a fare war, then wait till Air Asia comes. There will be constant changes. All I can say is there will be more sophistication in tactical offers. There will be more segmental pricing. One fare will not fit all sizes,” says Kapoor.
Kaul forecasts difficult times for all till the third quarter of 2014-15 because of fuel or currency costs. He is sure growth will not return till the cost structure is improved.
But at a time when the market is not expanding and the overall passenger load factor has increased marginally, the aviation industry needs some quick reforms to come out of its current situation.
India’s aviation sector has seen many transformations, the most important one being the advent of low-cost carriers, which let people who always travelled by train to fly for the first time. The years following the Air Deccan debut were heady times for Indian civil aviation. The scenario has changed. Today, only those who have to or can afford to, fly.
At the time of independence nine airlines were in business. Later, one of them, Orient Airways, shifted base to Pakistan. The other eight included Tata Airlines (which later became Air India).
Gradually others went down and only Air India survived. For decades domestic aviation was a state monopoly. Then, as the skies were opened up in the early 90s, came many new private carriers. Of them East West, Damania, ModiLuft, NEPC Airlines, Air Deccan and Kingfisher are history because they all had unviable business models.
Indian aviation is like the phoenix. It rises high, gets burned and then rises again from its ashes. We are probably in the second phase of the cycle. Hopefully, the next phase will begin sooner than later.