Thursday, December 28, 2006

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!

16 comments:

Balaji said...

I would like to refute your predictions for airline industry.

First, dont try to directly compare India and US. US is entering a recession and India is having a 9% growth. Aviation in India is also starting from a smaller base and is having millions of new customers. So, no conclusion can be got from a simple India-US aviation comparison.

Second, the bankruptsies of airlines like East-West in the past have no bearing on the current aviation scene. Indian scene looks like the massive expansion phase of the US industry in the post-war period, and India is basically a new economy fresh out of ever-lasting poverty (atleast for the top 100 million people).

Third, the airfares in many of the sectors are still too high compared to even international fares. This is getting to go down, as aviation fuel tax is going to reduced and more domestic carriers are allowed to fly abroad.

Last, the ever increasing NRI presence abroad and the family visits, combined with greater inbound and outbound tourism can keep aviation flying high for the next decade.

Capt. Anup Murthy said...

Thanks for your comment Balaji, I appreciate it. The optimism that you sound is good but ground reality is that with huge losses that all Airlines are making now and huge losses admitted by them, that they will make in the coming few years (including Dr. Mallya's own admission, as such, on IBN)concurs with my view.

As for comparing the US and India, there are a lot of things similar, aviation is old in the US and what we did 20 years ago, they are doing now in india and I can see that happening. Essentially each Airline has hired white guys to run the Airline, simply because they have US/Canada/UK experience (none of the CEO's have India background!) and they have all gone through this sort of thing before but some of them are unable to shake off their original "legacy carrier" baggage that they have brought with them. Case in point: Indigo! an LCC run by Legacy chaps!

Bankruptcies in the past in India was also not because of a shortage of flying public, it was lack of understanding of the business, prices were controlled those days if you remember and they were pretty high. NEPC Airlines occupancy levels were in the 90% mark on their turboprop sectors and they lost out the minute they bought Damania, everyone knows that was a bad decision. Jet Airways survived well in that phase but now face incredible losses. What is Jet's share price today compared to their IPO price? Less than half, and tell me no one is losing in this game. They even fly International, thats done nothing to reduce losses.

Basically you are saying that passenger levels will be high in future due to international and NRI and others travelling is right. I do not contest that point, I agree there will be larger number of people travelling but the costs are also going to go high, no matter if the tax is reduced on turbine fuel, it is still too high and will remain high. The other thing is that if any untoward incident happens like it did in 2001 the entire industry will be in a tailspin. While no one can predict such thing and one wishes such acts neverhappen, do the companies have any contingencies to handle anything like that? They are bleeding badly without such things happening.

My point is that while passenger numbers will go up, unmanageable levels of expansion will not work. Where are the pilots, engineers, space, infrastructure and all that? Every one has to be imported including pilots and engineers. Junior pilots who come out of flight school need a few thousand hours before they get on the left seat as Captain, thats what I am talking about. These things will not only add costs but will also contribute towards an airline's demise.

You've got to see the pricing and yields, it does not matter if some sectors the fares are still very high. Some of them will continue to be high regardless, but look at the average yield, Kingfisher and Jet yields are better than everyone else, no matter how much occupancy you have on a carrier and they both are still making massive losses. I'm sorry the math is a bit different in this business. Sorry mate I wish this was just something we could wish away. I'll be happy if I am wrong but have seen this before and the losses are huge and building up. I'm also talking to leading Indian aviation analysts here in SIngapore and we all concur.

Dr. Mallya on "devils advocate" admitted that they won't even break even for a few more years and we are talking about operational breakeven, not accumulated losses, whose going to fund that?

Thanks again Balaji, keep them coming, good to hear you point of view as well.

Anonymous said...

It is honeymoon time for the consumers right now! As for the airlines, the airline-birth rate is coming closer to the human-birth rate in India. Well, maybe not, but, the competition is quite nasty. Do you see an Indian version of the Spoils Conference in the future years, Capt. Murthy?

Capt. Anup Murthy said...

The honeymoon is going to last a bit longer Nikhil. Thats not because the competition is becoming friendlier, it is because the Ministry of Civil Aviation has started to throw all of them some lifelines.

