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Is the Tata – Jet Deal Bad News for Indigo, Air India ?

It was Jet Airways founder Naresh Goyal who had tried to prevent the Tatas to venture into the airline business. It is well known in aviation circles that for the past 20 years or so, Jet Airways did not want any airline license for Tatas. Jet Airways had even tried to resist any relaxation in the erstwhile 5/20 norms to prevent Tata’s entry. All those events are history now. (See:  5/20 Lobby )

airline business.

Today, the story is different.

Tables seem to have turned. Jet has pruned its network. A number of its planes are grounded and out of airline business. Deeply immersed in debt and losses, Jet is trying to sell its planes, it is cutting its work force and has been unable to pay staff salaries on time. Though Jet Airways has ordered a number of new Boeings, it is not in a position to take their deliveries. (See: Jet Airways)

Initially, Jet Airways was among the airlines who had protested & delayed the entry of foreign airlines. After some time it claimed all entitlements, sold partly its stake to foreign airlines (Etihad).

Today, Jet is strapped of cash. It has been in talks with both strategic and financial investors to sell its assets and a major chunk of its business. A situation has reached today where both Mr and Mrs Naresh Goyal are agreeing to relinquish their own shares on the buyer’s terms. Strange.

Enter Tatas.

For Tatas, Jet Airways appeared to be a better option than buying Air India for the time being. The profits of Tata’s airline business have been severely affected by its inability to have flights across the country. Tatas want to give its aviation plans a much needed boost. They are keen on landing rights, routes, related infrastructure amenities, and the new Boeings of Jet. The Tata group is also keen on the exit of existing promoters and the Goyal family to have a complete control over Jet Airways. (See: Tata-Jet Dealairline business

Tata group chairman N Chandrasekaran has been doing a great job steering the well respected Tata group. He is keen that a deal is quickly worked out that will strengthen the group’s position in the aviation business and give it a much needed heft. The Jet deal is a meticulously calculated risk at a time when Tata group as a whole is doing exceeding well. Only Tatas can survive where Jet with more than two decades of experience failed. Anybody who buys jet now will immediately need to fund in billions to recover the airline plus more to make it functional.

The First Step

In the first formal step towards a possible acquisition of Jet Airways, Tata Sons will take up the proposal at its board meeting and focus on achieving the scale in Tatas’ aviation business through Jet purchase.

According to analysts and aviation followers, the Tata-Jet deal is an excellent news as a monopoly presently being enjoyed by Indigo is not good for the consumers. A strong and healthy Jet is therefore needed to counter this.

The deal between the Tata group and Jet Airways is slowly moving forward towards its conclusion.

Naresh Goyal is finally forced to leave a sinking ship and will be very happy to hand over the proverbial “tail of the tiger” to Tatas and quit. Subroto Roy of Sahara and Capt Gopinath of Air Deccan had already done so earlier. The Wheel of fortune keeps rotating. History repeats itself. After Jet, may be Air India, which was with the Tatas 65 years ago, could be the next for Tatas. That may be a different story.




World’s largest airport ‘under one roof’ Coming Up in Istanbul

The world’s largest airport terminal “under one roof” with a capacity to serve 90 million passengers will be officially opened on October 29 in Istanbul, Turkey.

Dubbed as phase-1A of the project – Istanbul New Airport – will have a capacity to handle 90 million passenger per year, making it the largest such facility in the world.

Besides the inauguration, the new infrastructure facility after Atatürk Airport and Sabiha Gökçen Airport both in Istanbul will be named on October 29 which marks the Republic Day of Turkey.




Air India to connect Mumbai with JFK airport starting Dec 7

National carrier Air India will connect the city with a direct daily flight to JFK airport in New York, starting December,an airline official said Thursday.

The airline currently flies a daily service to Newark’s Liberty Airport from the city.

“We will launch our air services to JFK airport from Mumbai from December 7, where we already operate from New Delhi. The flight will be operated three times per week to begin,” the official told PTI.

The airline earlier used to fly to JFK through New Delhi, which was discontinued later.

