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Cover Story
 

Losing An Unfare War?
For The Fifth time in a row, there is no Airline Company in The B&E Power 100 list. Swati Sharma Writes on why there will be none Next Year too.
Issue Date - 21/07/2011
 
Annual profits are a phenomenon unheard of in the Indian commercial aviation space. After recording losses of $6.5 billion between CY2006 & CY2009, the industry continued swimming underwater during CY2010, despite a rather pleasing domestic passenger count of 52 million. While it is tempting to argue that even globally, airlines have not had a happy outing during the past half-a-decade, one cannot overlook the biting truth that of late, the Indian aviation industry seems to have mastered the art of making losses even when the sector globally records positive incomes. Factor this – in FY2010, globally, airlines earned $18 billion in profits. Indian carriers on the other hand, lost $400 million (loss as per IATA). The fact that Indian carriers today carry a debt burden of $13 billion (the highest in Asia) is another worry.

When former Civil Aviation Minister Praful Patel assumed office seven years back, he had declared that India would become one of the largest aviation markets in the world. It has. But only in terms of footfalls. On the profit-making part, it is today a tale of Christian scientists relying on mere prayers. So who’s to blame?
The largest player makes a loss, and you know everything is not good. Worse, it comes as a confirmation that even after years of famine, none in this industry stand a chance of reaching the oasis called the B&E Power 100 list. True: the hallmark of any sector that has enjoyed an overwhelming presence (like BFSI, Oil & Gas, Power, Metals et al) in the list of India’s 100 most profitable companies, during any given year, has been at least the largest in the category that has made a positive margin on revenues. But look at the negative state of affairs on the P&L sheet of India’s largest domestic airline Jet Airways (market share of 24.8% of the domestic market, as of April 2011; DGCA data), and you will understand why there is no airline name in the ranking.

Despite revenues of $3.3 billion, Jet recorded a net loss of Rs.858.4 million in FY2010-11. A big problem for Jet is its accumulated and ever-increasing debt load of Rs.130 billion. In fact, due to debt issues, employee unrest and continuous losses annually, its stock has also been under fire. Today, the company is valued at $800 million – about 62% lower than in May 2005, when it got listed on NSE. The airline then was purely a domestic player. Today, it earns 58.3% of its revenues from international routes – a fact which should have added greatly to its advantage and profitability thereof, given the much profitable long-haul routes. But no. Structural issues have got the better of Naresh Goyal’s brainchild. The problem with the other two-largest Full-Service Carriers is no different. Together with Jet, Kingfisher (20% market share) and Air India (15.4%) made more than Rs.68 billion in losses during FY2010-11. [While Kingfisher lost Rs.10.27 billion, Air India is expected to have lost more than Rs.57 billion.

 
There are two reasons why even after five years of annual losses, airlines in India have failed to move out of the red zone. First, the rise of ATF price by 51% during H2, FY2010-11, made fuel dearer than anticipated. For instance, due to the rise in crude, Jet shelled out Rs.12.79 billion on fuel during Q4 last year – as compared to a fuel bill of Rs.8.36 billion during the same period a year back. This eroded Jet’s margins by Rs.3.43 billion, thereby wiping out all the hard work done during H1, FY2010-11 and resulting in a loss of Rs.858.4 million for the year. While pointing out other factors ailing the aviation market in India besides ATF prices, Ketki Mahajan, Aerospace Analyst at Frost & Sullivan, tells B&E, “Airlines can no longer work on low cost model. This is because of high crude oil prices, and high aviation fuel tax levied by various states, high airport charges and rising service tax on fares.”

The increase in fuel cost (to unprecedented levels, which rose to 39% of operating cost by Q4, FY2010-11), coupled with the second big problem, the presence of fare wars (triggered-off by Air India and which became prominent during Q4 last financial year), made profit-making an impossible task to achieve. So the question remains – will Indian airlines finally get into the act of making profits when B&E Power 100 knocks on the doors of India Inc. again next year?
The year began on a note which was tough to digest for aviators across the world. For debt-laden Indian carriers, it was a nightmare of a beginning, with crude crossing the $114-per-barrel mark. Then there is the fact that at present, the situation arising out of the inability of the players to pass on the price hike to passengers is made worse with state governments adding more taxes on the players, with no intentions to lower the already high sales tax on ATF. Infuriated on this attitude of the government, Sudheer Raghavan, COO, Jet Airways, tells B&E, “Sometime, we wonder why we are in the airline business at all. Not just Jet Airways’ but the entire sector’s future is questioned. We already have so many taxes; and by imposing more of them, the policy makers are only shackling us.” At present, airlines are paying Rs.57,166.96 per kilolitre of fuel – 33.5% more than what they were doing 12 months back. Do you even expect their already loss-making situation to improve with costs rising? Let us not day-dream.

Fact is, B&E Power 100 next year will yet again, see no Indian airline being featured in the list. Reason: the carriers are all set to lose more money in FY2011-12 than they did the previous year, due to higher ATF prices & excess capacity. In June 2011, IATA even slashed down the worldwide profit forecast for the industry for FY2011, to $4 billion – due to an increase of 53.5% in operating cost as compared to FY2010. With average oil price forecasted to remain around the $100-plus zone during the better half of EY2011-12, and with fuel constituting 30-50% of an airline’s cost in India even during the coming 12 months (internationally this value is around 14-15%), under ordinary circumstances, you could expect the top three airlines in India to lose anywhere in the range of $2.2-2.5 billion next year. And given that there is a lean quarter starting next month (July-September), expect a couple of fare wars, which will only make the air-pockets deeper. Forget about profits for the immediate year ahead, the question for Indian airlines is to face the issue of sustainability in the long run. Some short-terms therapies might surface, but how long and at what cost will they help prolong life in the air? [Or perhaps they will.

Swati Sharma           

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