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NASCENT RECOVERY IN INDIA?
Over-capacity, unsustainable fare discounting, excessive taxes and a regulatory strait jacket have kept the balance sheet of India’s flag carrier, and those of most competitors, red. So it is surprising, reports Tom Ballanyne, that some analysts believe a recovery is on the way for both Air India and its home-grown rivals.
July 1st 2014
If the arrival of two new airlines in India’s already crowded domestic skies, as well as plans by foreign carriers to fly more capacity into the country, are serious threats to the industry’s viability, the boss of the country’s flagship carrier remains calm as the pending storm approaches. Read More »
State-owned Air India is in multi-million dollar debt and in poor operational shape, but chairman and managing director, Rohit Nandan, said the increased capacity that AirAsia India and the Singapore Airlines-TATA joint venture will bring into the market “is competition to be managed”.
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| 'How do we bring down the cost of airline operations in India? All the problems arise because of operational costs' |
| Rohit Nandan Air India chairman and managing director |
“It will be an interesting time for all of us. Everyone is likely to be impacted, but whether it is to be negative or positive has yet to be seen. We are quite confident it will have a positive effect on Air India,” he told Orient Aviation.
He is as pragmatic about the plans of Lufthansa, Singapore Airlines and Emirates Airline to operate A380s on their India services. “It is going to be within their entitlements. We are completely OK with that. Competition is bound to come. We can’t shy away from it,” he said.
Nandan explained why. “Everything, but especially the travel industry, has been affected in the last two years as the Indian economy plateaued. In the 2012-2013 year, growth was negative, but in the latest twelve months, air traffic numbers rose by 4.5%. We are very confident India’s new government will boost the economy and therefore the travel industry. We expect things to get better.”
India’s new government, led by Prime Minister, Narendra Modi, is viewed as business friendly and is a major reason for Nandan’s upbeat forecast for Indian aviation.
Airline management is confident onerous taxes, particularly those attached to jet fuel, will be removed. “This is one thing the industry is expecting. How do we bring down the cost of operations in India? All the problems arise because of operational costs,” he said.
Nevertheless, a new wave of capacity in India is the last thing the country’s airlines need. Last year, Indian carriers collectively lost US$1.65 billion on revenues of $9.5 billion. The optimists admit it is not a good number, but point out it is significantly better than the previous year’s loss of $2.3 billion.
But, for now, the fiscal pain persists, and not just at Air India. In May, established carrier, Jet Airways, now 24%-owned by Abu Dhabi’s Etihad Airways, reported its biggest quarterly loss in its history, at $366.5 million, for its final quarter to March 31.
Ajit Singh, the country’s Minister for Aviation, is on record with the forecast that Air India will report an operating profit of about $176.3 million for 2013-14, on revenue that jumped by 20%, to $3.3 billion. However, the carrier will still report a net loss of $676.1 million for the year, albeit the result is an improvement on a $962.6 million loss for the previous 12 months.
| Air India’s recovery plan Air India’s restructuring plan, approved two years ago, envisaged a government equity infusion into the carrier of $6.7 billion over nine years, to 2021. The airline has asked the government to increase its support because of the declining value of the rupee. When the restructuring plan was drawn up, US$1 equalled 45 Rupees. Last month, it was 62 Rupees to US$1, which has reduced the government’s support package. Nandan said: “The national restructuring and turnaround plan was approved by the cabinet of the day when we knew pretty well a change of government was coming in 2014. The option of having a review is always there. The new government can have a relook at the whole matter, but we are more than confident. Our performance since 2012 has been significantly better. The government will look at it very positively. We are certainly hopeful things will be far more decisive with the new government in place.” |
Factors contributing to the positive financial performance include the decision by Air India to establish Air India Engineering Services and Air India Transport Services as entities that can contract for third party airline work. Previously, they could only work for Air India or its related enterprises.
Domestically, profits have been elusive for all airlines, with the exception of budget carrier, IndiGo. Low-cost rival, SpiceJet, is looking for a financial lifeline. In the final quarter of the 2013-2014 fiscal year, SpiceJet’s net loss widened to $54.4 million, from $31.5 million a year ago. Accumulated losses climbed to $170 million in 2013-14.
