The much hyped Indian low-cost airline industry could be in for a period of major contraction and consolidation rather than more explosive growth.
Some in the aviation industry have been questioning for months the realistic size of the Indian low-cost market, which has seen explosive growth with several start-ups and mega aircraft orders over the last two years. Air Deccan’s first results since going public three months ago provide the first hard evidence that all is not rosy in India. The carrier has just reported to the Bombay Stock Exchange a loss of Rs3.4 billion ($74 million) for the 15-months from 1 April 2005 to 30 June 2006 and a shocking negative 22% operating margin.
Bangalore-based Air Deccan became India’s first low-fare carrier when it launched in 2003. Three carriers have since followed, SpiceJet in May 2005, Go Air in November 2005 and Indigo last month. The four carriers combined have over 200 aircraft on order but many have been questioning if the market can handle all these aircraft – even some of the manufacturers.
While the demand is almost certainly there, the sceptics point out India is simply not ready for low-fare carriers. Airport costs are some of the highest in the world and cannot be avoided because there are no secondary airports. Low-cost carriers also do not have any advantage over traditional carriers when it comes to most other operating costs, including fuel and labour. In fact, manpower shortages in India has forced low-cost carriers to pay their pilots and mechanics more because that is the only way they can woo them away from traditional carriers.
Air Deccan has quickly grown and now has about 20% of the Indian domestic market, second only to Jet Airways. But its first set of financial results seem to indicate that its low fares are too low to be profitable and unless there is a sea change in India low-cost carriers could be doomed.
“We have the highest yield in India now and we’re barely making it,” says Kingifsher Airlines executive vice-president Hitesh Patel. “How can you make it with a Rs2,000 ($44) return air fare?”
Although it is often labelled as one, Kingfisher does not consider it itself a low-cost carrier and has kept yields up by offering several frills and introducing a business class. It is more going after Jet Airways, which is also generally in the black having reported profits in four of the last five quarters, than low-cost carriers. Jet had an initial public offering early last year and is also traded on the Bombay Stock Exchange. According to the Centre for Asia Pacific Aviation, Jet Airways estimates the Indian airline industry overall will rack up almost $500 million in losses for the year ending 31 March 2007.
Air Deccan in June joined Jet and Spiecjet on the Bombay Stock Exchange although it had a disappointing debut, raising Rs3.6 billion, about Rs700 million less than it expected. It is now trying to raise another $100 million from European banks but after releasing less than stellar financial results could be in for another disappointment.
Spicejet earlier reported a net loss of only Rs414 million for the year ending 31 May 2006. But it is much smaller, operating only six aircraft and generating revenues of only Rs4.2 billion since launching in May 2005.
In contrast, Air Deccan now serves 55 destinations with a fleet of over 30 aircraft and generated Rs12.4 billion over the 15 months ending 30 June 2006. That equates to a net margin of negative 28%. It released its financials over a 15 month-period because it recently changed its financial year from 30 June to 31 March.
Air Deccan also reported an operating loss of Rs2.7 billion, equating to an operating net margin of negative 22%. To put that in context the only airline in Airline Business’ top 150 ranking for 2005 that had a worst operating margin was US low-cost carrier ATA Airlines, which operated in bankruptcy protection all of last year. Based on its revenue figure, Deccan now falls just short of making the top 150 ranking but given its planned growth it will almost certainly make the list in a years’ time.
Air Deccan and India’s other low-cost carriers are betting the cost of operating aircraft in India is quickly reduced. For this to happen, infrastructure must be expanded and the government must unveil new policies which results in a reduction in landing, parking and other charges. But by the time this happens it could be too late.
“2007 and 2008 will be key years for India,” Patel says. “I think you’ll see some consolidation. I think you’ll see some going under.”
“It is clearly crunch time for the Indian low-cost-carrier sector,” says CAPA chairman Peter Harbison.