“Now we will be for the first time providing direct connectivity to New York from Mumbai with this new flight,” the official said.

This is the second international flight that Air India will be launching from Mumbai this year. It resumed services to Frankfurt from the city on October 16.




Will 1000 More Airplanes Meet India’s Aviation Demand?

The International Aviation Summit—India.

New Delhi, 4th Sept 2018.

Attendees: Civil Aviation Minister Suresh Prabhu, his deputy Jayant Sinha and several other Aviation Ministry officials, top CEOs of domestic and International airlines, IATA 

Jayant Sinha, the Union minister of state for civil aviation
Jayant Sinha, the Union minister of state for civil aviation

Main Issues: a High-cost scenario for Indian airlines due to the rise in fuel price, weak rupee and the airlines’ inability to raise fares to cover high costs.

Background.

India is widely viewed as the fastest-growing domestic aviation market in the world. Thanks to a huge support base of its Urban Middle class. A number of Indian airlines have already placed orders for a number of new Airbus SE and Boeing Co jets.  They are presently bracing for 1000 more airplanes scheduled for delivery over the next eight years.

“Even that (1000 more airplanes) may not satiate the thirst for travel,” remarked Alexandre de Juniac, Director General and CEO of the International Air Transport Association (IATA).  

The opportunity. The Demand.

1000 More Airplanes
There are 1000s of air travellers in India

Air travelers in India:

2010 – 79 million

2017 – 158 million

2037 – 520 million (as speculated by IATA)

IATA, a global grouping of more than 280 airlines, has stated that there would be almost 520 million annual air passengers in the country by the year 2037. Thus, India is likely to leave Germany, Japan, Spain, and the UK behind in less than a decade to become the world’s third biggest air passenger market.

With such persistent growth in demand, India is among the world’s cheapest domestic airline markets. A $50 (Rs 2600) one-way ticket for a two-hour flight from Mumbai to Delhi is very common. Even rail travellers are now shifting to air travel.

The Surprise.

Despite such a rosy scenario of seeing more than doubling of domestic passenger numbers over the last four years, the airlines in India could not show anything outstanding. 

Despite flying with their seats 90% full, they could not maintain financially a growth trajectory in tune with that of the robust demand and have struggled to stay profitable.

Despite placing orders for 1000 more Boeing and Airbus airplanes, the airlines in India recently produced a dismal report card for their last 6 months’ performances.

June Quarter Results for the three listed airline companies in India.

Jet Airways – A loss of Rs 13,230 million on a total income of Rs 60,669 million. In addition, the March quarter had also seen a loss of Rs 10,360 million. Its share crashed to 158-week low. The company is presently being probed by various agencies for various irregularities and allegations like siphoning off funds.

Spicejet – A loss of Rs 380 million against a net profit of Rs 1,750 million in the same period a year ago.

1000 more airplanesIndiGo – Net profit, lowest in three years, fell 97 percent to Rs 280 million from Rs 8,110 million a year earlier. IndiGo was somewhat saved due to Pratt & Whitney’s compensations for engine snags in Airbus A320neo planes, and income from sale and leaseback of aircraft.

India’s National carrier Air India, presently in a huge debt of over Rs 500 billion, had reported a loss of Rs 57.6 billion in March last year.

Airlines are quick to blame the double effect of rupee depreciation and higher fuel costs for their performances.

Aviation turbine fuel (ATF) prices

For an airline operating in India, Aviation turbine fuel (ATF) forms almost one-third of the cost of operations whereas, in the case of other airlines, it is one-fourth. Thus, the rise in fuel prices hurts Indian airlines much more than their foreign counterparts.

As per the analysis carried out by the Sydney-based aviation consulting and research body Centre for Asia Pacific Aviation, CAPA, the Indian airline sector is expected to report $1.65 billion-1.90 billion in losses in 2018-19, up from its own previous estimate of $430 million-$460 million. The chief reasons being – A higher price of crude at $75-$80 per barrel and a depreciated rupee at 70-72 against the US dollar.

