Wednesday, April 04, 2007

FIRST BLOOD DRAWN?

I have been away in Macao and almost missed some stories from back home in India. When I got to Singapore, the first news from India that caught my eye was about Indus Airways stopping flights and shutting down. It brought back memories from the 1990's when start-up airlines in India started folding, one after another.

Funnily enough, I had written in December last year that some of the airlines in India are run on ego and not on sound business plan and I had predicted their closure. This included Indus, as evidenced from one of my replies to a comment from a reader. My post got some bouquets and brickbats, as it usually does, with some going on to refute my prediction. I had mentioned that the reasons for my observations were based on pure math and also from knowing that the wrong aircraft for the wrong routes and wrong pricing can never add up to profits.

The writing is on the wall, I had said, sounding more like a doomsday prophet than an aviation professional, and some had questioned my observation about corporate investment in the airline sector.

I had said in my blog then "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. 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" and all that hogwash these guys come up with. And they get paid a mint, mind you, to say all this rubbish".

I had written about specifically the TATA group having picked up a stake in Spice Jet and that I thought was a mistake. This led to a question from a reader asking why I did not support corporate investment in Aviation business. I had felt that while corporate investment in the Airline sector was a good thing to have, it did not make much sense for a company to invest blindly. TATAs do know a thing or two about Aviation but on the advice of some of their financial consultants it seems, they had found it prudent to pick up some equity in Spice Jet.

So, coming to Spice Jet's current cup of woes, the latest news projects Spice Jet's loss this quarter is up by 395%. Staggering? It would be for any one else but as I mentioned, some one keeps injecting some fresh life in the scene and things keep floating for a longer time.

I have heard that the other Airlines are all keeping a positive attitude - that's good because that's all they can do; keep positive. They will paint red all over the skies with their results this year, notwithstanding bravado statements from the "glitterati" of aviation. The sector is set to lose something like Rs.1,800 crores and that’s no small change! Like I said before, it's been good for the flying public, cheap fares and all. My advice, stop complaining and keep flying. When more airlines fold up, the fares are heading north for sure!

So, we have the first blood drawn in this aviation scenario. Luckily it has not been a bloodbath in terms of an all out price war and the intention of one Airline to see another go down the tubes and fail. My blog on Macao had to wait for this piece, just had to get this one off my chest. This blog appeared first in desicritics.org

17 comments:

Athul said...

Hello Sir
just out or curiosity , how do they ( companies ) decide which planes to b used for which routes ..

quite intresting to know that there r investores now to invest on these companies ..

Capt. Anup Murthy said...

Hi Athul, when a company does their business plan, one of the main things they need study and formulate is their "core" market and the routes that they think are feasible for their operations. Depending on projected load factors, sector lengths, ease of operations, maintenance, training, dspatch reliability and a host of other factors, the company will need to identify the right type of Aircraft for their operations. It is common knowledge that turboprops can out perform jets on short routes and if the preference for jet Aircraft is the over rifding factor in decision making when it comes to Aircraft type, the company must then make revenues consistent with operating costs with using such Aircraft. That, I am afraid is one of the reasons for Indus to fall behind in making ends meet and allegedly unable to make even lease payments on their Aircraft.

Today (9th April) news is that US investment companies are in talks with Air Deccan for taking up some minority stake in the company (reportedly 5%-7%), again, whoever is doing the math for the investment company hopefully knows something about the business that no one else seems to know!

Vikram V. said...

Very interesting space this... Would wanna understand more about Biz Plans in aviation, any suggestions/ sites that you recommend? Ideally would like some in case you have it... i know its confidential, but would be gr8 to read, understand and learn about it. My email is vikramv65@hotmail.com. Thx.

Capt. Anup Murthy said...

Hi Vikram, thanks for your comment. As such I have not run into any websites that have details of business plans for aviation. These have to be company and country specific and cannot be generic ones because a true business plan needs to be based on market realities of the country of operations and other factors.

SKY said...

Capt.Murthy,

I am a Mysore boy myself, currently living in the Bay Area in the US. While I work in the financial services, I have been taking flying lessons as a hobby. I am pretty close to my Private Pilots Certificate here in the US.

I plan on coming back to India in a few years. What is the General Aviation scene like in India? When I lived there I had no means to undergo flight training and therefore didn't bother enquiring. I scratched my itch with aeromodeling. But I don't think I can live without flying now (I am sure you know the feeling). I tried to look for clubs and such but there don't seem to be any in Mysore or Bangalore. There are flight schools but that is not what I need. What are the options?