Firstly, they are not giving fresh licenses to those with the same business plan as the rest of the current players, secondly, they have announced that a proposal to increase foreign (non Airline holding) equity participation in Airlines in India from 49% currently to 74% and this would enable to find resources for funding their acquisitions. A few other resources are there that can be used later and all this will prolong the honeymoon.

Whats going to kill the business is the unprecendented growth in Aircraft purchases resulting in seat capacity explosion, without having matching operating crew and other items that are absolutely necessary and the DGCA is already talking of easing some of the licensing norms and importing at least 250 foreign pilots a year. Aviation is on an upswing in many parts of the World, the US included. It is not India alone that is growing. There will still be pressure on getting everything right in this over-expensive operating environment.

The Airlines in India have formed a lobbying association when they should actually forget about lobbying for sops from the Government and concentrate on addressing the future problems each one of them face and try and jointly tackle them, easier said than done of course, because one wants to devour the other at the moment. Consolidation will be the key in the future. Thats already happened in the US and elsewhere. Thanks for your comments.

Anonymous said...

Hi Captain

First, a very happy new year to you and wish you many more happy air-miles in 2007 as we all watch in envy !

Interesting debate on what will bring down the airlines this time around. Having witnessed the rise and the collapse of the private airlines in the early 1990s, its worth noting that we could see similar fall-outs albeit for altogether different reasons as you mention.

I somehow feel the promoters behind the new crop of airlines are far more focussed on the business itself and perhaps more determined as well. Possibly, they are aided by the availability of expertise.

All of which will not necessarily save them if the business starts turning. While there is considerable demand, most of it is also at lower fares which are not necessarily sustainable all the time.

Also, I think we are okay in terms of capacity and aircraft as of now, I think the question is whether the environment can sustain so many airlines ? And to that extent, consolidation is inevitable !


Govindraj

Capt. Anup Murthy said...

Thanks Govind for your kind wishes and I wish you a Very Happy New Year as well. I have been following interesting debates on your blog as well.
I agree with your observations on the Airline scenario, especially about some of the promoters being quite focussed on the business development. There's also a few who don't seem to to be too focussed and seem to not know what they are doing! Fortunately they have much smaller fleets and their Airline's demise is not going to hurt any one, hopefully.
Regarding seat capacity growth vis a vis passenger growth, it is going to be a different story when IC starts bringing in their 40 odd aircraft and Kingfisher, Jet, Deccan and others also start expansions.

Something new has been reported by IBN quoting the Star newspaper in Malaysia about Virgin express/Virgin Blue tying up with Air Asia and Easy jet to create a global LCC network and since they are true LCC's, and since their current networks are so well covered, this sort of co-operation will make International budget travel that much cheaper. How this is going to affect Indian carriers that have International aspirations, but don't have any membership to such a alliance is going to be interesting to watch.

Anonymous said...

Hi Anup , was surfing the net and came across your Blog. Was pleasantly surprised and read with a lot of Interest. Regards
Capt Sanjay Verma

Capt. Anup Murthy said...

Hi Sanjay, nice to hear from you. It's been a while. Thanks for your comment and taking the time out to read my blog! Keep in touch.

Capt. Anup Murthy said...

Dear Anonymous, I looked around for you on the www and found a website that gives news about airlines and aviation in India. Try: http://avindia.blogspot.com/ Some of the article may relate to statistics. I do get online news from time to time that mentions things like market share. My articles are usually my own perceptions and the data (numbers) are gleaned from various news inputs i get online. The Government is not giving licenses ad-hoc anymore and are insisting on strong business plans and evidence of very deeppockets to be able to sustain flight operations. Actually, we may not see the demise of all airline enmasse like it happened earlier because some innovative financing by all parties concerned is helping to delay the inevitable. So, in this mad rush for staying alive at any cost, they'll beat each other, practically to death. Thats my opinion too, as is yours. Good to hear from you, hope you like my previous articles, some not related to aviation, and hope you enjoy my future articles as well. Some of the controversial (some people think so) writings seem to raise the hackles of some readers.

Cynical Consultant said...

Capt. Anup Murthy... Great blog.
Very informative. I developed a new found interest in aviation when i had to take a whole bunch of flights for work related purposes.

Began to think about how much are airlines losing circling, etc...
Boeing Vs. Airbus.