Air India and Spicejet are not the only carriers needing major corporate surgery. Following its most recent financial performance, Jet Airways has produced a three-year restructuring plan intended to return the airline to profit. Jet’s vice-president for finance, Ravichandran Narayan, said operations are expected to stabilize and profits to return by the second half of 2016.
Heading up the rescue and resuscitation exercise is a James Hogan protege, fellow Australian Cramer Ball. Until recently the chief executive of Air Seychelles, in which Etihad also has a financial interest, Ball is the carrier’s fourth boss in the last 12 months.
The current turnaround plan includes increasing revenue via code shares and ancillary services as well as cost and efficiency improvements. Jet’s debt is about $1.8 billion. Part-owner Etihad has three seats on the board of the Mumbai-based airline and has underscored its backing for Jet. “We are a long-term strategic investor and committed to supporting Jet Airways as it re-engineers its business to achieve sustainable profitability,” said Etihad chief executive, James Hogan.
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| 'We are interested in IndiGo. We are interested in success. We only invest in successful airlines' |
| Akbar Al Baker Qatar Airways chief executive |
Elsewhere, India’s airlines face increasing competition on international routes with the arrival of foreign carriers’ A380 services. A ban on the big jet flying into India has been lifted. The airliner has been cleared to fly to Delhi, Mumbai, Bangalore and Hyderabad. Singapore Airlines was the first carrier to take advantage of the government’s rule change. In May, it introduced daily A380 services from Singapore to Mumbai and Delhi.
“We have been keen to operate the A380 to India and are glad that the Air Services Agreement (ASA) between Singapore and India now allows us to do so,” said SIA’s general manager (India) David Lau. The current bilateral allows SIA to offer 6,000 seats per week from Delhi and Mumbai.
Emirates Airline is adding 2,127 one-way weekly seats on the Dubai-Mumbai route this month, when it launches its first daily A380 services to India. Already, Emirates has the highest market share (over 12%) of traffic to and from India, after it recently knocked Air India off the top spot.
Germany’s Lufthansa has announced plans to fly its A380s to India, but it has not set a launch date or identified Indian destinations.
Despite the increasingly competitive operating environment, analysts see better times ahead, at least in offshore operations. Four airlines, Jet Airways, IndiGo, Spicejet and GoAir, could report profits of $250-$300 million for the 12 months to March 31 next year, said airline research house, CAPA.
According to the report “international traffic growth is expected to be more buoyant than domestic traffic. It could grow by 10%-12% as Indian carriers expand and as more bilateral entitlements are granted to foreign carriers”.
In the more challenging domestic sector, where budget carriers are fighting to retain market share and arrest falling yields, it is forecast that most of the growth, estimated at 4%-6%, will be in the second half of the year.
A concern is that Air India, which has not been known for its nimble management, may be left behind as its competitors expand international market share in an improving Indian economy. Under-performing international routes account for 80% of Air India’s losses. Jet is profitable on international operations and will strengthen its performance in 2014-2015 as its ties with Etihad deepen, CAPA forecasts. It added that IndiGo and SpiceJet are nearing breakeven on their non-domestic networks.
Air India’s Nandan disagrees. He points to the carrier’s improved performance, which will be boosted by the airline’s formal entry into the Star Alliance later this year. “We will get a lot of connectivity and we can look forward to being connected to a larger network. There will certainly be improvements in our revenue because of codeshare agreements with [alliance] partners. There will be an exchange of traffic. We will be getting better loads on premium traffic,” he said.
“Also, there will be benefits in procurement. There are increasing opportunities for 27 member airlines to collectively purchase equipment at every level of their inventories. All this is going to benefit us. We have made an assessment on the financial benefit, but I won’t discuss it here,” he said.
Asked about persistent reports Air India could be privatized, Nandan said this was a political decision to be taken by the government owners of the airline. “There is nothing very virtuous about being private,” he said.
“We have so many private airlines that failed. So many government airlines that have done very well. It’s not who owns the airline, it’s how you manage the airline,” Nandan said.
