Tuesday, December 19, 2006

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.

16 comments:

Anonymous said...

Sir, why do u think the investments being made by the other corporates in airlines is not a good idea? Airlines at this point require cash to survive, and the player who can last this transition phase will win we know that!So then why dont you support this idea of picking up equity stake in the airlines??

Blog-Capt. Anup Murthy said...

thanks for your question. True the Airline industry needs the cash, no doubt about it, you are right. But, for an investor, he should invest only if it makes good investment sense. Not a good idea to invest in an idea just to keep it floating so that one day it can be successful. This transition phase, as you call it, may last longer than practical and may not be sustainable. Also, why are Airlines in a financial mess requiring a bailout? In any case, in a free enterprise, if something does not work, it ought to shut down.

When I mentioned about this aspect, I said that some investors/corporates are picking up minority stakes. If they want an Airline to succeed, they have to do better than that. All one has to do is look at what has already happened in India in the past and how a majority of the Airlines that started well, made a big splash, went down? Despite corporate backing.
I am not at all against corporate investment in an Airline, only that they have to be careful especially if they are going to spend public funds. TATA is picking up some equity in SpiceJet and I am going to post an item in a couple of days on that. The TATA's do know a thing or two about aviation and they have a history of success in this field before Nationalization. Post nationalization, it was JRD Tata that brought Air India the good name it had, until he was sacked by an inefficient coalition Government (which by the way, did not last even a few years!).

Thanks again and do ask such pointed questions. I'll answer them according to my perpective on things and based on my experience. my article may not please all, in factit may raise the hackles of some industry chaps but thats OK.

Quodlibet said...

Merry Christmas to you as well! I hope you get to spend the holidays with your family and not working. All the best.

Blog-Capt. Anup Murthy said...

Thanks Quodlibet, for your kind wishes.

Nikhil Joshi said...

Finally, a realistic review of the industry by someone!
I might be a mere 2 years into the field of aviation, but believe me, it didn't take me long to realize that something was wrong. But nuances of that realization were evading me. And I found them here. :)

Indus... isn't this the same company owned by an Indian-American neurosurgeon? It's the company that recently designed & manufactured a light sport airplane or something. I keep forgetting the details on that one.

Merry Christmas to you!

Blog-Capt. Anup Murthy said...

Thanks for you comment Nikhil. I'd suggest you go into ibnlive.com and watch the interview with Dr.Vijay Mallya on "devils advocate" and it kind of exposes some of what I have said in this post. The link is: http://www.ibnlive.com/videos/29357/devils-advocate-vijay-mallya.html

The link may be gone after a while but it is interesting to watch it.

Indus is part of another liquor empire in North India, Mohan Meakin. Wikipedia has more info on the company.
To say that the industry is in a mess and deep pocket chaps want the ones with no so deep pockets to fold up!! Fantastic drama unfolding that the media is missing.

Madhukar - VU2MUD said...

I would like to bring to the attention of the article in Deccan Hearald of 25th December. Title of the article is Aviation: Caught in a twister.
http://www.deccanherald.com/deccanherald/dec252006/eb19473120061224.asp
The views of Capt. Murthy have been proved right by the article. Thought provoking and the civil aviation scenario need a quick rethink. In the meanwhile, let the passengers benefit while the investors sink their investment.

Blog-Capt. Anup Murthy said...

Thanks for your input Madhukar but for some reason, I failed to access the weblink for the Deccan Herald article.

Despite the Deccan Herald report, I feel large sections of the media is so enamoured by aviation that they generally fail to see the "behind the scenes story". I give you and example of today's issue (26th Dec 2006) of Economic times, normally a reputable business publication, right? Well, here is the link and hope this one works: http://economictimes.indiatimes.com/Lower_airfares_NRIs_fly_home_now/articleshow/927463.cms

First I thought the article was about why NRI's are visiting India more often and it is because of cheap airfares. Well, when you start reading the article, it reads like a school boy who just wrote an essay and offers simplistic reasons as to why low fare carriers offer low fares in India, for flights within India. Incredible that this article has been published at all, extremely juvenile in its assessment and write up and surely written by some one who doesn't know the front end to the back end of an airplane or the airline business and I thought "business savvy" journos wrote in business papers. Boy, am i wrong!

Madhukar - VU2MUD said...

Sorry about the link

Try this

http://www.deccanherald.com/deccanherald/dec252006/eb19473120061224.asp

Best Regards

Blog-Capt. Anup Murthy said...

Sorry the link again failed because after 2006/ the link does not completely show, try joining /eb19473120061224.asp (after 2006 in the link).
The article is still available in
Deccan Herald archives for 25th December.

Thanks Madhukar, for drawing my attention to this article. I concur with the author of that article, good to know that I am not the only one articulating the woes of the industry.

Anonymous said...

