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Indian Aviation Review 2012. Part 2: The airlines’ analyses

by Vinay Bhaskara

As promised, here is the second part of Indian Aviation’s 2012 review, with an airline by airline analysis of the events in 2012.

Air India

2012 was another banner year in Air India’s agonizingly slow death spiral. Whether it was yet more labor turmoil related to the still not completed merger with Indian Airlines, a botched Entry Into Service (EIS) for the Boeing 787 Dreamliner (though admittedly 2013 has not exactly been a banner year for the 787 thus far), or a will they/won’t they attempt at selling off a portion of the Boeing 777-200LR fleet, Air India once again set new records for mismanagement.

The 787 EIS, while botched, is still an incredibly positive step for Indian and global aviation. The 787 is currently plying select flights between Delhi and Tier 1 metros (Kolkata, Bangalore, Chennai, et. al) as well as international flights to Dubai, Frankfurt, and now Paris. Even with Air India’s relatively uncomfortable configuration (18J/238Y) and atrocious interiors, the 787 is still a step forward in terms of product quality (read our trip report and review here). And as the airline integrates more 787s into its fleet, hopefully its good onboard product (the meals in Economy are excellent) will become more recognized.

See our cabin photos and cabin video walk-through here.

Routes wise, the year was mostly maintenance of the status quo, though parts of the long haul network were temporarily dismantled during the pilot’s strike. Toronto – the loss leader of the long haul network might not be coming back, which is finally a sensible move from Air India’s route planning department. Air India has appeared to settle on Delhi T3 as its primary long haul hub, which is fine with as long as they stick to it.

The strike of course was a microcosm of the broader challenges facing Air India; over-entitled employees asking for even more benefits (some highly unrealistic) despite market leading compensation. But from a practical perspective, Air India needs to get the labour situation sorted out as soon as possible. There are several inefficiencies that arise from having two “airline(s) within an airline” and Air India can hardly afford to lose more money.

During the last third of 2012, the airline was goaded in to action by the Ministry of Civil Aviation, Mr. Ajit Singh. We have not been given financial statements for almost two years from now, but here’s a (not-so) bold prediction, while Air India lost thousands of crores in calendar year 2012, its losses will be lower than from the years before.

GoAir

On the whole, GoAir had a relatively quiet year, at least by the standards of Indian carriers. It added the 13th A320 to its fleet, and with only 7 more current generation aircraft coming, it is pursuing modest growth for the foreseeable future. On the routes front, it added Chennai to the network but was otherwise quiet. I wonder however at the order for 72 A320neos. It’s viability is heavily reliant on GoAir getting approval to fly international routes as well where there is less competition and more room for individual airlines to secure their own niches.

Of course the most important fact about GoAir is that they are profitable, as Bangalore Aviation exclusively revealed in an interview with GoAir CEO Georgio de Roni back in October. Ultimately, that is the only metric that matters in this industry, and the following quote from Mr. de Roni was music to the ears: “Yes, we have a more cautious approach to growth. We are exclusively targeting profitability and not really market share.”

IndiGo

With no publicly available financial and operational data available for IndiGo, it is hard to qualitatively evaluate the airline. However, the major trend was a decided shift towards international expansion. IndiGo as well pushed towards international flying, though with a slightly different strategy than SpiceJet.

After launching services from Mumbai and Delhi to Singapore/Bangkok in Southeast Asia (Mumbai-Singapore/Bangkok have since been terminated and replaced with Chennai/Hyderabad – Singapore) as well as to Dubai and Muscat, it instead focused its 2012 efforts on growing its operations on the heavily trafficked route(s) to Dubai, adding services from Chennai, Hyderabad, and Kochi. It also added Kathmandu to the network with service from Delhi.

However, there is some question as to the viability of IndiGo moving forward. Already, reports have emerged that IndiGo is not operationally profitable and that its finances are supported primarily by high revenue from sale-leaseback of its fleet of Airbus A320 aircraft. Notwithstanding a potential collapse in the sale-leaseback market for current generation A320s as next generation re-engined products enter the market; IndiGo will thus have to maintain its high rate of A320 deliveries to keep delivering profits. They currently have 68 orders for the current generation A320, as well as the (formerly) record-setting 180 A320neos on order. But the question for IndiGo becomes, how will they adequately utilize all of these new aircraft?

Already with just 62 A320s in the fleet, IndiGo has found it hard to find enough flying. Beyond capacity dumping on Metro routes, the list of routes in India that can handle A320s is pretty much saturated by LCCs already. International operations are pretty much IndiGo’s only venue at this point, with the Gulf being the largest market within easy range of the A320s. IndiGo can replicate much of Air India Express’ market to the Gulf, though the process of securing flying rights from the Indian government is sure to be a challenge. In our opinion, IndiGo thus made a strategic blunder in committing to too many mainline aircraft and not ordering a turboprop like the Q400 or ATR 72 for service to relatively untapped tertiary markets.

Jet Airways

The year for Jet Airways was more mixed. The airline restructured its operations and saw rapid fare growth in the second half of the year as Kingfisher fell apart. They also fully embraced the power of sale-leaseback and made some good product decisions including unification of their low fare brands, (long overdue) reconfiguration of the 777-300ER fleet, and replenishment of the regional fleet. The flip side of course, is that Jet Airways still lost money overall for the year, but there steps in the correct direction.

