FE Editorial : Flight to nowhere

Dec 26 2012, 04:07 IST
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SummaryAirlines world over have traditionally been tough businesses with few carriers able to make money consistently.

Airlines world over have traditionally been tough businesses with few carriers able to make money consistently. In India, the first round of privatisation, in the early 1990s, saw no survivors—all three carriers East West, ModiLuft and Damania sank without a trace. Some of the second crop of players, however, have done well in a more liberalised economic environment and while some of them may be heavily indebted—Jet Airways, Indigo and SpiceJet—have all built up strong franchises. So far there has been one casualty—Deccan Aviation—which was bought out by Vijay Mallya, in a spectacularly bad decision. Going by the look of things, Kingfisher Airlines could be the next. The decision to buy Deccan apart, Mallya’s more than full-service model for KFA was in itself seriously flawed because there was not enough of an addressable market, over a sustained period, that would earn KFA the kind of fares that it needed to be able to cover its ever increasing costs. In other words, the top line for such a product simply didn’t exist even as costs continued to rise. To their credit, the value value carriers like Indigo and SpiceJet read the Indian market more correctly by not going over the top with their revenue projections but instead keeping costs in check and focusing on service. KFA’s expenses incurred in running a full-service airline—and servicing the huge debt on its books—simply got out of hand at a time when the rising price of crude oil and high taxes on aviation fuel hit the airlines badly. Prices of ATF have more than doubled since March 2009 to around R70,000/kl and are at near 10-year highs. But despite this, Indigo reported an operating loss of just R87 crore last year on revenues of R5,552 crore while Spice Jet reported losses, post rentals, of R600 crore on revenues of R3,900 crore. KFA’s losses, on revenues of R5,493 crore, were much larger at R2,328 crore.

The industry will continue to be in trouble for a while because there’s simply not enough pricing power. Jet Airways is expected to report a loss of around R150 crore in 2012-13 not just because costs will double but also because the airline will pay out nearly R1,000 crore as interest; the anticipated revenues of R20,000 crore are not expected to be enough to cover these. Of course all airlines are reworking their route maps; Jet for instance, has opted out

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