Sir, If you were to join an airline as a pilot in India , which one and Why? I am just about to finish converting my FAA licence to a INdian Licence
Thanks for your help

Blog-Capt. Anup Murthy said...

Thanks for your question anonymous. It is difficult to chose and it is simply my opinion, what I am going to say now, but the decision should be your's.
All things considered, Indian Airline (Indian) is the best bet, always supported by the Government come hell or high water. They have ordered a large fleet of Aircraft and are short of pilots, like everybody else. There is a possibility of AI-IA merger and that will open up more possibilities.
Jet is a good option, they use B737NG's and are already International. They are, like everyone else, making losses but they are survivors and have gone through years of knowing how to survive and grow.
Kingfisher is not a bad choice, too much pride is at stake and Dr. Mallya will keep it running for a while at least he's got the funding to keep it afloat for a while and when that runs out, there will be foreign funds who may pick up equity and put in funds. Air Deccan is not doing well, like everyone else and their reputation is going down but Capt. Gopinath is a visionary and I do wish him success because he started a revolution of sorts and it takes bravery to do this. Also, Air Deccan has one of the best regional coverages in India.

This is all in theory. I am not deriding any other carrier and I wish they all succeed because as an aviator, we all love it when something succeeds, it is our bread and butter.

After I wrote the last blog piece of the year came the news that the Civil Aviation Minister Mr. Praful Patel (the best minister in any government for aviation, I'll say that anytime) has made another announcement that foreign funds/investor can hold upto 74% from the earlier cap of 49% and this will ease a lot of the burden on the Airlines in India if they can tap this potential, at least to fund Aircraft acquisition. Operational and overall profitablity wil be decided by the other factors that I have discussed.

Please do your own research as well and take a decision, whoever you end up with, you'll get a new generation Aircraft type rating and turbine time, that will bode you well for the future anywhere. All the best in your endeavors.

Venkat Ramanan said...

Hello Captain!
Another excellent interesting review of the Aviation sector! I used to feel that Airlines can have party time for long since "Economy is growing" (as naive as any other Indian who reads newspapers like ET :-)) ) until I read reviews like what you have written!! I also read what CAPA Kapil has to rant about Indian Aviation industry.. He keeps ranting about our pathetic infra, high taxes and excessive supply in the making... I can hear him ranting all this in the past 2 years, yet our aviation barons, netas and babus don't seem to have done anything about it (or are they doing anything?!)

BTB, The link in Deccan Chronicle is as follows
http://www.deccanherald.com/
deccanherald/dec252006/
eb19473120061224.asp

I have split the whole link.. plz join them together and access the link..

And about that ET article, ET ALWAYS writes such illogical articles. It is the likes of ET which pumps up adrenaline of a common citizen without giving actual facts about what is happening at the ground level! We need more responsible media, instead of our ET and Rajdeeps who sensationalise even shitting of an average rural person!!

Capt. Anup Murthy said...

Hi Venkat, thanks for the link. I had read that piece recently too, another friend of mine mailed me the link. CAPA Kapil's comments from time to time has me confused actually. Seems like sometimes he is pandering to the industry and awarding them for all the wrong reasons. Survival I guess, in order not to turn into a "persona non grata" in the Indian aviation Industry. I don't blame him.
As for ET, it should stand for "Entertainment Tonight". Some TV channels have also become more tabloid and less news. All in the garb of providing infotainment (who is the sick guy who invented this word I wonder). Anyway, all freedom of speech.

Anonymous said...

Dear Capt Murthy,
I guess "Some Deep pockets are out to kill not so deep pockets" remain quite true...
With Kingfisher & Sahara the source of funds can be guessed but not that with the ones like Indigo & Jet.

Like any other person who have no idea about the Draconian policies under which all the private airlines function I would say that the LCC like Air Deccan , Spice, & all business class Paramount are doing quite well.

Let's take the case of AD, they hd no option but to expand at a high speed before the existing players start choking them to death. This high speed expansion has come with a price, bad publicity, irractic schedules, complaining passengers...but all in all AD is fighting the war which they started. I feel they have the policy running survival of the fitest.

Now with Spice... they have been moving more cautiously & are relying on trunk routes in which everyone one is jumping... good that Tata & BNP have shown confidence in their model which is one type of aircraft.

Paramount: Though the fares are pitched high they have carved their niche amongst the fight of LCC & full service. they are expanding in a true marathon style

With so many players in the marke Jet & Indian have to lose their market share which will be garnerd by the growing LCC which is set to be approx 70%
A successful airline should not be judged by the market share, but by the value return to the shareholders...


The future I believe is in the regional conectivity to the major cities, the earlier they realize better for the industry.

Capt. Anup Murthy said...

Dear Anonymous, thanks and it is refreshing to read your comment that does bring in new elements to the topic. I almost missed your comment because I almost don't go back to my old topics to look for comments but maybe I should because some interesting comments does come in sometimes, like yours did.