Any good sources that you can recommend?

Capt. Anup Murthy said...

Hi Sky, I am afraid there's no general aviation anywhere in India as of now. Just a bunch of flight schools scattered around and the politics associated with them will put you off for sure. Firstly, you'd have to re-write a bunch of exams for getting your Indian license (they call it license in India)to fly as a private pilot. After considerable delay, you'll get the license and then you'd have to keep renewing them. India is nothing like North America in GA terms.
I'd give an arm and a leg to be able to bring in a Cessna 172 and just putz around the sky for fun when i get back to India eventually. I hope conditions would have improved in india and they'd let me do something like that. Sorry mate, I don't have positive news in this regard at the moment. Keep in touch and thanks for reading my blog.

Nikhil said...

Interesting! All the more so to me, my father met Capt. Gopinath and Capt. Poovaiah (Of Air Deccan/Deccan Aviation), and they supposedly advised me to head back to India since Aviation in India is "on a roll, and here to stay." I am sure Air Deccan is not in the vicinity of the graveyard (yet), but its funny how they said that at a time when aviation is actually in a tailspin, business-wise. For passengers, honeymoon season's not yet over! Heh.

Capt. Anup Murthy said...

True Nikhil, aviation is in a tailspin but many companies, including Air Deccan have managed to stay afloat using innovative funding mechanisms. That does not mean they'll be left standing in the end, although that would be nice if every one survives. Every one is now trying to stay afloat with whatever means they can employ.

But, Vasant Pooviah and Gopi are right about aviation being on a roll. India needs strong growth in the aviation sector because there is a genuine need for fast transportation in the long term. So, even if some chaps end up closing or even delaying the inevitable, there'a always some one else who will do well at some one else's cost. If a good opportunity comes along in India, do take it, an India experience on your resume' is looked at favorably these days I have heard.

Gagan said...

Hello Capt. Murthy, There is one flying school in Mysore, that gives PPL licence training http://www.bangaloreaerosports.com. I think they wud be providing CPL training too. - Gagan

Gagan said...

Hello Capt Murthy, http://www.bangaloreaerosports.com/ gives PPL training in Mysore, I think they wud be giving CPL training too.

Gagan said...

Hello Capt Murthy, http://www.bangaloreaerosports.com/ gives PPL training in Mysore, I think they wud be giving CPL training too.

Anonymous said...

Hello Capt Murthy, http://www.bangaloreaerosports.com/ gives PPL training in Mysore, I think they wud be giving CPL training too. - Gagan (gaganworks@hotmail.com)

Capt. Anup Murthy said...

Thanks for all four of your comments Gagan. Thanks for the information as well, good to know.

Vinod Chand said...

If an airline is not operating profitably, what is it doing wrong? What are the cost factors that are pulling the low cost carriers down and putting them in the red. I believe that the management and sales cost far outweigh the operational cost.
Therefore, if the management was to be simplified and sales made direct to customer rather than through a sales channel, would these airlines not be able to survive?

Your response will be appreciated

Capt. Anup Murthy said...

Thanks for your question Vinod. However, it is a complex question. Each Airline has it's own unique reason for failing or succeeding. You ask why LCC's in India are painting red. I'd say, not the LCC's alone, even full fare Airlines are in the red including KingFisher.

Management and Sales costs are high no doubt but operational costs are very high too. Fuel bills take up a substantial amount of the pie. I don't believe that by reducing management or cutting sales costs it will lead to an Airline becoming profitable although sales costs can contribute to great savings. One has to do a case by case study of each Airline. There are several factors that are quite general in nature, that leads me to believe that an Airline will do well or go belly up. In my opinion, the revenue yield of most Airlines in India falls short of the costs and that never makes any business sense anywhere. But, in order to compete and stay alive, Airlines continue to sell tickets at prices lesser than cost. That's commiting Hara Kiri!

Vinod Chand said...

Hi Anup,

Thanks for your clarifications on the operational viability of airlines operating in India.

If you say that almost all of them are losing money, then what revenue model and business model are they working on?

Are they doing some activity that is hidden and / or illegal to survive?

Also, I was told by a person who worked in erstwhile Sahara Airlines that more than 50% of passengers are paying cash and traveling on assumed names to avoid income tax. Therefore is it possible that the airlines are actually being used for money laundering and generating black money by creating false losses while siphoning off hard cash?

Regards

Vinod Chand

Mumbai Travel Guide said...

Sir, thanks for the comprehensive information on aviation business. Would love to read more posts on the same. Pls also recommend your favorite books.

Thanks
Smit