Traffic fall adds to the cash woes of airlines

Falling domestic air passenger traffic is hitting the cash flows of airlines, making
it difficult for them to meet their working capital requirements.

Not so long ago, domestic carriers were able to mobilise close to 30-40% of the total working capital from advance sale of tickets. Today, with travellers being resistant to flying, airlines are able to raise only 15-20% cash from advance sales.

Such a low upfront revenue accrual is making airlines jittery. This is one of the reasons they are coming out with attractive schemes for passengers to get them onboard early.  “Till the last quarter of 2007-08, the cash flow from advance sale was substantial. This made us comfortable but that has come down significantly today. Falling demand for air travel has affected our ability to raise enough passenger revenues to meet a large part of our working capital need,” said a senior executive of a budget airline.

The executive said that despite drop in the aviation turbine fuel (ATF) prices and other operational costs over the last few months, operating an A320 or a Boeing 737-800 for 180-200 flights can cost anywhere between Rs 10 crore and Rs 12 crore per month.
This means that airline with a fleet of 20 aircraft need to raise around Rs 200-250 crore from their operations to meet their working capital needs.

“In today’s scenario, it is becoming increasingly difficult to do so (ensure the cash flow for meeting their operational cost),” said the executive.

An aviation analyst said airlines were trying to strike a balance between yield and revenues by introducing and withdrawing promotional offers.  

“By changing base fare and fuel surcharge, airlines are able to prop up booking volumes that ensures some cash flows but this hampers yields (average fare per passenger).  So, the trade off is between getting higher volume with low ticket prices and getting lower volume with higher fares,” said the analyst, who did not want to be named.

With passenger revenues taking a dip, airlines were trying to generate some cash flow through sale and leaseback deals. And even though such a capacity induction could prove suicidal in a market that is slowing down, domestic carriers are taking delivery of planes to earn income from sale & leaseback.

“We sell and leaseback about 3-4 aircraft every year and that generates working capital for the airline, depending on the type and age of the aircraft,” said a senior executive with full service carrier Jet Airways.

Budget SpiceJet Ltd inducted four aircraft to its fleet since October while GoAir is going to add two by June.

Ankur Bhatia, managing director of Amadeus, believes the two no-frill airlines are trying to infuse cash into their operation by earning profits on S&L.

Though, softening prices of aircraft in recent times have pulled down the profits from such deal. Cash generated from an S&L deal on a B737-800 has slipped to $1.5 million from $3-3.5 million a year back.    

Severe working capital crunch has driven full service carriers (FSC) Jet Airways and Kingfisher Airlines to lease aircraft to foreign airlines. Jet has already leased of its aircraft and Kingfisher two. This summer, Naresh Goyal-owned FSC is going to lease four planes.

Analysts feel this is a good strategy to ensure a steady flow of income, with no or lower operating cost.

A senior Jet Airways executive said his airline has flown into non-turbulent working capital zone after lining up funding of Rs 2,000 crore from Indian banks in the last few months.

Many Industry experts argue that the airlines cannot be dependent on the banks for meeting their working capital needs forever. As passenger revenues fall, they are borrowings from the banks are also shooting up.  

Mark Martin, aviation head at research firm KPMG, says going forward private equity funding would become a popular mode of capital infusion for the airlines.

Kapil Kaul, CEO – India and Middle East —- of Centre for Asia Pacific Aviation (CAPA), says that survival of the airlines industry would depend on their ability to ensure uninterrupted cash flow.

“They (airlines) have to address the issue of cash flow for their survival. If they don’t then they’ll have no balance sheet by 2010,” said Kaul.

The CAPA chief for India and Middle East says the current enterprise value of the airline industry is not more than $ 1 billion. This means that with an industry loss of $2 billion, its current networth is negative.