Thursday, January 29, 2015

Experts seek budgetary support for aviation sector


Experts have asked the government to notify aviation turbine fuel as a declared good and lay a clear road map for sale of Air India among other measures to be considered in the forthcoming Union budget.
“The notification on declared good should be with immediate effect. It is much more prudent to generate tax from downstream goods and services than an industrial raw material (ATF). ATF in India is 55-60 per cent costlier than the Gulf and ASEAN region. The cascading effects of ATF taxes have brought ruin to the airline sector. ATF should have a uniform levy of 4 per cent across India,” said Amber Dubey, partner and India head of Aerospace and Defence, KPMG.
“The government should announce a clear road map for auction of Air India to the private sector. Else Air India will continue to bleed under increasing competition, falling market share and increasing costs. Low fare offers by the taxpayer-funded- airline distorts the market. The taxpayers’ funds should be used for development of the entire aviation sector and not just one player,” Mr. Dubey added.
Though the government has decided to develop new airports in Tier-I and Tier-II cities, there are still significant challenges relating to land acquisition, various regulatory approvals and finalization of airport tariffs.
“I expect these challenges to be addressed in the forthcoming budget,” said Ankur Bhatia, Executive Director, Bird Group.
“There is an immense potential for growth of the Indian civil aviation industry provided certain structural deficiencies are corrected. It would serve as a key enabler for economic growth, employment creation and tax revenues. It is imperative that success of civil aviation is seen as a national priority,” he added.
The other recommendations include establishment of an independent Aeronautics Commission with a budget of around Rs.500 crore to facilitate cutting edge research and development of aeronautical manufacturing in India; a ten-year tax holiday on aeronautical and defence manufacturing; MRO and import of aircraft, allowing private airport operators to issue tax-free infrastructure bonds to the public and provision for seed funding for development of LCC terminals at major airports.

Sunday, January 25, 2015

Ailing airlines need fresh equity to pare net loss


The last few months have seen tailwinds converging for India’s airlines — such as improvement in demand and, therefore, passenger load factors (PLFs), a largely stable rupee-dollar exchange rate and, most importantly, a steep fall in crude oil prices. That would mean airlines are set to post their best operational performance in the last five years.
Over the next couple of years, airlines are unlikely to face significant cost pressures due to lower prices of aviation turbine fuel (ATF), which accounts for 40-45 per cent of players’ operating costs, and a range-bound rupee. However, the industry is saddled with high accumulated losses and a huge debt burden and will, therefore, see the current situation as a way out of the morass that it is currently in.
We expect only a marginal 2-4 per cent hike in ticket prices over the next couple of years, as airlines look to recoup their financial losses.
However, rising competition will keep the price increases under check as existing players look to protect their turf from the new players.
Domestic air traffic

The industry is likely to use the premise of an increase in demand to jack up prices. Domestic air traffic has remained almost flat at about 60 million passengers over the past couple of years. But growth is expected to soar to double digits by 2015-16, helped by economic recovery, relatively smaller price hikes and enhanced connectivity. Economic growth, after being sub-5 per cent for two consecutive years, is expected to pick up in 2014-15 and 2015-16. Also, the launch of new routes and direct connectivity between smaller towns will help passenger traffic growth. International air traffic growth is also expected to be slightly higher than in the past due to the expected recovery in both the domestic and the global economy and expansion of Indian carriers in the gulf region. The number of airlines operating in the Indian skies has also risen from five as of March 2013 to eight now. The past year saw two new airlines entering the domestic skies — Air Costa and AirAsia. However, surprisingly, despite the new entrants, aggregate PLFs are expected to improve by about 400-500 bps by 2015-16. Existing players will find it difficult to increase capacity significantly due to reduction in fleet of SpiceJet — the fleet size has come down from 58 aircraft to 37 aircraft in the current year. Also, we believe the new entrants will be measured and cautious initially in ramping up capacities.
Falling crude oil prices are a big positive for airline companies. We expect about 30 per cent lower ATF prices for fiscal 2016 compared with fiscal 2014. More importantly, the fall is accompanied by an improving demand scenario, unlike fiscal 2010 when the players were unable to benefit significantly due to weak demand.
Interest burden on debt

