Bad times can make strange bedfellows of those who cannot see eye to eye otherwise. The Kingfisher-Jet alliance struck recently is an apt example. As the aviation industry in India bleeds and is estimated to close this financial year with cumulative losses of about Rs 8,000-9,000 crore (close to $2 billion) double the amount last year, alliances of this kind have become a necessity today.
?It (airline alliance) is nothing uncommon abroad,? says M Thiagarajan, managing director of Paramount Airways, a regional carrier that operates flights mainly in the south of India. ?Alliances have been around for some time in the international market.?
Star Alliance, Oneworld and SkyTeam, for instance, have been competing with each other globally over the last decade or so. The objective of these alliances is to provide a common pool of services to their members such as the use of common passenger terminals at airports, linking frequent flyer programmes and providing flights across member carriers.
Synergising operations like this has its advantages: passengers benefit significantly and carriers can rationalise their flight operations to some extent. Naturally some big names are part of these groups. Singapore Airlines, Lufthansa and Air Canada are with the Star Alliance, which is the largest in the world at the moment. Even Indian flag carrier Air India is with it. SkyTeam, the second-largest, has Air France and KLM Royal Dutch Airlines among others, while the third-largest Oneworld has British Airways, Cathay Pacific and Qantas Airways as its members.
As India warms up to the concept and Jet and Kingfisher in specific get down to harnessing synergies to bring down costs as part of their recent alliance, the likelihood of rivals reacting to the combine, which has a 60% marketshare now, has significantly increased.
Explains Kapil Kaul, chief executive officer of the Indian & Middle Eastern chapters of the Centre for Asia-Pacific Aviation (CAPA), ?First, there was growth, then consolidation, and now, it is the phase of strategic alliances. I see it getting strengthened over the next six months.?
Though aviation companies in general are tight-lipped about how they intend tackling the new Jet-Kingfisher combination, whispers of a possible alliance between the smaller carriers such as Indigo, SpiceJet and GoAir have surfaced off and on. The carriers themselves are not saying anything at this point. Kishore Gupta, director, SpiceJet, for instance, says, ?We are not contemplating an alliance.?
Whether an alliance does eventually happen or not is a matter of speculation and debate, but the fact remains that times are just too uncertain for friendly gestures to be ignored altogether. An aviation industry source puts it well: ?Jet and Kingfisher realised there was no sense fighting with each other when both were suffering significant losses every day.? For Jet, the daily loss has been almost Rs 10 crore, while Kingfisher?s daily loss has been half of that.
Even then it is not something to be taken lightly. As Saroj Datta, executive director, Jet Airways, says, ?Cutting costs is imperative for both of us.?
By some estimates, cost-cutting measures by the two airlines are likely to result in a saving of about Rs 1,500 crore per year. A significant amount of time and energy, say executives of the two carriers, will be spent in rationalising their networks, basically routes, to avoid duplication of services. As Hitesh Patel, executive vice-president, Kingfisher Airlines, says, ?Cutting down on capacity is important.?
As demand slows, the biggest bane for airlines has been excess capacity. When the market boomed over the last few years, airlines went into overdrive booking aircraft from manufacturers such as Boeing and Airbus. It was felt that growing passenger traffic would be able to sustain the number of planes on order. It wasn?t unjustified.
Growth in domestic passenger traffic in 2007, for instance, was 432.89 lakh as against 326.68 lakh in 2006. In percentile terms, the growth was 32.51% ? quite a bit for anybody to be excited by the aviation story unfolding in India. This year, however, the domestic traffic from January-September, that is, the first three quarters, has been about 313.17 lakh. And with load factors at 60-65%, domestic traffic for the fourth quarter?a crucial one given the holiday season?is not likely to be high.
Says Zubin Karkaria, chief executive officer and managing director, India & South Asia, Kuoni, a leading travel company, ?We haven?t seen any cancellations in Diwali departures. They are booked, but my assessment is that there could be a dip in the coming months.?
The economic slowdown the world over including in India is taking its toll on the travel plans of people. The first in line to be impacted by this are the airlines and hotels. Says Ashwini Kakkar, executive vice-chairman, Mercury Travels, ?Based on advanced booking numbers till December, the kind of growth witnessed in travel over the last few years will not happen this year. It is likely to come down.? From 15% year-on-year over the last three years, growth in inbound and outbound travel is likely to be about half of that, at 7-8%, says Kakkar.
Naturally, it makes no sense for carriers to have a large fleet of aircraft when demand is falling so fast. By some estimates, the number of planes in the Indian skies is about 330-odd, which, following cutbacks in recent months, is now down to about 300-odd. ?But there is still some amount of oversupply, which has to be rationalised,? says Dinesh Keskar, senior vice-president, sales, Boeing Commercial Planes.
Ironical as it may seem that a statement like this is coming from a man responsible for selling Boeing aircraft in India, it is not out of context. ?Airline seats,? says an industry expert, ?is a perishable commodity. If you can fill your planes with passengers well and good, if not, it?s a loss.? When there is a demand-supply mismatch, bringing about equilibrium is a must.
Boeing alone, for instance, sold some 164 aircraft in the last three years, of which 60 have been delivered, says Keskar. ?But these 60 have been mainly for international operations. Of the 100-odd left, 64 again are mainly for international operations and 36 for domestic operations, delivery of which is to be done over six years. So, we are not adding to the excess capacity here,? he says.
Airbus, on the other hand, has had orders for 380 aircraft in the last three years, deliveries of which have been about 40-45 per year, says Kiran Rao, executive vice-president, sales & marketing, Airbus, who is also president, Airbus, India. ?Kingfisher however has recently cancelled orders for three A-340s. This is what working in partnerships is about. We are aware of the ground realities and are willing to help carriers move their aircraft,? he says.
But even as orders get cancelled and delivery of aircraft slows down, the fact remains that rationalising supply against demand, which, according to some observers, is a bit of a moving target, is becoming difficult. ?These are unpredictable times,? says a domestic airline executive. ?You never know what could be the scene tomorrow.?
By some accounts, an ideal capacity in the domestic sector at this point would be about 240-250-odd aircraft?a cut of about 20% in the existing 300-odd?to ensure stability of airlines. But industry insiders opine that it would be a bit difficult to achieve it since carriers would have to contend with downsizing of staff, which is a prickly issue at this point. Grounding airplanes necessarily implies that staff would have to go. It?s something nobody is willing to do after the recent drama around Jet?s laying off probationary staff in the cabin crew department.
Kingfisher, for instance, had earlier hinted at possible layoffs, but at this point the airline has merely brought down the pay of trainee pilots. Patel of Kingfisher says there is no plan to downsize at the moment. ?We?re not overstaffed,? he says.
Despite this, experts say, some amount of rationalising of staff would be required as players desperately try to match supply and demand. This eventually has a bearing on the fuel offtake of airlines. More planes, means more fuel burn – something airlines are trying to curb desperately at this point of time. Relief measures such as payment of cumulative dues of Rs 2,500 crore by airlines to oil PSUs in equated monthly installments by March next year are welcome, but insufficient. The big relief would be bringing down the high incidence of tax?over 30%?on aviation turbine fuel for aircraft over 40 tonnes. Experts say that this may take some time because any change in the tax structure would call for a modification in the Money Bill. ?It will be a challenge. But we are hoping for the best,? says an industry insider.