With new revenue opportunities, airlines look to turning in healthier balance sheets
Alliances with foreign carriers, a new revenue stream from “unbundling” services, and inducting newer and more efficient aircraft: the aviation industry in India is hoping for a turnaround after a few disastrous years.
Survival was first on the agenda for the major carriers which posted a total debt of over $13 billion. Air India, the government-owned carrier, managed to get a sugar-coated deal from its owner, which enables it to access capital of Rs.30,000 crore over a period of time. The private players looked for suitors.
Soon after the Jet-Etihad deal, in which the West Asian airline picked up a 24 per cent stake, which literally lifted Jet from the red, it is now the turn of low cost carrier IndiGo to be wooed. Early this year, British Airways was in negotiations with it. This May, Qatar Airways confirmed that it was in talks with IndiGo on a code share arrangement. SpiceJet was approached early this year by the Singapore-based low-cost carrier, Tiger Airways. There are also reports of Emirates evincing interest in SpiceJet. Industry insiders believe that both airlines will firm up their alliances and strategies before AirAsia India commences pan-India operations.
Foreign carriers are interested in picking up stakes in Indian airline operators despite the fact that the largest six have a huge debt burden. The reason? Last year, airlines in India flew 67.5 million passengers. The prediction is that in a country of over a billion people, this number will only grow. The only other country that can outclass India in the numbers game is China. But China’s airlines have not shown any serious interest in their stakes being picked up by foreign airlines. And, by and large, airlines in China have turned in a profit.
Focus on balance sheets
Another focus area for airlines in India is balance sheets. Make money through all possible legal ways is the slogan. Early this month, Air India announced a reduced baggage allowance for economy class passengers.
Jet Airways (and Jet Konnect) announced new baggage rules for economy class passengers. IndiGo decided to charge for preferential seating. Before this, the Directorate General of Civil Aviation allowed airlines to charge fees for “unbundled services” such as check-in baggage, preferential seats, meals/snacks or drink (barring drinking water) and the carriage of sporting equipment and musical instruments on their domestic flights. Though this does not look to be a major revenue grosser, statistics from the United States is a pointer: According to the U.S. Bureau of Transportation Statistics, the top 15 airlines collected $3.5 billion in baggage fees in 2012. Reservation change fees fetched them another $2.6 billion. But for the additional revenue generated, the top 10 U.S. airlines together could not have posted a net profit of $201 million in 2012; in 2011, the net loss was $5,00,000.
Airline representatives say charging for baggage and preferred seats is just the beginning. That’s because when it comes to transporting passengers, profits are meagre. Worldwide, despite revenue of $671 billion in 2012, the profit earned was just over one per cent. In no other sector are profit margins more wafer-thin than in aviation. According to the International Air Transport Association (IATA), the trade association of airlines, the profit forecast for 2013 is 1.6 per cent ($10.6 billion). Airlines need a seven to eight per cent profit to cover capital costs.
In 2012, the fuel bill for airlines worldwide (which are a part of IATA), was $209 billion, and, this year, that number is slated to go up. Fuel accounts for 33 per cent of the operating costs of an airline worldwide. In India, the situation is worse. According to a few operators, fuel costs are pegged at 45 per cent of operating costs. And costs of operating in India are increasing, especially with the opening of remodelled/newer airports.
Substantial hikes will not go down well in the price-sensitive Indian market, where airlines have just managed to wean away about five per cent of the travelling population to air travel. Unlike the case of the diesel and petrol price hikes in the road transport sector, where the transporter or other service providers routinely pass on the hike to the consumer, an airline operator is not in a position to do this as the cost-conscious Indian flyer has to be kept in mind. Hence, there is a ceiling beyond which an airline operator cannot go for fear of driving at least a section of consumers back to train travel.
The Kingfisher story
There is also one more factor that might actually check the “make more money” motives of the Indian carriers — AirAsia India, which has already filed an application with the Civil Aviation Ministry to launch operations. The ensuing competition will, possibly, remind travellers of the time when airlines sold tickets below cost price because of intense competition among the top players in the Indian market: Jet, SpiceJet, Indigo, Air India, and Kingfisher.
From 2005 till end-2011, Kingfisher, which had a presence rivalling that of the biggest Indian carriers, fought a disastrous war that threatened to bring down more than just the Bangalore-based carrier. If Kingfisher had deep pockets to remain in the market for a few more years, it could well have pulled down at least one major Indian private player.
The Kingfisher story is still fresh in the minds of the bosses of Indian carriers. This is apparent from the manner in which the Indian carriers have gone about tinkering with their business plans. If the industry turns in healthier balance sheets at the end of this year, it will be because most airlines have incorporated the lessons learnt from the Kingfisher debacle.
For Indian airline operators it is time to act because the window of opportunity will not last long.