India's budget airlines leave rivals in tight spot

India's low-cost airlines are set to go from strength to strength as they grab market share from ailing premier carriers such as Air India, whose debts and losses continue to pile up, said analysts.
Big airlines such as Jet Airways, Kingfisher and Air India are being hit by falling revenues due to tough economic conditions and high air fuel taxes.

The smaller, "no-frills" carriers such as Spicejet or Indigo, launched to open up the skies to the country's burgeoning middle classes, have dealt better with the turbulent business conditions of the last year, said analysts.

At least seven budget airlines fly across India's skies, with a 40-per cent market share. "By December-end, we estimate this to rise to 70 per cent," said Kapil Kaul, South Asia Chief Executive of the Centre for Asia Pacific Aviation (Capa) consultancy.

A sign of the predicament facing India's private airlines – which carry 80 per cent of local air traffic – was seen last month when bosses threatened to ground planes for a day unless the government gave them a bailout.

The demand was denied but a strike was averted when the government promised to take steps to reduce the burden of steep fuel taxes.

Air India posted a $1.03-billion (Dh3.78bn) loss last financial year and has appealed for about $620 million in state aid to keep flying.

Jet Airways lost Rs2.25bn (Dh172.63m) in the quarter ending June, while Kingfisher Airlines reported a net loss of Rs2.40bn in the same period.

Kingfisher's flamboyant Chairman, Vijay Mallya, said: "Our losses are no longer sustainable. It costs us more to fly than to stay on the ground."

Losses for the entire Indian aviation sector last year are put at some $2bn.

This means Indian airline losses represented nearly a fifth of the $10.4bn loss posted by the industry globally last year, even though the country accounts for just two per cent of the world's flying public.

The situation is a far cry from five years ago, when a clutch of new airlines was launched amid predictions of double-digit passenger growth as the government opened India's skies to more competition.

But the growth was too rapid, analysts say, leading to over-capacity.

By 2007-08, India's airlines were in shake-out mode with Jet striking an alliance last October with arch-rival Kingfisher. The deal includes code-sharing, route rationalisation and pooling crews.

"The first round of consolidation – Jet buying out loss-making Sahara, Kingfisher buying out Air Deccan, were strategic mistakes," said Capa's Kaul.

Mihir Shah, analyst with brokerage firm Prabhudas Lilladher, said: "India's airlines saw excess capacity and intense competition. When the economic downturn came, their business travellers were being replaced by the leisure class."

Kaul said the situation was "alarming" as major carriers were making losses, but said: "If there is a bad business case, we need to allow airlines to exit."

State taxes imposed on jet fuel are high at an average of 26 per cent. Fuel costs are also 70 per cent more expensive than the average paid by airlines globally.

Such factors have combined to leave Air India, Jet and Kingfisher with a combined debt of $8bn, analysts said, with $6bn more expected to be added by 2012.

Gaurang Shah, Chief Fund Manager with Geojit BNP Paribas Financial Services, suggested larger Indian airlines will have to cut more routes, fleets and staff to keep flying.

On the other hand, low-cost carriers like Spicejet and Indigo appear better placed, as they do not have a legacy of high debts, he said.

Spicejet showed a net profit of Rs263.42m for the quarter ending June against a net loss of Rs1.29bn a year earlier.

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