CAPA has commented that all the airlines in India, except IndiGo, do not have enough funds to withstand such downturns. Most of them are incompetent to withstand such reversals. They have fully lost the command to control airfare due to this sudden surge in capacity.

IATA Director General and CEO Alexandre de Juniac observed:

“To start, there is no real competition for fuel suppliers at (Indian) airports, so there is a little commercial incentive to keep fuel prices competitive. Adding insult to injury, Goods and Services Tax (GST) on overseas air tickets is then applied to the throughput fees, the infrastructure fee, and the into-plane service fee.”

Levying GST on overseas air tickets violates international norms and also weakens the competitiveness between domestic and International air-carriers.

He also raised several other issues at the summit like high jet fuel prices, gaps in infrastructure and privatization of airports in the context of India’s civil aviation.

The SpiceJet Chairman and Managing Director (CMD) Ajay Singh pleaded for a level playing field with international carriers who enjoy tax benefits.

Vinay Dube, CEO, Jet Airways felt that the current crisis faced by the airlines was a temporary phase and that his airline, along with others, would revive from the financial reverses.

Despite getting together at the said event, none of the CEOs of the airlines appeared keen to resolve the artificial air-fare war issue. None have them called for a ceasefire. They could have shown the maturity to reach a mutual understanding for determining the airfares. They could have agreed to cease operations because flying has become a costlier proposition. It is better not to fly, stay grounded and do something else when the chips are down.

Is it a clash of egos? Or were they waiting for some assistance from the government to arrive? Even then, can aviation business be run on sops and concessions alone? If that is so, then clearly there is nothing organic in the business that would yield meaningful profits which could justify the billions of investment that goes into it.

Meanwhile, the government has started to consider a relief package for airlines. Jayant Sinha, the Union minister of state for civil aviation said, “We are in talks with the finance ministry about what kind of support we can provide (to airlines) in view of the fact that there has been some deterioration on the macro side relating to crude prices and foreign exchange.”

The civil aviation secretary R.N. Choubey did not give the details of the relief package for the airlines but said that it would be a relief on the financial side with an intention to bring the costs down. 

1000 more airplanes
Civil aviation secretary R.N. Choubey

While the private airlines wait for their turn, the State-owned Air India seems to be the first chief beneficiary. Air India, already struggling with unsustainable debt and other legacy issues, is to get a breather of Rs 8,600 million as equity infusion from the government. It will then raise Rs 21,000 million in government-guaranteed borrowing. The loan will be extended by State Bank of India.

Thus, from a business perspective, it appears easier to place orders for 1000 more airplanes, claim hefty discounts, re-sell at a premium and/or leaseback. Because the buyer then has more leverage to dictate terms. Even the manufacturers – Boeing and Airbus-  have no option but to follow.

To operate the airplane only as a transport machine, howsoever efficient it has been manufactured, does not make any prudent business sense to the owner. 

It takes none other than Alexandre de Juniac, Director General and CEO, IATA, civil aviation’s supreme body,  to describe the story of India’s Civil Aviation as: 

“While it is easy to find Indian passengers who want to fly, it’s very difficult for the airlines to make money in this market.”




Is All Well with India’s Aviation Sector?

India’s aviation sector is presently facing serious issues but has so far failed to find any answers. Over the last one month, genuine alarm bells have started ringing. A number of India’s airlines are struggling to keep flying.

