HOW’S 2007 GOING TO BE, IN INDIAN AVIATION?

This time last year, I wrote a post called year end aviation review. Here’s my review/Q&A/Synopsis/lop sided theories, call it by any name…..

What’s the bottom line going to be in 2007 for the average Indian flyer?

For the consumer, lower fares, more options to travel and better connectivity. Simple, anyone could have told you that. For the Airlines in India, more red ink as each one of them battle for the same piece of the ever expanding pie. Ever expanding pie must mean higher levels of income and profitability for the Airlines, right? Sorry, that was too easy, wasn’t it? Passenger growth has been phenomenal, no doubt but the average yield has actually gone down.

Airlines here think their strength is going to be due to economics of scale, more Airplanes, more seats, more routes and they can control pricing. Well, it works in theory, in some analysts theories. Ground reality is that, similar overcapacity in the U.S. drove a lot of the majors into bankruptcy courts forcing them to cut employee strengths, wages, return Airplanes that they had leased, cancel orders for new purchases of Airplanes and so on.

Noted analysts in the US say that this led to a reduction in seat capacity a bit and now the same analysts are predicting a banner year for US Airline industry because of the seat capacity reduction, costs under control and excellent passenger growth. This has prompted the carriers there to actually increase fares by 15-20% for economy class and reportedly 40% for business class, and still going full. That’s great and the analysts are calculating a profit (hold your breath) of US$2.3 Billion (that’s right, billion, with a “B”), despite the rising cost of fuel, as against more than $35 Billion in losses the US Airline industry suffered between 2001 and 2005 and $11 Billion losses in 2002 alone. Now, this is not to say that all carriers are going to be profitable, just that some of them that got the basics right, finally, are going to make it and have made it. One carrier that’s noteworthy (no, not southWest, which is going to make record profits yet again) is Continental Airlines. American Airlines is going to show more revenue from fewer seats.

What lessons can we learn in 2007?

Anyway, let me not digress from the Indian aviation scenario. What lessons can we learn from the US experience? Well, firstly, let us admit that even though we’d like to think that we are the brainiest people on the planet that’s heading out to becoming a superpower and that we don’t need lessons from anybody, the ground reality is that aviation stumps the best guy around. It’s a nasty business that bites you back, if you are an investor. It is time to look around. Wake up, smell the coffee and realize that your business plan should be your own and not driven by the desire to surpass some one else. You should identify what’s going to make you money and how to cut costs and make it more efficient, not be driven by this crazy concept that “I will be the largest Airline one day and will build up a nice brand and be able to control everything”. Wrong! That’s only going to make a bigger mess for you and the rest of the industry that can’t seem to get a grip on things. I’ll stop the lecturing here and move on to the next question.

What’s 2007 going to hold for investors in aviation?

An analyst in the US said Airline stocks must come with a warning (much like cigarette packs): “trading in Airline stocks may be hazardous to your wealth”. I say this again to the Indian public, if you think you are going to make money from investing in Airline shares, be prepared to lose all of it next year. In the short term, there’s going to be no miracle. Remember the past in India, and all the Airlines that went bad whose shares were trading at such high levels then and now the same shares are not worth not even the paper they are printed on.

Some Airlines claim that they don’t need to go public and they have enough reserves to last the distance. Well, good for them, let the passenger make use of their lovely services till they run out. Some Airlines think that they will get into profitability as soon as they go International. I don’t know who advises these guys but margins on International flights are coming down plenty and the number of carriers and their frequencies for the same set of destinations is increasing all the time. It is not a magic formula “lets go International and we will be doing well”.

All sounds depressing? It could have been worse but some deep pockets by all players concerned seem to be delaying the ultimate – going belly up. The media in India will, by and large, keep aviation in the news making it sound glamorous and chic to be in the business. That’s one way to beat depression, read nice stories about aviation. The good news will come to those that can act in the right manner.

How is the quality of my travel going to be in 2007?

Well, this is an easy one. It’s not going to be better than what you had in 2006. In terms of congestion, circling over major airports, ground and in-flight services will all be the same, matter of fact you’ll be slightly worse off regarding congestion and crowding because nothing’s improved in that area. Hyderabad and Bangalore’s new airports are slated to open little later, perhaps in 2008 and that may reduce congestion at these airports but may increase problems connecting to the airports by road or rail, especially in Bangalore.

The prices are going to remain low; I hope that for god’s sake, not lower than current levels. You as consumer should be happy with what you are paying now and maybe pay a bit more. It is in your interest that competition remains and that competitors are aplenty. If not, you’d back to square one with few competitors and monopolistic pricing of tickets and that’s going to hurt you. The Airlines, those surviving of course, will be laughing all the way to the Bank. At least that’s what it is, in theory!

Happy New Year to all my readers! Safe landings in 2007!

AIRLINES IN THE NEWS AGAIN:

Airlines make news for all kinds of reasons and even if they are small ones, they get the kind of exposure that even large manufacturers of other products don’t get. It is a glamour industry after all. Underneath it all, there’s very little glamour and a lot of red ink on the bottom line, be it an American, European, Asian or any other carrier of any other nationality. There are some exceptions and they are just that - exceptions. These include Gol in South America, a low cost, low fare Airline. Also add to this mix, SouthWest in the United States, Ryanair and EasyJet and a couple of Asian ones that are not listed on any stock exchange and hence difficult to verify whether they are as profitable as they claim.

