GoAir’s recent appointment of former Jet Airways and Air Berlin executive Wolfgang Prock-Schauer as its new CEO has led to expectations of higher profits at the airline. GoAir has managed to post profits, albeit slender, in the last two years whereas most of its competitors made huge losses.
Prock-Schauer’s predecessor, Giorgio De Roni, who quit last March, is credited with turning around the airline and bringing it to profitability.
The appointment couldn’t have come at a better time for Prock-Schauer with jet fuel prices, which account for 40-60% of an airline’s expenses, falling about 23% in the last 12 months. Nevertheless, several other challenges will test the 34-year-old industry veteran as competition intensifies in an already stretched market.
The domestic air space is getting cluttered with the arrival of new airlines. In the past few months, full-service Vistara and no-frills airlines like Air Pegasus, AirAsia India and Air Costa have launched operations in a space that is already crowded with incumbents. There are reports of some other groups applying for permissions to set shop.
“The domestic commercial aviation market is saturated given the current demand level. This apart, leaving IndiGo, no other low-cost carrier has an unique offering. The sector needs structural changes in terms of policies for so many airlines to thrive together,” said Deep Narayan Mukherjee, senior director at India Ratings & Research, who tracks the sector closely.
Then there is the problem of low yields, owing to the high cost of operations in India, That stifles the profitability of airlines. For instance, while Air India’s domestic yield stands at Rs 6-7 per kilometre (more or less the industry benchmark), for American carriers like United Airlines, the figure stands at Rs 70 per mile.
“While there is a huge gap between the demand and supply of seats, airlines are not making much money. The ultra competitive environment in India doesn’t allow airlines to raise their yield. GoAir will face challenges in increasing their yield as they would want to increase their profitability,” said a senior executive of a low-cost carrier under the condition of anonymity
Note that GoAir, which plans to fly to international destinations in coming years and expand its domestic services, had placed a huge order of 72 airbus A320 neo (new engine option) aircraft, the first batch of which is expected to be inducted by 2016.
“When a profitable airline with a relatively small fleet plans to expand and increase its size, its bottom line comes under immense pressure due to the huge loans undertaken for fleet expansion plan. This apart, the airline’s profitability further suffers when elements of amortization and depreciation (of their fleet) comes into play with such a huge fleet,” said an industry veteran with over three decades of experience.
“Air India and Indian Airlines were both posting small profits before a huge aircraft order was placed in 2005-06.
However, the acquisition of new Airbus and Boeing fleet left a huge debt in the airline’s balance sheet. The challenge for Prock-Schauer will be to balance the airline’s profitability with growth and expansion plans,” he said.
Tricky situation
* The appointment couldn’t have come at a better time for Prock-Schauer with jet fuel prices falling about 23% in the last 12 months
* Experts say that when a small airline expands, its bottom line usually comes under pressure
* GoAir has placed a huge order of 72 airbus A320 neo (new engine option) aircraft. The the first
batch is expected to be inducted by 2016
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