Jet, Kingfisher running out of peer support in mid air

Jet Airways’ Naresh Goyal and Kingfisher Airlines’ Vijay Mallya may think they have the entire aviation industry on their side in seeking a government bailout, but their peers seem to think otherwise.

Many feel the government has no reason to oblige them since the mess they are in today is of their own making rather than of the government.

A senior executive of a leading budget carrier even went to the extent of saying the two carriers should be allowed to perish if they are commercially unviable. “These guys (Jet and Kingfisher) are not managing their yields and costs properly. They paid huge prices for airlines (Air Sahara and Air Deccan) they took over and today they (the airlines that have been taken over) have no value. Why should the government be held responsible for all this? The government should let them die. Such a shakeout will be good for the industry,” he said, requesting not to be named.

An executive with state-owned Air India, who did not want to be named, was just as unsympathetic. “These people are reaping the fruits of the seeds they have sown. First, they added capacity and resorted to unrealistic fares and now when things have gone out of hand, they are crying,” he said.

According to the executives, the losses of Jet and Kingfisher were mounting mainly because they were selling tickets way below operational cost. And this, they said, was fuelling unhealthy competition in the market, which was making the entire airline industry sick.

“Today, fares on all sectors have dropped to the early 1990s level even though costs scaled up more than 10 folds on many items since then. Here, we are not even considering the interest costs that have also gone up for these (Jet and Kingfisher) airlines because of the expensive buyouts and aggressive expansion for which they raised huge debts,” said the budget airline executive.

According to him, the price of jet fuel or aviation turbine fuel (ATF) in the early 1990s was close to $10 per barrel, which has shot up to over $60 per barrel today. Similarly, pilot salary and aircraft lease rentals have climbed from Rs 25,000 per month and $125,000-150,000 per month to Rs 5 lakh per month and $350,000-375,000 per month, respectively. Meanwhile, the rupee has weakened — from around 11 to 50 — versus the dollar, which too has adversely impacted the airlines’ costs as 20-30% of an airline’s total costs are denominated in dollar.

“When all costs have swelled so much, why haven’t the fares?” the executive asked. “Air tickets did go up between early 2000 and mid-2000 but slipped again after the low-cost airlines entered the market. The government did not fix this price. It was the private airlines that decided to sell below costs,” he said.

The executive said, at today’s costs, low-cost carriers (LCCs) cannot sell tickets below Rs 3,500 on the Delhi-Mumbai sector on a minimum seat factor of over 70%. For full service carriers (FSCs), the breakeven fare on the same sector is Rs 8,000 at the same seat factor.

“Both segments (LCC and FSC) are selling below this level, but the gap between price and cost is wider for the FSCs because they have started selling a large portion of their seat inventory at low fares while they have yet to match their cost with it,” he added.
Kapil Kaul, chief executive officer of Centre for Asia Pacific Aviation - India and Middle East, defended Jet and Kingfisher saying it was difficult for airlines to manage yields — net revenue per seat of a carrier — due to the current market dynamics, where only lower fares were stimulating demand.

Such market dynamics, he said would result in over 70% of the aviation market moving to low fares. He worried what impact such domination of low fares would have on the yields of the airlines.

“By third quarter (of this fiscal), we will see recovery in air travel demand, but by then all the airlines will become low-cost airlines. This could impact their yields negatively,” said Kaul.

Kingfisher has already moved 70% of its seat inventory to low fares. Jet also plans to shift two-thirds of its capacity to Jet Konnect (its low-fare service). By the third quarter, Air India too may have launched its low-fare service on domestic routes. 

Last Friday, the Federation of Indian Airlines (FIA), a representative body of domestic airlines, had threatened to go on indefinite strike from August 18 if the government did not heed their pleas on rationalisation of sales tax on ATF and lower airport charges.
Kaustak Dhar, chief operating officer and executive director of MDLR Airlines, said these demands were mainly from Jet and Kingfisher, whose dues with the oil marketing companies and airport operators were bloating.

The three listed carriers — Kingfisher, Jet Airways and JetLite — posted losses of Rs 440 crore in the June quarter and Rs 2,920 crore last fiscal.

Anirudha Dutta, analyst with CLSA Asia Pacific Markets, wrote in a July 31 report that rationalisation of sales tax on jet fuel will improve the Ebidtar (earnings before interest, depreciation, tax, amortisation and rentals) margins of airlines by 6-7%. He said this would have helped Jet save Rs 54.1 crore last quarter and Rs 410 crore last fiscal. Its total cost per available seat kilometre would have also been lower by 5% at Rs 4.55 and 7.5% at Rs 4.90, respectively in the two periods.

Another analyst with a Mumbai-based broking house, however, said tax and airport charges were not the only reasons for airline losses. The business models of the FSCs have been faulty, or budget airlines won’t be making profits in the same environment,” he said, adding, “Lowering the taxes will help but the industry too needs to be held accountable.” 

Anil Baijal, secretary general of FIA, preferred to remain silent when asked who is to be blamed for the turbulence that Jet and Kingfisher are facing.