Turbulent times

Analysts believe that given the sharp 47 per cent spike in ATF prices in Q1 FY09, there is little choice for carriers than raise prices. While raising prices when customer demand is dipping might be risky, what are the areas they can look at? Says Kapil Arora, partner, Risk Advisory Services, Ernst & Young, India, "On the operations front, companies can bring down the costs of ticketing, optimise the routes they fly and improve turnaround times for maintenance. On the revenues side, they could increase the value added services chunk by bundling holiday packages, selling food separately or charging for baggage clearance." He believes that companies must invest heavily on technology and maintenance, repair and overhaul (MRO) services to run a more efficient, leaner organisation. Airlines have responded by resorting to job cuts, route rationalisation, reducing or doing away with travel agent commissions and by hiking prices to offset the ATF hike. While Air India, Jet Airways and SpiceJet have increased fuel surcharge by a minimum of Rs 300, Kingfisher and Air Deccan have announced higher base fares ranging from Rs 500 to Rs 3,000. In addition to hiking prices, companies have cut operations between Tier2 and Tier3 cities and shorter haul routes. What will be the impact of the higher ATF prices on growth and expansion of operations of companies? Hazy future

The increase in ticket prices due to the rise in ATF costs have dealt a double whammy to the sector. Airlines are now having to cope with growth, which is coming in single digits as customers are leaning to cheaper modes of transport while costs are spiralling out of control. For the January-March 2008 period, passenger traffic grew at 10.5 per cent which was less than half of the 25-30 per cent achieved in the last couple of years. If fares continue to go up, growth rates are expected to be in low single digits or slip into the negative. Earlier, with high growth rates, airline companies had ordered for about 480 aircrafts, which was to be inducted between now and 2012. Analysts say the assumptions were based on demand growth, expansion into new sectors and the prevailing ATF cost structure. Companies are expected to either cancel the order or lease it out to other carriers. Analysts believe that the low cost carriers (SpiceJet, Indigo and Go Air) will be the first to be hit as they target the visiting friends and relatives or leisure segment, whereas the professionals or the business segment constitutes the bulk of the customer base for full service carriers.

BATTLING IT OUT
Market Share in CY07	(%)
Jet Airways + Jet Lite	29.8
Indigo	7.6
Air India + Indian Airlines	19
SpiceJet	8.8
Kingfisher + Deccan	29.3
Go Air	4.2
Others	1.3
Source: DGCA

The LCCs, which have about 45 per cent of the market in the country, were expected to garner 60 per cent in the next three years, but with the consolidation (Jet Airways-Sahara, Kingfisher-Deccan and Indian Airlines-Air India) this looks unlikely. Ernst and Young believes that for the sector to survive, there has to be a rationalisation of ATF prices, consolidation offering synergies in operations and distribution, and improvement in airport infrastructure, which will bring down holding times on the ground and in the air. In addition, Arora believes that companies with deep pockets, ability and patience to withstand this bad patch and good quality management will survive. And, who are these players? Analysts say that if crude stabilises at current levels, none of the airlines will make money. However, if crude prices falls below $100 levels, Jet Airways and SpiceJet are the best placed to turn corner. (See: Turbulent future) While Jet Airways has a robust business model with a good mix of domestic and international routes combined with a value-based carrier Jet Lite, SpiceJet is the lowest cost carrier in the industry currently. Even for companies which are running a tight operation it is difficult to fathom how they will fund their operations considering that the sector witnessed losses of $1 billion in the last fiscal and lenders are sitting tight. Without additional funds, the outlook for the sector looks rather bleak. Says Nikhil Vora, managing director, IDFC-SSKI, "Future prospects for the companies look dim. What can be more stark than a sector with a market capitalisation of $3 billion sitting on losses of about $1.5 billion.