2008 was the year reality struck home in the Indian airline industry. One whiff of the downturn exposed the lack of robust business planning, and abundance of financial vulnerability of Indian carriers, leaving all of them battered and bruised, some more than others.

We saw mass-scale defaulting on payments by carriers in India to everyone from airports to aircraft manufacturers.

Touted as THE growth sector of the future by both Boeing and Airbus in 2007, in the last nine months, domestic airlines have slashed capacity and with very shallow pockets, pulled back at least one-third of their aircraft orders due for delivery this year.

India’s domestic airline capacity shrank by more than 8%, compared with 3.5% in Japan and growth of 18% in China.

As late as mid 2008 Boeing, Airbus SAS and Empresa Brasileira de Aeronautica SA (Embraer) were projecting delivery of 91 aircraft during 2009. They will now thank the stars if they can deliver the reduced quantity of 57 aircraft expected this year.

Both Boeing and Airbus are claiming that no airline has "cancelled orders", but this statement does not account for the deferrals in delivery and the diversion sales of aircraft by Indian carriers to foreign airlines.

In this highly competitive market, it appears that Boeing has the upper hand. It is facing deferral of only two of its 22 expected deliveries down 10%, while Airbus is down 53% expecting to deliver only 32 out of the expected 68 aircraft in large part due to Kingfisher. Embraer increased its delivery tally to five aircraft up 500% from the projected one thanks to the phenomenal growth of Paramount Airways their main customer

Boeing Customers

Jet Airways with fleet of 111 aircraft accounts for the two deferrals of Boeing. One 777-300ER and one 737. Jet has leased out a significant portion of its wide-body fleet. A total of seven of its eleven uber-luxurious Boeing 777-300ERs to Turkish Airlines THY and Gulf Air, and two each of its Airbus A330-200s to Oman Air and Gulf Air. Jet has called for a further ten per cent cut in seat capacity and is now trying to leasing out its narrow body Boeing 737s.

Image courtesy and copyright A.J. Best. Used with his permission. Please do not re-use without permission.

SpiceJet with 12.5 per cent growth will take delivery of 12 Boeing 737-800s/900s, one each quarter for the next three years adding to its fleet of 14 Boeing 737-800s and 900s.

Air India backed by the Government of India, will take delivery of its new Boeing 737-800s, four 777-300ERs and and three 777-200LRs by September, as scheduled. Air India (domestic and international combined) has a fleet of 150 aircraft. The combined order to Boeing and Airbus was for 111 aircraft.

Airbus Customers

The largest domestic carrier and most aggressive Airbus customer Kingfisher Airlines is in terrible financial shape. It led all Asian carriers with a 17.1 per cent capacity cut and has held its expansion to its existing 76 aircraft not withstanding the fracas with GECAS on four of its aircraft. It has diverted its three of its five A340-500s to Arik Air of Nigeria, the balance two have become "white tails" at Toulouse. Of the five A330-200s delivered, two are lying idle. Kingfisher is now in talks with Arik Air in an effort to lease them. The deliveries of the A380 have been deferred yet again. Even pending deliveries of ATR42s and 72s from the Air Deccan days are languishing at Toulouse. Kingfisher has been forced to defer delivery of 32 of 48 Airbus A320 planes that were due for delivery in late 2008 and in 2009 and is also diverting its narrow body A320 family orders to foreign airlines like Turkish THY. So while Airbus may deliver planes to an Indian airline, the aircraft may never come to India.

IndiGo along with fellow value carrier SpiceJet has been registered increasing market share, and has recently taken delivery of its 19th Airbus A320. It is maintaining a more conservative but steady delivery rate.

Air India domestic (formerly Indian Airlines) will maintain its delivery with Airbus for the narrow body A320 family having recently taken delivery of three each A321-200s and A319-100s. Airbus has also commenced discussions with Air India on the A380 superjumbo and hopes to convince the airline to buy a few.

While both Boeing and Airbus do not expect any new orders from the Indian market in the near to medium term, they continue to be bullish on India and maintain their market forecasts which estimates that the country’s airlines would buy up to 1,100 planes over the next 20 years.

SpiceJet has announced the return of its successful promotion scheme “Book for 2 pay for 1”.



This scheme is valid for bookings made from March 4 to 6, 2009 and only for bookings made through the SpiceJet website. There are conditions attached to this scheme.

