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Reading this article, I am again reminded how tough it is to make a profit in the airline industry. I therefore conclude that one generally should avoid airline companies when it comes to investing (yes, including SIA and Tiger Airways). Tongue

The Straits Times
Nov 17, 2011
India's airlines bleeding despite soaring demand

The carriers are hit by cut-throat competition and high fuel costs

By Ravi Velloor

EVER since the industry was opened to private players, India's airlines have been an exuberant advertisement for the nation's increasingly open policies, with their spotlessly maintained fleet and well-turned-out, efficient crew.

Falling ticket prices spurred a boom in air travel that left passengers thrilled and aircraft manufacturers salivating over the market. Kingfisher Airlines chairman Vijay Mallya, in particular, with his fleet of red aircraft manned by a red-uniformed crew, has often been compared with British entrepreneur Richard Branson and is known as the 'king of good times'.

But the industry has not managed to turn booming demand into profits.

Jet Airways, the No. 1 carrier, posted a US$142 million (S$183 million) loss in the quarter ended September, swinging from a profit in the same period last year. Discount carrier SpiceJet has also slipped into the red. At state-owned Air India, the bleeding is so severe that staff salaries are frequently delayed and the government is considering a US$5 billion bailout.

This week, the spotlight has been on Kingfisher, which lost nearly US$1 billion in the past three years and owes US$1.2 billion to creditors. As the Bangalore-based airline cancels a third of its flights, struggles to pay its fuel bills, delays buying the Airbus A-380 superjumbo and crams its aircraft with more seats to improve yield, some are asking if the king of good times built castles in the air. Mr Mallya was forced to defend his company's health this week.

'The industry is in deep trouble,' said the liquor baron, who named his airline after India's best-selling beer. 'We aren't worse off. In fact, we are better off. In five of the last six quarters, Kingfisher has outperformed the industry.'

Analysts said he is largely right and airlines are caught in a perfect storm.

Interest rate increases have pushed up borrowing and repayment costs for airlines. The cost of jet fuel, which accounts for more than 50 per cent of the operating expenditure of the average Indian airline, has soared in recent months as oil prices rose and the rupee depreciated, making imports costlier. State sales taxes of about 60 per cent add to the fuel costs. To cap it all, airport fees are high.

Mr Mallya said that when Kingfisher negotiated a debt recast plan last year, the assumed interest rate was 11 per cent. Today, it is 14 per cent.

Meanwhile, he and others said cut-throat competition has prevented airlines from raising ticket prices.

'Fare increases can only work if the industry agrees to do it together,' said a top executive with a full-service carrier. 'Every time we raise rates, we wait to see if the others follow. When they don't, we quietly allow rates to slip back. Each flight we operate, we are bleeding ourselves a little bit more.'

Aviation analysts said the situation will lead to a shake-up in the industry, with mergers or the entry of new strategic investors being likely.

'A large part of the problem arises from structural issues such as fuel costs,' said Mr Kapil Kaul, regional head of the Centre for Asia Pacific Aviation, a consultancy. 'But the airlines themselves are to blame for expanding too aggressively without properly understanding the underlying risks. That said, I do not foresee any airline closures, although a new set of financial investors are a certainty.'

The pity, analysts like Mr Kaul said, is that the airlines are bleeding at a time when demand is soaring. The number of domestic passengers rose 19 per cent in the year through August to 40 million, government figures showed.

Earlier this year, budget carrier IndiGo surprised the world by placing a US$16 billion order with Airbus.

Mr Mallya himself ordered five A-380s, orders he said he will delay accepting. He started Kingfisher in 2005. Three years later, he bought Air Deccan, India's first no-frills airline, joking at the time that he had 'chosen to be an employee of Captain G.R. Gopinath', the founder of the airline.

Now the joke's on Mr Mallya. Capt Gopinath, it seems, departed on time.
As always the old joke holds true.

Q: How do you become a millionaire?
A: Start with a billion and buy an airline.

Richard Branson's autobiography, Losing my Virginity, is a pretty good read for those interested in how he started Virgin Air and a sampling of how the Airline industry is like. For those that think airlines are great businesses, note that Branson's worked because he had Virgin records. Without that, Virgin Air might not be around in its current form.