At the current debt levels, we believe the sector will post net losses even in 2015-16, though some of the airlines with stronger capital structure will turn profitable. We believe reducing losses will be a function of airlines’ ability to sort out their capital structures.
Today, about 15 of their revenues are used to pay interest on debt. Still, as a result of some very positive factors this year such as falling fuel prices and the stable rupee, domestic airline companies may post their best operational performance this fiscal compared to the last five years.
At an aggregate level, we expect domestic carriers to post an operating profit of Rs.8,100 crore in fiscal 2016 — a complete U-turn from the Rs.1,500 crore loss posted in fiscal 2014. That translates into a spectacular 14 percentage point improvement in operating profit margin to around 11 per cent in fiscal 2016. The profitability will be driven by factors such as improvement in demand and, therefore, passenger load factors (PLFs), a largely stable rupee-dollar exchange rate and, most importantly, a steep fall in crude oil prices.
However, at the net profit level, the sector will continue to post losses due to high interest burden on account of high debt levels, through some of the airlines with stronger capital structure will turn profitable. To break-even at the net level, interest expenses will have to halve for the sector. This, in turn, will mean equity infusion of around Rs.35,000 crore — primarily for the three carriers Jet Airways, Air India and Spice Jet, which account for about 75 of the commercial aircraft fleet in India but over 93 per cent of the sector’s debt of Rs.70,500 crore as of March 2014. So, it is still fingers crossed for the sector.
The author is Director, CRISIL Research.

Friday, January 23, 2015

FIA opposes Govt’s proposal to change flying norms


The government’s move to relax international flying norms by doing away with the 5/20 rule and revise Route Dispersal Guidelines (RDG) for new airlines has been opposed by Federation of Indian Airlines (FIA) which represents incumbent airlines.
In a letter to G K Ashok Kumar, Joint Secretary, Ministry of Civil Aviation, FIA has asked the government to stick to the current regime with minimal changes ‘to ensure continued servicing of national interests’.
Recently the government had proposed to remove the 5/20 rule which makes it mandatory for airlines to have five years of domestic flying experience with a fleet of 20 aircraft to become eligible for flying international. It had also proposed to revise the RDG which makes it compulsory for domestic airlines to deploy a certain percentage of their capacity in under-served areas in the North East, J&K and Andaman & Nicobar Islands.
“Over the last two decades, the RDG has resulted in more than 800 flights per week operating to these markets, significantly contributing to the increased welfare of the inhabitants of these regions,” FIA said.
“The twin criteria of 5 years and 20 aircraft were introduced to ensure that all new airlines would serve the domestic market adequately …not operating with minimum fleet during the qualification period,” the letter said.
“The new proposed policy is totally unfair and unjust because it proposes to not only alienate the rights already earned by the existing airlines in order to exclusively benefit the two new latest entrants [Vistara and AirAsia India] both of which are partnered by one industrial house [Tata Group], but also because it frees the new entrants from the socio economic requirements of serving the domestic market and transfer that burden to incumbent airlines instead,” the letter added.
The letter has evoked sharp reaction from the new airlines.
“The existing RDG and 5/20 rules distort the market forces and are detrimental to the long term growth of Indian aviation. We share the government’s vision of creating world-class international hubs in India,” a Vistara spokesperson said.
“The need of the hour is to do away with the restrictive practices and allow Indian airlines to rule the global skies as international connectivity provided by them will boost the economy through improved tourism which will help India earn the tag of a great investment destination,” the spokesperson added.

Monday, January 19, 2015

Domestic air traffic grows 10 % in 2014


Driven by a slew of discounted ticket schemes, 673.83 lakh passengers were flown by domestic airlines last calendar year, a growth of 9.7 per cent over 2013.
In 2013, airlines carried 614.26 lakh passengers, according to the latest data released by the Directorate General of Civil Aviation (DGCA).
Of this, state-owned Air India flew 124.25 lakh passengers, accounting for 18.4 per cent of total domestic air passenger traffic. Private airlines carried 549.58 lakh passengers or 81.6 per cent share of domestic air traffic. According to the data, private budget carrier IndiGo continued its domination with 31.8 per cent market share, having flown 214.25 lakh passengers in 2014.
Jet Airways, together with its subsidiary JetLite, registered 21.7 per cent market share, carrying 146.65 lakh passenger.
Air India came next. SpiceJet had 17.4 per cent of the total domestic passenger traffic in 2014, carrying 117.40 lakh passengers. GoAir garnered 9.2 per cent of the market share by transporting 62.02 lakh passengers in during the year.

SpiceJet promoters will suffer huge loss: CFO


Exiting the cash-strapped SpiceJet will cause “a substantial capital loss” to its existing promoters Sun TV group, says the group CFO, SL Narayanan.
In an interview to Business Line, he said, “The existing promoters (Kalanithi Maran and Kal Airways) will be incurring a substantial capital loss on the transfer of these shares.”
However, as part of the revival plan submitted to Ministry of Civil Aviation, Mr. Maran will invest about Rs 80 crore more into the company ahead of the new investors, to make the warrants that he holds fully paid up. These warrants will convert into 18 crore shares by 2016, which represents about 23 per cent of the fully diluted equity.
“Once the new investors come on board, our stake will stand further diluted, and we shall be a passive investor,” Mr. Narayanan said.
Last week, SpiceJet in its regulatory filing to the stock exchange said the company had agreed to transfer the current promoters’ stake of 53.48 per cent to the budget carrier’s original promoter Ajay Singh, and submitted its proposal to this effect to the Civil Aviation Ministry.
To a question on why Mr. Maran did not pledge his Sun TV shares to raise funds to keep SpiceJet going till a turnaround happened, he said, “That was unacceptable since the minority shareholders of Sun TV would have never forgiven us.”
The Chennai-headquartered media conglomerate entered into the aviation industry in 2010 by acquiring a controlling stake in SpiceJet. In the last four years, the company has been incurring losses, despite frequent capital infusion by Mr. Maran. It reported an accumulated loss of over Rs 2,600 crore and debts to the tune of Rs. 1,000 crore.
Talks with two US-based blue chip investors did not fructify due to some “extraneous reasons”, Mr. Narayanan said.
However, given the group's situation, “the consequences of not hiving off SpiceJet could have been a lot worse,” he added.

