India’s private airlines began the year optimistically, as soaring passenger numbers raised hopes that profits were finally on the horizon. But while Indians are flying in record numbers, the airlines are still bleeding red ink, wounded by surging fuel prices and fierce price wars with ailing state carrier Air-India.
Already burdened with years of accumulated losses, the private airlines are battling for survival, and some of the weaker ones could be forced out of business even as Air-India – the most indebted of all – is kept aloft by a taxpayer-funded lifeline.
“Some of these airlines are at a critical stage,” said Kapil Kaul, the south Asia chief executive of the Centre for Asia Pacific Aviation.
Air-India, which has estimated debts exceeding $9bn and is expected to lose another $1.5bn this year, was forced by a pilot strike to ground most of its domestic flights for 10 days earlier this year. Since then it has fought back by cutting its domestic fares by between 15 per cent and 20 per cent.
Industry executives say the fare-slashing by Air-India – which received $425m in government handouts in the past two years and is looking for more – has pressured private airlines to hold down their own fares even as more crowded planes should have brought them greater pricing power.
“In the current calendar year, Brent crude went from $80 to $125 per barrel, while Air-India decided to halve their fares to justify their huge capacity expansion,” says Ravi Nedungadi, chief financial officer for the UB Group, the parent company of Kingfisher Airlines.
Mr Kaul said Air-India is playing “the most lethal, below-the-belt pricing games” by selling tickets below cost while counting on the cushion of government funds.
“It’s going to turn out to be a disastrous year for everyone,” he says. “When fuel is at a peak, and you are pricing below cost, the damage on your balance sheet is going to be of a very significant order.”
That was evident in airlines’ earnings for April to June, the first quarter of India’s financial year. Analysts warn that the second quarter, a traditionally lean season for domestic travel in India, will probably be worse.
Kingfisher, owned by Indian liquor baron Vijay Mallya, lost Rs2.6bn ($52m), compared with a net loss of Rs1.87bn in the same period last year. Jet Airways lost Rs1.23bn compared with a net Rs35m profit previously, while low-cost carrier SpiceJet lost Rs719m, far worse than analysts’ forecasts.
Indian airlines do not lack for demand. Domestic passenger numbers have rebounded strongly since the 2008 global financial crisis, rising 19 per cent in 2010 to an all-time high of 52m and surging another 18 per cent in the first half of 2011.
But that has failed to translate into financial reward in an industry that New Delhi still views – and taxes – as a decadent luxury sector rather than an integral part of a growing economy.
Indian airlines graphic
Among Indian private carriers, Kingfisher, tied with Indigo as the country’s second-largest airline with 19 per cent market share, is in the most critical condition. It reached a deal in November to restructure about $1.3bn in debt but had to postpone plans to raise $500m in new equity.
Jet Airways, which together with low-cost subsidiary Jet Lite is the country’s biggest airline with 26 per cent market share, has been trying for years to raise about $400m in new equity but has also put plans on hold.
Mr Nedungadi says Kingfisher is looking to convert some of its high-cost rupee debt to lower-cost US dollar-denominated debt, and may sell some of its real estate holdings to raise funds.
The airline’s owners are also keen to sell a stake to a foreign strategic partner and have an interested suitor in IAG, Mr Nedungadi said, but the Indian government prohibits foreign airlines from investing in domestic carriers.
Meanwhile, New Delhi is resisting calls for Air-India, which has a 15 per cent market share, to be either privatised or shut down.
“Anything that is perceived to hurt Air-India is off the table,” said Mr Kaul. “No one wants to take hard decisions on Air-India, especially in the current hostile environment against the government.”