Airlines fly into cash-flow problems

BANGALORE: Airlines are trying hard to keep their business afloat despite strong headwinds that threaten to crash-land them into a severe financial crisis.

However, some strains of the cash-flow problem and the capital crunch owing to rising operational costs and falling demand growth, and thus revenue growth, are already emanating from the industry.

A New Delhi-based regional airline is so starved for cash that it has grounded one of its aircraft (BAE RJ70) to rip off spares from it whenever needed — a bleak reminder of what Air Sahara (now JetLite under Jet Airways) did just before it went under.

“It (the regional airline) does not have the financial muscle to maintain the inventory of spares. This way, they can operate the other two BAERJ 70s in their fleet without disturbing their on-time performance. It’s a desperate measure,” said an industry insider.

But it’s not just the smaller operators that are feeling the heat of spiralling fuel prices; bigger airlines are also pinching every penny to keep their aircraft in the air.

And the first to be affected by these desperate measures are the vendors (groundhandling service providers, pilot trainers, call centre operators, etc).
As the dark clouds of rising ATF prices gather over their heads, airlines have cut seat capacity. They are now operating fewer aircraft to lesser destinations.

This has reduced the revenues of the vendors considerably. Ground-handling service vendors are paid fees on the basis of aircraft flown by an airline.

However, the vendor’s woes do not end there.
As airlines’ flow of income turn into trickles due to plunging air traffic (down from 27% growth in November to less than 10% in April) and costs hitting the roof, airlines are postponing or making partial payments to their vendors for their services.

“We are a little bit concerned. Even though our payments can be rotated (pushed to a later date), dues from the airlines are only piling up. Most airlines have exceeded their credit period (normally one month),” says a vendor, who feels a shakeout in the aviation industry is imminent.

And it is not just a single airline, which was procrastinating paying to vendors; “They are all in dire straits. Of all, IndiGo seems to be in a somewhat better placed,” said a vendor.

An industry insider said dues of groundhandling service providers like Universal Aviation Services, Arun Aviation and Sunshine Aviation were running into crores and were mounting by the month.

“It’s a very tricky situation we are in. If we stopped services, our money will get stuck and if we continue, outstanding (dues) from the carriers are only shooting up,” whined a vendor.

And if the previous consolidation moves were supposed to improve the health of full service carriers Jet Airways and Kingfisher Airlines, a vendor had a different take on it.

“The merger of Kingfisher Airlines with Deccan and Jet Airways with JetLite (formerly Air Sahara) has sunk them into a deeper financial quagmire. We are getting indication that they are not happy with it. Capt G R Gopinath (previous owner of Deccan) and Subroto Roy (previous owner of Air Sahara) exited at the right time,” said a vendor.

And from how things stand today, the situation is only expected to get worse.
An industry insider said that whatever the airlines did—hiking, introducing passenger charges and trimming frills—their revenues were not catching up with their cost.

“Usually in June (peak season) revenues are higher than cost but this year costs will overshoot revenues for most airlines,” an executive of a regional airline said.

Information available from sources in the industry reveals that SpiceJet is expecting to earn revenues of around Rs 140 crore in June. Of this, its fuel bill alone would be close to Rs 110 crore (Thursday’s 4.3% cut in ATF prices is not factored in) while it would spend approximately Rs 22 crore as lease rentals.

“This does not include other costs like personnel, vendor fees and others. Department heads in the airline (SpiceJet) are worried about salaries of their staff,” said the source.
SpiceJet chief financial officer Partha Sarathi Basu brushed off such concerns. “Airline business is seasonal. Revenues waver as per season. There is no serious crisis.”

Vendors feel their problem will tide over only if airlines are sold or if they succeed in infusing more funds from investors. “We are hoping they (airlines) are able to raise funds from investors or sold to some cash rich company, which will settle our dues,” said an optimistic vendor.

p_sharma@dnaindia.net