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High oil prices hit India's airlines

July 21, 2008 13:48 IST

India's airlines have been flying high these past years as deregulation powered a booming industry. Over the past four years, six new airlines took off from Indian tarmacs, serving 100,000 passengers a day.

In 2006, India's airlines made headlines when they ordered 400 new planes -- $37 billion worth of flying machines -- as the industry became a magnet for pilots from all over the world.

But all these ambitious plans and dreams have of late wound down, in large part due to the rise in global oil prices. At $143 a barrel, the price of oil has affected aviation globally, and the seemingly golden Indian carriers have been hit perhaps hardest.

From Air India to Jet Airways, to Kingfisher and SpiceJet, the airline industry reported losses that totaled $938 million for the fiscal year ended Mar. 31, 2008. This year, Indian aviation revenues are expected to grow a mere 9%, vs. 29% last year, and the industry will operate at a loss. Jet Airways, SpiceJet, and Air Deccan have all seen their stocks fall more than 50% over the past 12 months.

On June 24, Jet Airways, India's largest private-sector airline, and its low-cost subsidiary JetLite reported a combined loss of $152 million for the year ended Mar. 31.

Jet said that it had to pay $30 million more for fuel than in the previous year, given soaring prices. Jet, which has 60 aircraft, has already cut domestic capacity by 10% and raised fares. "There's too much capacity in the market, and traffic growth has declined with [rising] inflation," says Saroj Datta, executive director of Jet Airways.

Hard times for GoAir

One of the worst hit is GoAir, India's youngest low-cost airline set up by Jeh Wadia, scion of a textile conglomerate Bombay Dyeing. GoAir, which has been trying to sell off a 26% stake in the airline for some time now, is cutting 10% of jobs, paring short-haul flights, and putting expansion plans on the back burner.

Why is India's airline sector reeling more than those of other countries? Aviation fuel in India has tripled over the past three years and now is the most expensive in the world -- 80% higher than in most countries, including theUS and Britain.

That's in large part because of high federal and state government levies, including 15% oil marketing charges charged by India's state-run oil companies. Indian carriers and foreign airlines that refuel in India must buy oil from Indian Oil, Hindustan Petroleum, and Bharat Petroleum.

New Delhi allows the oil companies to charge the airlines higher prices to make up for the fuel subsidies that the state-owned oil players are forced to offer the public for cooking oil, gasoline, and diesel.

As a result, fuel accounts for nearly 50% of the operational costs of the Indian airlines, compared to a global average of 23%. Concerned by rising global crude oil prices, New Delhi raised aviation fuel prices by 18.5% in May, bringing added pain to India's carriers.

Airline losses could double

There's worse news: India's aviation secretary Ashok Chawla said on June 10 that if oil prices continue to rise, airline losses this year could double, to $2 billion. India alone would then account for a third of the $6.1 billion global losses projected by the International Air Transport Assn. -- the largest of any country.

Oil is not the only culprit of the current turmoil. India's woeful aviation infrastructure and a policy that favors the state-owned giant Air India have also hit the private players hard.

To protect Air India, New Delhi has maintained strict rules banning India's private airlines from flying overseas. Jet Airways is the only private airline with overseas routes. Currently, overseas flying rights require that an airline must be in operation for five years and have a 20-aircraft fleet.

And while budget airlines globally operate from secondary airports, India lacks these. India has only 92 commercial airports, of which only half see any serious passenger traffic and only 10 operate profitably.

As a result, even the smaller airlines are saddled with high airport charges for landing and takeoff. So on average those charges make up 12% of Indian carriers' cost, 50% higher than is common for global airlines.

Scaling back growth plans

Meanwhile, India's aviation infrastructure is badly overwhelmed. Mumbai, the country's main airport, which services over 600 flights each day, has only two functioning runways. So takeoff and landing at the country's airports usually requires circling around cities for 15 to 45 minutes on average.

Redirection to other airports is also common. "We have no choice but to bear the air congestion costs," says a frustrated private airline official.

All these problems have forced the Indian carriers to cut back plans for growth. So while Indian carriers were expected to add 36 new aircraft in 2008, "I will be surprised even if 15 planes come in this year," says Kapil Kaul, the India CEO of the Center for Asia Pacific Aviation.

After deferring their expansive aircraft acquisition plans, the Indian airlines have now begun to lay off expensive foreign pilots, cut staff both in and out of the air, and have increased fares overall by up to 15%.

GoAir, for example, has sent home 17% of its 79 expatriate pilots, and whittled down its plans for 34 new aircraft by 2009 to just eight, say analysts. It's a Catch-22 situation for the airlines: if they raise fares, they lose customers, but if they don't, they lose money. And for all the airlines, passenger load levels, are already falling, down from 72% last year to 65% today.

Consolidate or die

Indian travelers, who have gotten fed up with overcrowded trains, took to the air in the hopes of more comfortable journeys. After getting used to pleasant traveling conditions and affordable prices, now travelers are becoming disappointed.

Ten days ago, Dev Satyan, a human resources manager in a private sector bank, got his Mumbai-Delhi Jet Airways round-trip fare for $256. On his second trip to Delhi in five days, Satyan's bank forked out $349 for the ticket, a 36% increase. Satyan, who travels at least 12 days a month, says that rising ticket prices may force him to curtail his air travel. "We just might have to freeze travel for a while, and resort to videoconferencing to deal with our branches," he adds.

So what is the way out for Indian aviation? "We have to cut down capacity, charge fares above cost, and stop chasing market share," says Jet's executive director Saroj Datta. Consolidation is also likely. Last year, Jet acquired JetLite (which was earlier a full-service airline called Sahara Airlines, while Kingfisher bought Air Deccan.

New Delhi-based SpiceJet, with daily losses of $160,000, wants to raise $100 million to tide it over during the current crisis. And Britain-based investor Bhupendra Kansagra -- who has a 13% stake in the airline -- wants out. Two likely contenders bidding for Kansagra's share, along with the 14.7% stake held by Dubai-based investment firm Isthitmar, are U.S-based distressed asset buyer Wilbur Ross Jr. and India's liquor king, Vijay Mallya.

"This is a no pain-no gain story," says Ravi Menon, director of Mumbai-based air maintenance organization Airworks India. "Airlines have no choice but to collaborate and consolidate for survival."

Nandini Lakshman,