Saturday, January 17, 2015

Air India embarks on cost cutting measures


The Ministry of Civil Aviation has asked the airline to cut variable cost by about Rs.1,400 crore

Air India (AI), at the instruction of the Ministry of Civil Aviation, has embarked on an exercise to reduce its variable costs by 10 per cent to minimise losses. The airline’s total cost is estimated at Rs.24,000 crore, and out of this Rs.14,000 crore is variable cost. Going by the Ministry’s directive, AI has to reduce expenditure by Rs.1,400 crore in next financial year.
Air India Chairman and Managing Director Rohit Nandan has asked all departments to take action in this front.
As per the directive, no fresh post will be created except in operational areas. Surplus staff will be identified by mid-February and casual and contractual engagement would be frozen.
All domestic temporary postings will be withdrawn unless justified. Temporary postings in the engineering department will be discontinued.
There has been a ban on purchase of vehicles, including staff cars. Old vehicles will be scrapped.
Use of mobile phones other than for operational reasons while on roaming in foreign stations has been banned. Travel between stations has been regulated and employees must return the same day. Restriction has been imposed on training programmes abroad.
A 10 per cent cut on expenses incurred in organising or attending conferences has been imposed with immediate effect. There has been a complete ban on holding meetings in five star hotels except few events.
To take delivery of new aircraft, minimum number of engineers and crew will be sent. Officers have been asked to travel in the economy-class.
The scheduling department will ensure quick turnaround of flights. SOD (staff-on-duty) travel must be to the minimum and to be reduced by 10 per cent.
The commercial department will take steps to increase occupancy in flights. Flights, which are not meeting fuel cost, would be discontinued. Flights not meeting variable costs would be closely monitored.
Video conferencing and VOIP calls should be given priority to curtail SOD travel. The 10 per cent cut on fuel bill reimbursement will continue and most pool cars will be discontinued. The existing 10 per cent cut on TA/DA will be applied uniformly at all stations, as per the directive.
Wage increase at foreign locations will not be entertained unless mandated by local laws. There will be 50 per cent reduction in over time by March end.
Airport managers have been asked to reduce wastage of meals. Executive directors are required to surrender extra space at T3 Delhi and at Mumbai airport. Thrust will be given to increase bookings through the web and reduce distribution cost, and the CEO of Engineering Services has been asked to handle the maximum overhaul and maintenance work in-house.
“We are hopeful to achieve the target. Now that fuel prices are coming down, our fuel bill will be reduced by Rs.2,000 crore,” said a senior AI official.

Tuesday, January 13, 2015

Airbus wins 1,456 net orders in 2014


Up slightly from 626 a year earlier but lagging behind Boeing's industry high of 723.

Airbus clung to the top spot in commercial plane orders by confirming it outsold Boeing last year, while failing to close a gap in deliveries that leaves its U.S. rival as the world's largest plane manufacturer for the third year running.
The unexpected lead in aircraft orders, which confirms a Reuters report last week, comes after an unprecedented surge that saw the planemaker book over 400 plane orders in December.
Airbus said on Tuesday that it won 1,456 net orders in 2014, down from 1,503 a year earlier but enough to pass Boeing's total of 1,432.
The Airbus Group unit delivered a company record of 629 aircraft in 2014, up slightly from 626 a year earlier but lagging behind Boeing's industry high of 723.
Total deliveries by the two plane giants rose 6 per cent to a record 1,352 aircraft, reflecting fleet renewals and the rapid growth of Asia as an aviation hub. But some analysts say demand may have peaked as plummeting oil prices - although good for most airlines - reveal broader economic concerns.
Deliveries of the A320 narrow-body jet family, which generates much of Airbus's cash, slipped to 490 aircraft from 493 a year earlier but trumped deliveries of the Boeing 737 range, ending a deficit seen between January and November.
Airbus delivered 30 A380 superjumbos, a model whose future direction has been left uncertain as the company tries to win sales. Airbus was expected to face questions about its plans for the world's largest jetliner at a news conference on Tuesday.