Low-cost fares exact a high price

It is a measure of his concern that Kingfisher Airlines chairman Vijay Mallya ? despite being deeply involved with India?s first Formula One race in Greater Noida ? made regular visits to Rajiv Gandhi Bhavan, which houses the civil aviation ministry, in the run-up to the motoring event. In fact, on one of his visit he even waited for more than hour, very unusual for Mallya, in the guest room of civil aviation minister Vayalar Ravi for his turn to come. The promoter of the cash-strapped airline had kept all the people in the civil aviation ministry who matter ? the minister, secretary and the Airport Authority of India chairman ? informed about the crisis that was engulfing his airline even as actively sought their help to avert it.

?He (Mallya) tried his best. The desperate measure of grounding flights was taken after trying out all possible options,? said a director in the civil aviation ministry. It?s not as if Mallya is alone. Some two weeks earlier, on October 16, the chief executives of leading carriers including Jet Airways chairman Naresh Goyal and IndiGo president Aditya Ghosh met Ravi, asking him to address the sector?s declining financial health, exacerbated by by underpricing and rising input costs. As a follow-up, airlines through the industry lobby group warned the government that in case corrective measures were not taken, some carriers could even shut shop.

That?s borne out by the numbers. Jet Airways has the highest debt to equity ratio in the troubled airlines sector, followed by Kingfisher Airlines and SpiceJet, according to data from Thomson Reuters StarMine. Kingfisher?s long-term debt to equity ratio is 2.9, suggesting its long-term debt is nearly 3 times its equity, compared with Jet?s 4.1 and SpiceJet?s 0.08.

Mallya?s own difficulties achieved full-blown crisis proportions when Kingfisher cancelled over 40 flights on November 7 and announced that it would continue limited operation till November 19. The best hope for Kingfisher today is to that the government pushes banks to offer loans at concessional rates.

Kingfisher?s problems may be bigger than its private sector peers?, but there?s no denying the industry is in bad shape. State-owned carrier Air India alone has a daily cash loss of R21 crore. It is expected to post an operating loss of R7,300 crore in the current fiscal. Two BSE-listed entities ?Jet Airways and SpiceJet ? have posted a combined loss of close to R1,000 crore for the quarter ended September. Private carriers together are estimated to be adding a R20-crore loss every day to their books.

Both Jet Airways and SpiceJet, which announced their results last week, made losses despite an increase in revenue and passengers. The largest private carrier by market share and fleet size, Jet posted a loss of R713 crore even as its revenue and passenger number grew by 8% and 13%, respectively. SpiceJet, which registered a loss of R240 crore in the July-September quarter, saw its per passenger yield dropping 5% to R3,317 during this period.

?There are some bad apples. The others are being spoiled by them. When two carriers sell tickets below price, others have no option but to sell cheap,? a top executive of a private airline said. He said that while tickets are underpriced, input costs have been going up, and a depreciating rupee does not help when it comes to making large dollar-denominated payments. Moreover, he added, the industry is over-regulated.

A Federation of Indian Airlines (FIA) tariff analysis shows that the fare charged by domestic carriers is less than half and at times even lower vis-a-vis foreign carriers in their local network on comparable routes. The airline body in an October 18 letter to the government wrote, ?Lack of pricing maturity in an extremely price-sensitive market like ours is causing almost all airlines to sell at fare levels that could be as low as 25% below the cost. As a result of high input cost and low fares, in the first six months of this financial year the domestic airlines are likely to report a loss of R3,500 crore.?

The trouble has only been deepening for the sector with IndiGo, the lone domestic airline that claims to be making a profit, saying last month that it was losing R1 crore a day mainly due to prevailing low ticket prices. Jet, whose financial performance is considered a barometer for the domestic airline industry, has also been struggling to cut its losses.

?Increased fuel cost is not being passed on to consumers. While input cost has been rising and capacity being added to the market, air fare is not increasing. That?s the main problem,? Jet Airways senior vice-president for finance Shiv Kumar said.

Aviation advisory firm Centre for Asia Pacific Aviation India has said that the domestic traffic will grow by 17-18% in the current fiscal but most of the growth is likely to be due to cost-minus pricing by airlines. ?We have a largely loss-making aviation industry, the financial status of which is very fragile,? CAPA India CEO Kapil Kaul said.

The domestic airline industry?s combined losses at the end of the previous fiscal was estimated to be around $6 billion. It is burdened with nearly $16 billion in debt. With signs of an economic slowdown visible, the financial health of the carriers is unlikely to get better anytime soon.

The domestic airline industry fits best for a case study for its losses. Sample this. Indian airlines ? which carry just 2.5% of the world?s passengers ? could make a loss of $2.5-3 billion against a projected profit of $4.9 billion in the current year by all carriers globally, according to the International Air Transport Association.

?The operating environment for airlines is very challenging in India. Our infrastructure is not comparable with foreign countries. Airport charges are very high, besides there is heavy taxes on ATF (aviation turbine fuel). The competition is very stiff in the domestic market. Also, aviation penetration in developed countries is very high compared to India,? said Rashesh Shah, analyst at Mumbai-based brokerage ICICI Securities.

While airlines have to shoulder their share of the blame for the financial mess they find themselves in, industry watchers also point fingers at the aviation ministry. CAPA India?s Kaul said that the government had a very serious issue on hand of addressing the viability of Indian carriers.

?But unfortunately, there is no direction in this regard. Response by the government to the financial crisis continues to be ad hoc and weak,? he said.

Key financials as on March 2011

Jet Airways

Total income: R14,522 crore

Net loss: R86 crore

Total debt: R14,522 crore

Air India

Total revenue: R13,964 crore

Net loss: R6,994 crore

Total debt : R42,000 crore

Kingfisher Airlines

Total revenue: R6,496 crore

Net loss: R1,027 crore