Why is Jet the only one which flies boeing (sahara too maybe?) and everyone else is on the airbus.

I read an article about airbus being more economical.

From personal experience i can say that its certainly quieter :)

Adding ur blog feed to my RSS. Cheers, & pls keep updating often

Capt. Anup Murthy said...

Thanks Cynical Consultant, for your words of encouragement. Boeing Vs Airbus is purely a commercial call. The Worlds most consistent profit making Airline for the last 35 years has been SouthWest Airlines and they operate only the Boeing 737 family. So, efficiency is not an Airbus quality. Having said that, Asia's most profitable LCC, Air Asia based in Malaysia (started by the yound Indian origin upstart Tony Fernandes)is chaning their entire Boeing 737 fleet into an all Airbus fleet. They claim better value. I am fond of Boeing but Airbus does make some very fine Aircraft. It boils down to commercial considerations and who gives the best commercial deal in the end and believe me, they do try very hard to sell their products. Airbus is often accused by Boeing of being subsidized heavily by the European countries that jointly own it. We all know that European Union also subisidizes their farmers at the cost of third world countires especially Africa. The US is also guily of such practises and sometimes they are at each others throats, the case of the kettle calling the pot black!

Anonymous said...

Hi guys,

I just found out about your blog after trying to search an answer to an aviation related question on google.

I would like to know how do you explain a situation like this: the airline seat capaicty is going down in certain airports, but passenger traffic is going up at the same period of time at the same airports?

Could anyone comment on this?

many thanks

Capt. Anup Murthy said...

Hi anonymous, I had difficulty understanding the question. Can you desrcibe more fully, the situation, the airport in question and exactly what you want to know?
Assuming I understand the question, here's my two bit hypothesis. Seat capacity may have been high at that airport earlier and although passenger traffic was seeing a growth, it was probably still not growing at the rate that would enable to let a carrier run full. The other thing is that if seat capacity goes down (presumably due to airlines cutting the number of flights that it operates to the town or by introducing a smaller Aircraft on the route)then Airlines can command a higher fare. Got it? Demand and supply. It also remains to be seen whether the passenger traffic growth was in the premium/full fare paying segment or whether it was due to overall low fares. It is all about yield, not occupancy of seats only. More bums on seats is good, so long as the bums are paying fair fare!

Anonymous said...

Hi Mr. Captain,

Thank you so much for your prompt reply. I am trying to digest what you commented here...Pls. allow me to reframe my question first.

I have been trying to analyse the trend of gateway passenger traffic between North America and Asia. I looked into 14 airports in Canada and US which have non-stop flight to Asia. The data that I gathered showed that from 1998 to 2006, the airline seat capacity to Asia actually went down 8-9%, however, in the meantime, the O/D passenger traffic to Asia had been going up (not too sure about the exact precentage). So I don't understand how could seat capacity goes down, but airport passenger goes up...

Does my question make sense this time?

thanks
JD

Capt. Anup Murthy said...

JD, let me try and give you some info on this:

Passenger growth depends on various factors, it maybe a combination of things such as better point to point connectivity, lower fares, greater disposable incomes of the individual due to better economy and so on.

Airline seat capacity can go up and down, again based on a combination of factors such as using lower capacity due to point-to-point flights, reduction of the number of flights on sectors and in some cases withdrawal of services to some sectors.
Take Air canada that withdrew flights between points in Canada and New Delhi just last week. That reduces the seat availability on the sector but even with a healthy passenger growth in that sector, perhaps there is excess capacity on other Airlines to cater to absorb the passenger growth. The Airlines that continue to serve the same sector will benefit from an increase in their occupancy. You must know that most Airlines almost never fly full except during their respective "high seasons". Hope you get the picture.
Sorry that others are not pitching in and commenting on this because most of my readers don't go back to the older posts and leave comments. Maybe the next question can be posted on my latest blog and even if the question is not related to that blog, it may evoke some response from others (or maybe not!). Thanks for your questions.

Anonymous said...

thank you Mr. Captain. I will post my future questions on the latest page. You don't have to post this. Just for your own reference.

your blog is so great... the discussion is so interesting... write to you more later.

I work for YVR.

take care
JD