Now, coming to the story in India, people who made claims that their Airline will make profits from the first year of starting operations, face heavy losses. It’s not good times for them or their competition, even though the Indian market has grown tremendously and is set to grow at a rapid pace. So how come no one is making money? Not one, none, zip, zilch, nada. In fact they are losing in buckets. Well, there are many reasons for this and I have put in my two bit a few times before and other “experts” in the field will be quick to come up with fantastic quotes and theories about the subject.

Airlines are also making the news for other reasons too. I had been talking about mergers, acquisitions, Airlines in India slipping into the red, consolidations and all that, at this time last year. When I wrote 2005 Aviation year end review and a few more articles after that, I had predicted that such things would happen and in fact it has become the order of the day. Let’s not talk about the major Airlines in the US that are merging or talking about some sort of consolidation. Let me just talk about India for the time being.

I don’t claim that I was the only one who saw it coming last year, about losses in aviation and the need to merge, consolidate and all that, there were a few others, but industry captains at that time were quite gung ho in their attitude. Not too many of the so-called experts whose sound bites get recorded from time to time in India predicted a bloodbath in terms of red ink. One of these expert organizations even gave away awards for Airlines as being the best in terms of glitz, glamour, quality of service, blah, blah, blah. Of course surveys were conducted using passengers. Smooze a guy and he'll love you. Ask him about management of the Airline, ground operations chaos, technical deficiencies and he'll give you a blank look.

Smoozing your customer is good but how about running a profitable company? How about getting an award for being the most profitable or even barely viable Airline of the year? First prize goes to so and so Airline for making ends meet. That would be good. There would be no Airline in India that can claim this prize at the moment.

The Captains of the industry only saw roses or fooled the public into thinking that way and made money out of them. Case in point Jet Airways Initial Public Offering priced at Indian Rupees 1250 (was it) and the share value is now down to less than half the IPO amount. Look at any other Airline, and they are struggling.

Sure there are genuine problems of tarmac space; congestion in the skies, antiquated air traffic equipment and systems, ill-trained foreign (chaps who can't speak English well enough to be understood by ATC) and Indian pilots (who can't land in Delhi in fog because they are not suitably trained), add the lack of quality middle and upper management and the masala becomes a dangerous mix. Add to this broth, the offering of free seats, deeply discounted cheap tickets, free gifts, low cut blouses and short skirts and you’ve got the public salivating and traveling in larger numbers than ever before. Good for the common man and he should make the most of it while the party lasts. And it ain’t gonna last long. Why? Again, many reasons for it and also the fact that all of these guys fly to the same few Airports in India. Air Deccan being the exception because their larger reach into secondary towns and airports using turboprop Aircraft. Now Indus in the North wants to do the same except that they will use regional jets. Good luck, because it ain’t gonna work.

That’s when mergers and consolidations become a necessity, and I still predict some large scale bankruptcies that will leave a lot of employees and others high and dry. People who you see on TV sporting large smiles and making outlandish predictions will get out of the business, surely they are packaging the business to sell. As I had mentioned previously and keep saying this, there are already some moves for consolidations, even small carriers such as Indus (never heard of them? Don’t worry) is tying up with Air Sahara, already tottering on the edge themselves.

An example of a merger going bad: Jet Airways went through a costly exercise of trying to acquire Air Sahara and calling off the wedding at the last minute. I daresay Jet actually gained from the annulment even if it meant that they would lose a lot of money. If that merger had taken place, Jets bottom line would have become deep purple (apologies to the band), forget red!

Airlines in India have already consolidated in one way. They have formed a lobby of sorts. Long term scenario? Let’s see now. I'l close my eyes, pretend I am a soothsayer and predict that a couple of Airlines are going to go down (as in closing down, don’t want to scare the reader), a couple of them being sold off and a few mergers happening. Result will be that the fare paying passenger is going to have to pay more money, that’s for sure. In any case, running an Airline below cost (or any other business for that matter) is not viable. Don't need to be an expert to say this.

There’s another curious activity going on these days that’s also making news. Financial companies, investment firms and other corporate types are buying up small equity shares in some of the Airlines. I don’t know why and some seem keen on picking up larger equity. I don’t know who is advising these guys and I’ll bet there is an army of CA’s and MBA’s in ties involved. Oh, I did hear some sound bites from the “experts” about this and they were saying: “these are very positive a signs indeed, signs of maturity, such an investment lends credibility etc etc” and all that hogwash these guys come up with. And they get paid a mint, mind you, to say all this rubbish.

Remember the late 90’s when over a hundred chaps in ties converged on Damania Airways and the Airline was taken over by NEPC Airlines in what was then termed as the “fastest Airline take over in the history of aviation”. Remember that? What the business magazines, newspapers and TV’s forgot to mention later was, that this was also perhaps the “fastest Airline to go down the tubes after the take over in history”. Leave the suits and ties chaps who came out Biz schools out of this, they don’t understand aviation. You don’t wear a suit and sit in an office and learn about aviation. That ain't gonna happen.

A friend of a friend recently commented that the Airlines may actually be profitable but are probably showing losses to avoid taxation. I wanted to shake him badly to wake him up. It does not take a rocket scientist to do the math on the revenues and expenditures. I’ve done the math and such works as feasibility studies for Airlines overseas too. And it is just plain silly to underestimate the clever Indian taxman. Avoid taxation? Good joke.

To the flying public, I say, go fly. Go everywhere you want to go. Because you can afford to do so, at least for now. Like I said before, it ain’t gonna last. Happy Landings.