1. Jet Airways: India’s biggest full-service airline. It planned to lay off employees, said only 60 days left, suggested pay cuts but couldn’t do so. On August 9, it deferred the announcement of its financial results which caused its share price to crash to a three-year low. The aviation regulator, the Directorate General of Civil Aviation (DGCA) had to step in for the audit. Its Chairman, Narendra Goyal, the London-based NRI, cut a sorry figure. He had to tell his shareholders that he’s embarrassed and guilty of their losses. 
2. IndiGo: India’s biggest airline by market share. Its net profit plunged 97% year-on-year to Rs 2780 million in the April-June quarter.
3. SpiceJet: On August 14, the LCC posted a net loss of Rs 381 million year-on-year for the June quarter.
4. Air India: 23 of its airplanes grounded. Not able to get spares. Unable to pay salaries to its staff on time. The loss-making debt-ridden carrier has been facing cash paucity ever since the government decided not to fund the airline any further after its decision to sell it last year. It has delayed salaries of its employees six times in the last seven months. It paid July salaries to its employees on August 14. Air India pilots have warned that they will stop operations if their flying allowance dues are not paid immediately.
Jet Airways CEO Vinay Dube had said earlier, “Financial performance was weaker due to the continuing increase in the price of Brent fuel without a corresponding increase in airfares, as well as market-to-market adjustments due to a weaker rupee.” 
Aviation experts, however, differ.
They assert that the airlines can not keep blaming fuel prices and rupee volatility for all their problems. These are among the well-known risk factors in the aviation business.  It is clear that the airlines did not show better wisdom to handle such situations.
The root cause for most of these troubles is the airlines’ inability to understand aviation business.
Passengers or profits. Indian airline companies are yet to decide the way that will take them steadily forward. Instead of focusing on a viable business strategy that will prevent such situations, they resort to market gimmicks in an attempt to increase their market shares.
Things have changed a lot since the collapse of Kingfisher in 2012. The demand has surged by more than 17% year-on-year in June 2018, but the aviation companies could not capitalize, they were unable to fulfill the demand and consequently lagged behind.
The Indian air carriers continue to offer promotional discounts despite high inflation and unfavorable other global factors. For instance, on August 11, Jet announced an up to 30% discount on its international routes. Air India and GoAir followed Jet. Such competitive fares do not make a prudent business sense for such branded players. 
Recently, the rupee touched the 70-mark against the US dollar. Other sectors like IT are able to deal with such circumstances as they have certain hedging practices in place. The aviation sector, however, has not been able to devise a credible currency policy to date.
This inability to value sustainability has caused the aviation companies to bring their houses in disarray.
The Civil Aviation Minister Jayant Sinha has said that the government will soon announce a comprehensive package for the Air India and a supportive policy for the whole of aviation sector by giving it a viable tax structure.
Every airline will like to create a growth-oriented, sustainable future and a revitalized guest experience. Besides, it has to stay practical and in sync with market dynamics. 



Jet, IndiGo, SpiceJet Penalised Rs 540 million for Unfair Business Practices

March 8, 2018.

The Competition Commission of India (CCI) has penalised Jet, IndiGo, SpiceJet Rs 540 mn for unfair business practices.
 
The penalty levied are as :
on Jet Airways – Rs 398.1 million, 
on IndiGo – Rs 94.5 million and 
on SpiceJet – Rs 51 million
 
The CCI has imposed the penalty for fixing fuel surcharge.
 
The CCI acted on a cartelisation complaint by Express Industry Council of India against Jet, IndiGo, SpiceJet, Air India and GoAir. 
 
“Considering the financial position of the airlines and noting that fuel surcharge constitutes 20-30 per cent of cargo revenue, penalty was imposed by the CCI at 3 per cent of their average relevant turnover of the last three financial years,” the CCI said. 
 
During hearings with the CCI, the airlines said there was only one instance where four players changed the fuel surcharge at the same time. They also justified the movement in fuel surcharge by linking it with increase in aviation turbine fuel prices. 
Last time these airlines were penalised by the CCI, the airlines appealed at the Competition Appellate Tribunal (Compat). The Compat had asked the CCI to re-investigate the case as it felt that the commission had failed to cite reasons for disagreement with DG report and did not give the airlines an effective opportunity to the airline companies to show that they had not formed any cartel for jacking up fuel surcharge from time to time.

History

In November 2015, the CCI had imposed a penalty of Rs.151.69 crore on Jet Airways, Rs 63.74 crore on IndiGo and Rs 42.48 crore on SpiceJet for cartelization and reported in these columns. (Read More: Unfair Business)
The fine corresponded to 1% of the annual revenue of the companies. This time, the penalty has been brought down as the commission has considered only the relevant turnover.