I am a big fan of the international network restructuring; the most notable changes being the elimination of Brussels-JFK, Chennai-Brussels, Delhi-Milan, and Mumbai-Johannesburg, as well as several cuts to regional international flights. In today’s high tax, high-fuel environment, it represents smart capacity management which is not exactly a strong suit for Indian carriers. The benefits have already been seen, as Jet’s recent quarterly results have shown a marked improvement in international yield and brought revenues more in line with costs.

The A330-300 was inducted at the end of 2012, and the choice of the A330-300 was a smart one. The aircraft has very low unit costs (cost/available seat kilometer) and is a good tool for routes that have a lot of visiting family/relatives (VFR) and leisure traffic in economy class, and limited premium traffic. Moreover, the low economy class unit costs are especially important considering the growing competition for economy class travel from MEB3+1 rivals like Emirates, Etihad, Qatar Airways, and Turkish Airlines, all of whom have very low seat mile costs.

Similarly, reconfiguring the 777-300ERs into a higher density configuration will drive down unit costs on the flights to London-Heathrow. The 10 abreast configuration is rather uncomfortable but it is a necessary evil in competing with the MEB3+1. Emirates also has 10 abreast seating in its 777-300ERs. However, Jet should have gone further and stripped the extremely heavy First Class product from its 777-300ERs, thereby allowing the aircraft to do nonstop India-US flights.

Adding the ATR 72-600s is a good move, whether for replacing the existing ATR 72-500s, or for growth to combat the steady expansion of SpiceJet’s Q400 operation and expand on less competitive regional routes. Either way, it offers improved technology and fuel burn over the ATR 72-500 and should help bolster the regional operations at Jet.

The move by Jet Airways to consolidate LCC operations under the JetKonnect brand was a good one, as it helped reduce (but not eliminate) the brand confusion surrounding Jet’s multiple brands and service levels. However, the actual integration process has been slow, and the brand clarity is still lacking. When Kingfisher fell apart, much of the Konnect capacity was quickly converted back to full service to help fill the premium capacity void so perhaps there is some merit to the idea in terms of product flexibility.

Sale leaseback helped bolster the finances for Jet, even leading to a profitable Q1 for fiscal year 2012-13. But in general, the financial performance left something to be desired. Hopefully 2013’s finances will show improvement for Jet.

Kingfisher Airlines

2012 was a horrific year for Kingfisher, with the airline getting itself grounded and its airline operating license not renewed.

The depths to which this once mighty airline has fallen was symbolised by the suicide by the wife of one of its many unpaid employees, citing financial troubles. All this while the junior Mallya was tweeting about cavorting with hordes of models in sunny sands.

The government is still awaiting a viable business plan from the promoters, which will see scores of vendors including airport operators, fuel companies, and employees getting paid.

We’d like to do due diligence to Kingfisher with a proper eulogy. However, we will wait to see if Vijay Mallya can pull a proverbial “rabbit” out of his hat and resurrect Kingfisher before we write that post. Stay tuned!

SpiceJet

As with Jet Airways, 2012 was a mixed year for SpiceJet. On the positive side, the carrier grew its regional Q400 operation by leaps and bounds with great success and launched and announced several international routes. However, once again SpiceJet struggled financially, posting one quarterly profit over the course of the calendar year. It also failed to secure funding for an expansion of its Q400 fleet which signals a degree of market skepticism over SpiceJet’s business plan.

The expansion of the Bombardier Dash 8-Q400 turboprop operation was a very beneficial step for SpiceJet. The Tier I Metro routes between Chennai, Delhi, Mumbai, Bengaluru, Kolkata, and Hyderabad are heavily saturated with low cost and full service competition, and even the routes between Tier I and Tier 2 Metros are starting to reach that tipping point in many cases. The best point of expansion thus becomes the tertiary and even quaternary destinations like Vijaywada and Pondicherry where SpiceJet tends to have a monopoly or at worst duopoly with a full service carrier. Initial loads and yields for the Q400 fleet were very strong, that too from the relatively weak market of Hyderabad. As the operation expanded, SpiceJet began to shift capacity towards stronger business markets like Bangalore, Chennai, and Delhi, and the Q400 operation continued to grow in scope and reach.

First SpiceJet Q400 leaves Toronto for India

The Q400 fleet has the benefit of operating under special rules from the Indian government including reduced fuel taxes as well as takeoff and landing charges (ostensibly to grow air service to regional airports), so the Q400 operation is certainly a strong performer in SpiceJet’s tepid overall finances. The full order of 15 Q400s is now complete, and while SpiceJet has options to purchase 15 more from Bombardier, unfortunately it cannot find financing for the next 15 deliveries, which it desperately needs to expand the regional operation.

Internationally, SpiceJet launched several new destinations and flights. It already operates to Dubai, Riyadh, Colombo, Male, Kabul, Kathmandu, and will launch services to Guangzhou in 2013. It was smart for SpiceJet to make its primary international base at Delhi, as this is the largest base of VFR and leisure origin and destination (O&D) travel most likely to use a LCC. Overall, international expansion is necessary for any of India’s LCCs to utilize their fleet given the saturation of domestic routes with enough demand to support 737-800 and A320 size aircraft, and the Indian LCCs have all committed to significant fleet growth.

About Vinay Bhaskara

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