SpiceJet in a bid to compete in the business segment with fellow low cost carrier IndiGo has announced some features:

• Passengers can buy hot coffee or tea with cookies for only Rs 20.
• Busy travellers can now collect their boarding passes for return flight, at the time of check in, provided they are coming back on the same day.
• Guests who land after travelling via an International airline, do not need to spend extra, to carry their “two bags”, while they fly with SpiceJet on domestic sectors
• Music is played as passenger boards and deplanes. This has been composed in-house by SpiceJet employee Moin Wasil.

Fellow low cost carrier IndiGo, has introduced special "all-inclusive" fares of Rs 1,600 and Rs 2,600 for journeys below and above 750 km. The over 750km Rs. 2,600 fare is attractive since, for example, for a Delhi-Mumbai flight the average full fare tickets cost Rs 5,500 or higher. For more details visit the IndiGo website.

Over the last year, IndiGo has been on a steady march, taking an increasing share of the Indian passenger market.

While most of its competitors contracted during the torrid 2008, IndiGo and fellow value carrier SpiceJet, have gained in actual passenger numbers.

The secret to IndiGo's success ? Read this article "Fine Strokes" by Business Standard.

The recent "hijack" incident involving Indigo airlines flight 6E344 from Goa to New Delhi, has created the furore all over India, and even on to the international stage.

I am glad, Jitendra Kumar Mohala, a 42-year-old chartered accountant, and son of a retired air commodore of the Indian Air Force, has been booked under sections 336 (endangering life and personal safety of others) and 506 (criminal intimidation) of the Indian Penal Code, as well as Suppression of Unlawful Act Against Safety Of Civil Aviation Act, 1982, which is non-bailable. Now let us hope the authorities throw the book at him.

In the last 15 days alone, there have been three other reported instances of passengers creating trouble on board an aircraft.

• January 14th. An Air India passenger, Valli Panikker (42) got so drunk on the flight that he started abusing and misbehaving with fellow passengers, and hit two cabin crew members on board a New York-Mumbai flight. He was handed over to Mumbai police after the plane landed. Penalty ? Rs. 1,200 fine. News report here.


• January 30th. A 72-year-old man, on a Chennai-Delhi flight, was completely drunk and started groping some women and tried to 'feel up' some of the stewardesses. Penalty ? He was de-planed. As per a police official at Chennai "As he was an aged man, the crew decided to not file a complaint against the man. We warned him not to repeat such activities and let him leave after some time." News report here.


• January 30th. A passenger, Prashant Imene, on board a Jet Airways London-Mumbai flight, molested a woman co-passenger, assaulted the cabin crew and hurled cuss words at them, threatened to throw his passport out of the window (I wonder how, at 30,000ft), tore his boarding pass, threw water on a flight attendant's face and hit an elderly passenger with a spoon. He was not drunk. Penalty ? The police booked him for outraging the modesty of a woman, threatening and assaulting. He was produced in court on January 31st. Sentence unknown. News report here.


• February 1st. Jitendra Kumar Mohala, 42, passenger on board Indigo 6E 344 misbehaved with an stewardess over some issue and threatened her, saying that he was armed. He said he had two accomplices on the board and they would hijack the plane. He also said that he was official of the Director General of Civil Aviation (DGCA) and will inspect the plane. Penalty ? Let us see what develops.
  

Outside this 15 day window,

• July 12, 2008, a drunk Kuwaiti national, Bilal Ahmed, 40, forced a Doha to Bangkok Qatar Airways flight. to make an emergency landing in Mumbai. Sources said his hands and feet had to be tied together to bring him under control. The Mumbai police meekly returned Bilal Ahmed to Doha on the very next Qatar Airways flight, instead of meting out any punishment.

Airlines, including those in India, hire attractive young ladies as customer service and cabin crew to inject glamour in to an otherwise tiresome travel experience. The Singapore Airlines' "Singapore Girl" is renowned globally. Virgin Airlines is considered "Still Red Hot" with its glamorous red uniformed female cabin crew, a theme followed by Kingfisher airlines in India. The crews of Jet, Indigo, SpiceJet, and some in Air India, are no less, in the glamour quotient.

Indian air crews, particularly, females, have to put up with troublesome passengers some who are over-aggressive, often hostile, many times drunk and lecherous, believing that the stewardess is their personal property to abuse, grope, and fondle.

In the land when 'Devi', the female goddess, is worshipped, this lack of respect for women in the air, is utterly disgusting.

