New Delhi. It has been a tumultuous year for the Indian civil aviation industry. All the major players have faced a series of crises and it seems as if the only ones still flying high in the sky are the budget airlines. It was Indigo, Spice Jet, Go Air and Paramount Airways who soared ahead of the rest as the Indian traveller made it clear that prices are more important than comfort.
The full fare airlines have been struggling to keep their bottomlines under control and the only way forward seems to have been to launch their own no-frills carriers. Jet Connect, Jet Lite and Kingfisher Red are thus attracting more business than their full fare brethren. As for the largest player, Air India, 2009 saw it reeling under enormous losses pegged at around Rs 7000 crore with the government scrambling to find a way to bail out the national air carrier.
A major highlight of the year was a spate of strikes or near-strikes that kept the industry and passengers on tenterhooks. August saw an unprecedented situation during which private airlines actually planned a one day suspension of flights to protest against government apathy to their financial woes. Fortunately that was warded off as government warned of strict action against the airlines, leading to a reversal of the decision by the private airline. This was followed by the real thing in September when air travellers had a tough time with first a five day strike by Jet Airways pilots followed by another five day strike by Air India pilots at the end of the month.
Even in November there was the threat of a strike by Air India pilots agitating over the loss of performance linked incentives but it was averted after several rounds of talks with the government.
The year began with 75 airplanes operated by the budget airlines and 120 by the full fare carriers. The balance is expected to tilt more towards the budget airlines by the end of the year which may soon have as many as 160 aircraft. Air India is also expected to enter the budget category shortly by launching Air India Express currently operating only abroad, on domestic routes. The realisation by the big players like Air India, Jet and Kingfisher that they would have to shift a large proportion of their planes to the budget category came early in the year as high world crude oil prices meant that aviation turbine fuel had become very expensive. With crude prices at around 70 dollars per barrel, the cost of ATF rose sharply and the Indian airline industry was forced to raise fares to meet costs. India being a highly price sensitive market, air travellers increasingly relied either on no frills budget airlines for their transport or reverted back to the railways.
The net result was that carriers like the big three suffered big hits on their bottomlines. According to the International Air Transport Association, Indian private airlines could end up with losses at 2.5 billion dollars during the year, accounting for one fourth of the total nine billion dollar losses of the global industry.
Proposals for a government bailout for the national airline, Air India began to be discussed by the middle of 2009. Even before these proposals could be thrashed out by the government, the other major carriers like Kingfisher and Jet Airways felt it was unfair that only the public sector carrier was being given financial support. They therefore spearheaded the move in August to suspend flights by a day. The decision sparked protests from the travelling public with the Directorate General of Civil Aviation as well as Civil Aviation Minister Praful Patel warning that such irresponsible behavious would be dealt out with in an appropriate fashion.
The budget airlines like Indigo, Go Air and Spice Jet quickly opted out of the flight suspension plan, ultimately followed by Kingfisher and Jet Airways.
Though the protest was meant to focus attention on the financial crises facing the private sector aviation industry, it only ended up making the big players look childish and petulant. Besides, the Civil Aviation Ministry pointed out that Air India would only be given an infusion of equity and it would have to carry out a drastic restructuring programme to get back on track.
The national carrier had accumulated unprecedent losses of Rs. 7200 crore and is saddled with debt of Rs. 15,241 crore taken to pay for 49 of the 111 planes ordered from Airbus and Boeing companies.
Air India’s Managing Director, Arvind Jadhav, who took charge of the troubled airline in May 2009 was forced to launch the major restructuring to try and turn the ailing company round. He said the first six months of the restructuring will focus on filling up aircraft that are flying at half occupancy by making sure on time performance improves. Subsequently over the next nine months, it cargo, engineering services, ground handling and airline operation will be carved out into separate divisions, making them individual revenue and profit centres.
The company will also spin off non-core units after 18 months through an additional public offer.
Air India and Indian Airlines which were merged in 2007 will also have a single code by March 2010. This will enable passengers to book tickets through a single website. They also plans to relocate 31000 employees into four new subsidiary companies.
Apart from its permanent employees, air India has 20,000 contract staff and labour costs amount to as much as 18 per cent of its total operating expenses, the highest ratio in the world, according to Aviation Minister Praful Patel. No wonder then that the Air India has plans to cut the controversial performance linked incentives given to its staff by 50 per cent to reduce costs by Rs 700 crore.
These plans have run into roadblocks, however, with protests from pilots and senior management alike. Reports have also come in about restoration of free flight perks for top management.
There is no choice though for the national carrier but to enforce cuts, from top to bottom.
While Air India is trying to take radical steps towards cutting debt and become profitable, Vijay Mallya’s Kingfisher and Naresh Goyal’s Jet Airways have also been trying during the year to reduce their growing losses. One of the steps taken by these two companies is to have a code sharing alliance. But it has not actually been implemented as yet though the announcement was made a year ago.
Both companies are ramping up the budget component of their airlines. Air Deccan acquired by Kingfisher has now been dubbed as Kingfisher Red. As a result, as much as 75 per cent Kingfisher’s passengers are now travelling by its budget airlines. Similarly, Sahara Airlines bought by Jet has renamed as Jet Lite. In addition, Jet has launched Jet Konnect, another no frills subsidiary to enlarge its footprint in the budget category.
But Jet ran into serious trouble in September when its pilots went on a wildcat strike over the sacking of two of their colleagues. This was the second time in about a year that Jet faced serious crisis in dealing with its employees. In 2008 there was a furore over the decision to sack hundreds of its cabin crew. This year, it was the strike by the pilots which created severe inconvenience for thousands of travellers.
Fortunately the situation was resolved within five days, but the reputation of the carrier has been dented by this incident.
The real winners during the year have been the little minnows about which many prophets of doom said would be the losers in the next industry shake out. Actually they turned out to be on top in terms of revenue as well as passenger traffic.
Indigo, SpiceJet and Paramount Airways have made profits during the year as compared to the growing losses suffered by Air India, Jet and Kingfisher airlines. However, analysts feel Indigo has an edge over other low fare carriers as its management has a better business focus. They say it has marginally lower costs structure, relatively debt free balance sheet and has managed to secure orders for planes at low prices. Other budget airlines, however, like Spice Jet and Paramount Airways are also making profits and are in a much better position in the market than the larger players. They have even entered the international arena with Spice Jet having launched short haul flights to Nepal from both Delhi and Bangalore. It has already enthused travellers to Nepal who are expecting air fares to come down on these sectors as a result of the budget airlines’ foray.
To sum it up, 2009 has been an exciting year for the Indian aviation industry. With so many players in the fray for the last few years, there have been ominous warnings about those who will lose out in a shake out. It was earlier felt that ultimately there will be only two or three major carriers in the aviation sector and these were largely expected to be the big three – Air India, Jet and Kingfisher.
In sharp contrast to such expectations, the small cheap airlines have really stolen the show. It is clear that Indian air travellers are price savvy and will always opt for the bargain fares being offered by the no-frills airlines rather than the expensive seats in the full fare airlines.
© India Strategic