Aviation Industry in 2006
2006 started on a promising note. At last things had started to look up, both passenger and cargo traffic was registering a healthy growth, new airlines launched during the previous year had succeeded in demonstrating their ability to sustain competition, several new routes had been started and most importantly, financially the industry seemed to be doing well too. Perception about the industry was so positive that some of the airlines were planning to come out with initial public offers; possibilities of mergers and acquisitions were also in the air.
Some of the promises continued to hold good, traffic continued to grow at a first clip with passenger showing a remarkable growth of almost 40%, airport reforms and its development was receiving priority attention. Amidst these positive developments a parallel development was also taking place that at first went largely unnoticed. Competition among airlines to gain market share kept getting stiffer and stiffer, the chosen tool for accessing market share was fare reduction. Before long the airlines were engaged in a fierce price war with fares being revised downwards ever so often. In fact, the fare war had long gone past the attention getting offers like Re 1/- fare, in some cases even the base fare was being reduced. At first, the fare war was seen as a welcome development since it had resulted in an increase in the number of flying passengers; in the excitement over ‘growth’ the effect that the price war was having on the finances of the airlines remained overlooked.
Things started to go wrong around the middle of the year. The imminent merger of two full service private airlines fizzled out, the IPO debut of the LCA leader unfortunately coincided with the worst slump of the year in the stock market and as a result the IPO almost came out a cropper (prompting several airlines to postpone their plans to bring in IPO) and the first quarter financial results of the listed airlines showed that they all had run into losses. Indication that some things were wrong was there but the reaction of the industry was on the predictable lines; it chose to go into denial mode and thought that it could brazen out the losses, after all the growth in passenger was still healthy and therefore if they could increase their market share then losses can be turned around. Consequently the fare war continued and the airlines bled with the result that the second quarter financial results were equally disappointing. The failure of the merger bid and poor financial performance of the industry seriously affected the confidence of the investor and the lenders too started having their own doubts as a consequence the airlines started finding it difficult to finance their needs from the local market. Thus at the beginning of the busy season of 2006 the industry was in the doldrums, analysts had actually started calculating and predicting staggering losses for the industry the situation was quite reminiscent of the 1990’s and speculations were being made as to which airline would fold up first.
Having suffered the consequences of ignoring the first wake up call the industry fortunately took the second wake up call more seriously. After all it did not need the intelligence of a Nobel laureate or a rocket scientist to understand that the present ills of the industry was primarily due to impractical attempts by the airlines to run the service at an unsustainable price. The fare war has since stopped, not only that, fares have been increased across the board by levying fuel surcharge and congestion surcharge. Though there can be debate about fairness of one or both surcharges but in the context of the poor financial health of the industry the revision of the fares has been a welcome development.
Cessation of fare war, more realistic pricing and cost control measures are apparently having a positive impact. Unlike the first half of 2006 there are fewer negative news now, big investors like the Tata Group, Goldman Sachs and BNP Paribus have shown an interest for investment this has helped in lifting the sentiment. With investors taking a relook into the sector it should help the fund raising plans of the airlines as almost every airline is trying to raise money to fund their expansions.
If early reports appearing in the media are any indication then the industry will end the year with better financial performance than that in the first half. Air Deccan is expected to end the year close to breaking even. It is being said that when the Air Deccan board meets on January 25 to consider quarterly results the chances are that the airline could substantially pare down its losses and perhaps even turn in a modest profit during October-December quarter. In December the airline showed improvement in some of its key performance parameters. Average yield per passenger was Rs. 3200, up from Rs. 2780 in the July-September quarter; break-even point is Rs. 3100 per seat. Air Deccan claims that it has brought down the cost per seat kilometre for the Airbus fleet to Rs. 2.70, which is among the lowest in the industry. The airlines revenue were up to Rs. 171 crore in December 2006, compared to Rs. 75 crore in December 2005.
On the back of new international routes and revised airfares Jet Airways too expects to end the September-December quarter in profit. Similarly Spicejet expects to achieve financial break even this fiscal year. It expects to post a turnover of Rs. 1100 crore in 2006-07 against Rs. 428 crore last year.
Prospects for 2007
Prospects for 2007 will depend to a large extent on the way airlines view airline business. Airlines in India think that they can control pricing if they have a large market share and to meet this objective their business plan is built on acquiring economies of scale through more planes, more seats and more routes. In theory it looks like a sound strategy but in practice it does not work out that way. When all the airlines at the same time attempt to expand seat capacity and increase route density it inevitably leads to over capacity and over crowding; yield starts going down and the rest of the consequences follow. Airlines in the USA tried similar strategy, which resulted in the US aviation industry suffering US$ 35 billion in losses between 2001 and 2005. Business philosophy of Indian airlines can perhaps be summed up thus: "I will be the largest Airline one day and will build up a nice brand and be able to control everything". To make 2007 a more meaningful year the airline companies will have to get out of this mindset. The reason is quite simple; the market size at present is not big enough to provide the critical mass that could support an industry that has one dominant player, one pretender and a handful of challengers. Each company must look into its own resources, identify what is going to make money for them, cut cost to make itself more efficient and competitive rather than to plan to become a monopolist the coming tomorrow.
