For airlines, cash flows are looking good again

Cash flows of airlines, which had turned into a trickle with falling passenger traffic and fares, are swelling again, but unlike in the past, carriers are not rushing to expand their operations.

Instead, they are building cash reserves that will see them through the next dry spell.
A senior executive of Jet Airways, who did not want to be named, confirmed that airlines were seeing better inflow of cash as industry yield and demand picked up. He said it has turned positive after a long a time.

“Improved conditions have  resulted in positive cash flow. It will provide relief to us because we can use the same for our working capital requirements,” he said.

Dwindling cash from operations was forcing Jet and some other domestic carriers to rely on borrowings from banks and institutions to meet their working capital needs.

Some of them resorted to sales and leaseback (S&L) of aircraft to infuse funds into their companies to meet their day-to-day cash requirement.

Samyukth Sridharan, chief commercial officer (CCO) of SpiceJet Ltd, also said there was a “healthy flow of cash” due to improving environment in the market, though he does not see this resulting in explosion of supply in the market like in the past — 2005 and 2006.
“The industry has realised it was partly overcapacity that caused problems. I don’t think airlines will expand with this flush of money. They’ll do it very rationally, slowly,” he said.

Sridharan said going by the aircraft order book of local airlines, 2010 will see very few inductions of aircraft. Budget airline SpiceJet will take delivery of four aircraft in the next calendar year. Other airlines adding more planes to fleet are IndiGo, GoAir and Paramount Airways.

“The current aircraft order book of airlines is very lean. It is much lower than three years back when every airline was taking one, some even two, every month,” he said.

Ankur Bhatia, managing director of Amadeus, said increased cash flow will help airlines to pay off huge debts and wipe out losses, which mounted over the last few years.

According to the airline consultancy firm Centre for Asia Pacific Aviation (CAPA) report published this month,  the industry could end this year with losses of Rs 6,500?7,000 crore.

In the four years to March 2010, Indian carriers will have accumulated operational losses of in excess of Rs 26,000 crore. Of this, the three large airline groups - Air India, Jet Airways and Kingfisher Airlines- account for almost Rs 23,000 crore.

According to the airlines research firm, the combined debt of three airlines is approximately Rs 46000 crore ($ 10 billion).

SpiceJet’s Sridharan said it would take close to 4-5 years before some of carriers will be able to erase the red off their balance sheet.

“They (airlines with high losses) will need continuous strong demand and high yields for several years to improve their balance sheet,” he said.

An analyst, who did not to be named, said airlines could use to current phase of positive cash flow to create reserves for future working capital needs.

“This (positive cash flow) is a short term phenomenon. However, if planned properly it will help them meet their working capital for the next couple of months. This way, they can avoid taking working capital loans during lean periods,” he said.

A Jet executive said his airline was doing just that: “the current positive cash flow will help us to in the coming quarters. It is helping us build reserves for the lean season.”