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

BANGKOK AND SUVARNABHUMI AIRPORT

It's been hectic couple of weeks and I've had no time to blog. I'm not complaining because it's been fun as well. The Chinese New Year is around the corner and in this neck of the woods, it is a big event, especially this year, supposed to be the lucky year of the Golden Pig. very auspicious indeed. For my Chinese readers, I'd like to wish them Gong Xi Fa Cai!

Couple of weeks back saw me head to Bangkok, landing at the new Suvarnabhumi Airport (pronounced by the Thais as Suvarnapoom). The new Airport looks grand and feels grand but there have been more problems here than is normal for any new greenfield Airport. Now, let me not try and compare Indian Airports with Suvarnabhumi because there's really no comparison. But, comparing it with regional heavyweights such as Singapore's Changi or KL's new terminal makes Suvarnabhumi look bad. Sure teething problems are normal but cracks in the runway, taxiways and other problems have forced some of the Airlines operating there to do a re-think and wanting to move back to the old Airport (Don Muang). Now, anyone who has been to Don Muang can see that it is a dump. I've been to Don Muang enough times to dislike using it again for commercial operations.

I am not sure that the move back and forth is going to benefit anyone. Nok Air, a discount carrier in thailand wants to go back there citing cheaper costs. Air Asia, the leading low cost/low fare Airline in Asia is sticking with the new Airport saying that the savings are negligible (if moving back to Don Muang). Anyway, the Airport and the scandals associated with it have received wide but negative publicity.

As for Bangkok, it is a big city, I spent very little time as I normaly do unless I am on vacation. However, there are a few things to note for an Indian traveller coming in on a passenger Airline. if you are coming into BKK, go to the "Visa on arrival" counter first before going to the Immigrations desks. You'd have to fork out Thai Baht 1,000 for the visa fees and you'd need to fill up a form and stick a photograph of yourself on the form. Keep a 1,000 Baht note ready for this. Arrival areas after immigration is rather cramped with shops, taxi companies and tourst representative companies jostling for space. The Thai people are friendly and hospitable but you'd probably find the opposite type at the "visa on arrival" counter.

There are various transportation options at the Airport to get you to down town or wherever else you may going. Bangkok is traffic filled, bursting at the seams, smoky and many areas of it look like any major Indian city and I don't mean it in a complementary way. English speakers are very less and don't expect people to communicate like we do in the rest of South Asia. I particularly mean taxi drivres, bus conductors (yup they have bus conductors issuing faded badly printed paper tickets that you can't read unless you know the language) and water taxi conductors. They have a Sky Train running up and down Bangkok and while it is a good system, it still looks inadequate. Shopping is good if you know where to go. I'll give more details of sightseeing and shopping after my next trip there, hopefully on vacation. I did take the grand tour of the Palace complex and a ride on a water taxi on the Chao Praya river. There's more to do of course and I will leave that for another blog later some day.

Departure hall is huge, humungous, big...you get the picture but still seems a bit cramped! Don't go to the restaurant level before immigration, the food options are not great and the prices are inflated. Instead, you'd be better off clearing passport control and going to the departure areas where there are better food options. For veggies, like yours truly, it's always a challenge here. Like at some of the Airports in India, they'll bus you to the Aircraft instead of using the aerobridge, if the taxiways have not been repaired. There are plenty of aerobridges at the new Airport but many of them cannot be used because of the tarmac conditions leading to them. All said and done, it's a nice place (some of it) and perhaps some people may have a good time there and better time visiting places other than Bangkok. Not my favourite town, though.

Here's wishing them all the best with the new Airport and hope they can get through this difficult period, get their act together and make Suvarnabhumi an important aviation hub. They need this to work, desperately.

Airline Stock Manipulated or just plain mistakes made?

I read with interest, an online edition of the business standard dated 19th Jan and that article mainly dealt with poaching of engineers by the Airlines in India. Poaching in this case refers to Aircraft Maintenance Engineers who jump from one company to the other, at the drop of a hat, lured away by a competitor for a higher pay (what else has people drooling about these days but moolah?). That’s all going to be stopped, like the scheme they invented for stopping the poaching of pilots, says the article. Not exactly Veerappan style poaching but close.

Anyway, what interested me more about this article is that the Author goes on to mention that the Airline industry is contemplating on increasing fuel surcharge on passenger tickets, to cover the increased cost of fuel. Now this is what I’d like to talk about and have done so in my blog in the past, maybe I stand vindicated. The Airlines are justified in making such a move, if they actually do it.

The Government made some noises about reducing the fuel bill burden on the Airlines by perhaps cutting taxes on the product. This prompted some readers of my blog to question me about whether I was wrong about my assessment, that the rising costs of fuel was going to be a major cause of downfall of the Airlines. I stood my ground saying that a reduction in tax wasn’t going to be quick and in any case wasn’t going to be meaningful.

Then another thing happened. I was in India briefly a couple of weeks back and saw on CNBC something strange happening on the BSE Mumbai Stock Exchange. The price of crude oil fell drastically in the World market. The BSE in Mumbai reacted to that news in frenzy, driving up the Airline stocks. I was just holding my head in my hands. Is the stock market a bit too euphoria driven and less driven by hard facts? Did they think that a drop in world crude prices was going to benefit Airline in India (or anyone else) so quickly?

I began to wonder how mature this market really is and whether everything is based on rumors and speculation based on sentiment rather than cold hard figures. Let me tell you why. Firstly, a fall in global crude prices means nothing for operators in India. The Oil PSU’s and the Ministry then decides whether to do something about it, or not. The Business Standard article goes on to say that jet fuel prices actually went up, prompting the operators to ponder about another increase in fuel surcharges. What does that tell you about the Airline stocks and their manipulations by the brokers at the BSE? Was this a case of jumping the gun or bad valuation as has been done in the Airline stocks since they became public, in the first place? Were more investor lured into a false sense of security and their money invested unwisely? These are the questions to ask.

The industry needs support, there’s no doubt about it. We need all of them to survive and do well, as a consumer that is in our best interest. What they need is level headed decision making. The Airlines have an association that comes together to fight common issues such as “poaching” but perhaps they are not asking each other to stop killing each other in pricing, revenues and other areas. Not much use having such an association that can be a mutual “backscratchers club” only on certain issues and a mutual “backstabbers club” when it comes to survival.

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.