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Will Indian airlines fly past these tough times?

Last updated on: January 23, 2012 13:31 IST

Will Indian airlines fly past these tough times?

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Aneesh Phadnis in Mumbai

Last week, Air India executives told lender-banks it would not be able to pay interest from February.

Working capital interest is about Rs 200 crore (Rs 2 billion) and each month the airline has a cash deficit of Rs 500-700 crore (Rs 5-7 billion). The management has decided to pay salaries only after the government decides to release Rs 150 crore (Rs 1.5 billion).

While the financial condition of other airlines may not be as grim, there isn't much to cheer. None except IndiGo have recorded profit.

While operating costs have increased, airlines were unable to recover costs. Revenues grew due to a rise in passengers, but average fares have fallen or, at best, remained constant.

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Jet Airways, which posted a Rs 101 crore (Rs 1.01 billion) third-quarter loss on Friday (its third successive quartely loss), said its fuel expense increased 60 per cent in the quarter.

Fuel is nearly 40 per cent of airlines' operating costs. For Jet, average gross revenue per passenger fell 1.3 per cent to Rs 7,387 in the third quarter (Q3) of 2011-12 over the same period last year.

In the earlier quarter, too, revenue per passenger dipped marginally for Jet and 15.5 per cent for JetLite. However, the cost per available seat-km, which measures unit cost, rose 25 per cent in Q3.

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The break-even seat factor was 89.3 per cent this year, compared to 74 per cent last year. This meant the airline needed to fill 89 per cent of seats to recover costs.

Jet has debt of about Rs 14,000 crore (Rs 140 billion) and the company plans to reduce it by Rs 1,000 crore (Rs 10 billion) over 2011-12. However, rupee depreciation has also hurt it, as it had already converted about Rs 2,000 crore (Rs 20 billion) of rupee loans into dollar loans.

Kingfisher and SpiceJet have not declared Q3 results yet, but both are expected to show losses. ICICI Securities estimates Kingfisher to post a loss of Rs 437 crore (Rs 4.37 billion) and SpiceJet of Rs 182 crore (Rs 1.82 billion) in the quarter.

In the previous quarter, Kingfisher lost Rs 469 crore (Rs 4.69 billion) and SpiceJet Rs 240 crore (Rs 2.4 billion).

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"Today, airlines can neither control costs nor charge a premium for their services,'' says management consultant and GoAir's former commercial officer, Raj Halve. "Why do the airlines need to put up crew in five-star hotels? They can have guest houses or hire flats."

Kapil Kaul of the Centre for Asia Pacfic Aviation feels airlines need to sacrifice growth for profits. "Airlines can't continue with pricing strategies which bring red ink to the balance sheet,'' he said. He estimates the combined annual losses of all domestic airlines at $2-2.5 billion (Rs 10,000-12,500 crore) for 2011-12.

In January-November last year, domestic passenger traffic grew 17.6 per cent. The growth was largely fuelled by low-cost carriers, which inducted planes.

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"Most airlines are selling below costs and that is why they are getting the loads. Our view is that it is better to grow at 10-12 per cent than grow at 20 per cent and make $2-billion losses. Financing losses is becoming difficult. Banks and investors will not put money and promoters will have to infuse capital to demonstrate commitment,"' Kaul said.

"(Only) IndiGo may make profits because of its relatively debt-free and because of higher revenue per flights,'' said an analyst.

In the second quarter of 2011-12, Kingfisher spent half its revenue on fuel and nearly 20 per cent on servicing debt. On a total revenue of Rs 1,630 crore (Rs 16.3 billion), it spent Rs 333 crore (Rs 3.33 billion) on interest.

The airline underwent debt restructuring last year, but still has loans of a little over Rs 6,000 crore (Rs 60 billion). On Friday, State Bank of India chairman Pratip Chaudhari ruled out fresh credit to the UB Group airline until promoters infused capital. Both SBI and Bank of India have formally categorised Kingfisher's loans as non-performing assets.




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