It is not just passengers, just yesterday (February 3rd), in a most shocking incident, an Andhra Pradesh Home Guard attached to the Rajiv Gandhi International Airport, B Vinod Reddy, was arrested for eve-teasing some girl students and then beating up their male classmate when he attempted to intervene and get Reddy to stop. Reddy was finally arrested and charged under sections 323 (Voluntarily causing hurt) and 509 (Insult the modesty of a woman) of the Indian Penal Code, after the students went on a protest at the airport.

Despite India having the laws under the Indian Penal Code, and being a signatory to all United Nations' conventions and treaties covering civil aviation, recent incident indicate a pattern of not levying punishment.

Compare the minor penalties in India, to the penalties in the United Kingdom which mandates a penalty of £5,000 or 2 years’ imprisonment. In the United States, criminal penalties are a fine of up to US$ 11,000 or 20 years imprisonment, civil penalties aside.

India has to enforce its laws, and severely punish offenders, only then, will passengers learn to control their mouths, their hands, and their behaviour.

What also surprises me is the lack of complaints from the airlines or the crews. I refuse to accept that a stewardess is not disgusted to the point of making a complaint, after being groped, abused, or 'felt-up'. An airline looses a lot of money by making emergency landings, and looses passengers who have to put up with a horrible experience.

It is time for all of us to stand firm with a "zero tolerance" policy against these maniac passengers, and also empower the crew by supporting their complaints. Otherwise, we risk the typical knee-jerk reaction, one can expect from the government -- to ban serving of alcohol on board any flight, which will only inconvenience 99.9% of passengers instead of punishing the offending 0.1%, and still leave cases like Prashant Imene (who was not drunk) and Jitendra Kumar Mohala (who drank before the flight) un-addressed.

The Mint is reporting that GoAir recently started offering uniform fares, inclusive of surcharges and other taxes, for purchases made 21 days in advance.

For short sectors, defined as less than 750 kms travel distance, the airline will charge Rs 1,700 a ticket and Rs 2,700 for distances greater than 750 kms. According to the company statement, in effect a Mumbai-Delhi ticket bought 21 days in advance will be for Rs 2,700 instead of the base fare of at least Rs 1,000 plus Rs 2,925 of surcharges and airport fees.

GoAir’s new offer is in reaction to the introduction of Rs one fare by IndiGo on certain routes and SpiceJet Ltd.’s Rs 99 base fare for tickets booked at least 21 days before travel.

The quarter ended December 31, 2008 witnessed an 18 per cent decline in domestic passenger growth, and has prompted all major airline groups in India to resort to price cuts in order to stimulate passenger demand.

Jet Airways, and its low cost subsidiary JetLite, were one of the early adopters of the 21 day advance fares also called APEX fares. Jet Airways also recently offered Rs 250 base ticket fares, while JetLite started Rs nine base fare for travel during this month. It has similar schemes for its Business-Class too. Jet Airways is expecting a 15 per cent increase in passenger traffic.

Jet's alliance partner Kingfisher Airlines also slashed fares between 21 per cent and 65 per cent on various routes earlier this month while the state-owned and operated National Aviation Company of India Ltd. (NACIL), which runs Air India, also announced an average reduction of 52 per cent in basic fares for domestic travel on 20 major routes.

2008 was a torrid year for domestic airlines in India, as recently released figures by the Ministry of Civil Aviation (MoCA) show.

Domestic passenger traffic for the year 2008 fell 5% from 42.58 million to 40.77 million (Fig. 1), driven by the increase in fuel costs, and the massive hikes in air fares, which are yet to fully retreat, and capacity reductions by the airlines.


The Low Cost Carriers (LCCs) Indigo, SpiceJet, and JetLite, improved their market shares at the expense of Full Service Carriers (FCCs) Air India, Jet Airways, and Kingfisher Airlines. IndiGo is the big winner this year with a four per cent market share gain. Air India (the former Indian Airlines), gave up a big three per cent share. (Fig. 2)

The notable exception is Go Air (now called No Go Air due to its numerous flight cancellations), and the former Air Deccan, now christened Kingfisher Red after their acquisition. Kingfisher Red lost five per cent market share, while Kingfisher Airlines gained only three per cent, resulting in an overall loss of two per cent market share to competitors. Clearly the strategy at Kingfisher is not working.


While most airlines and airline groups lost in actual passenger numbers, LCCs IndiGo, SpiceJet, JetLite (the former Air Sahara now a subsidiary of Jet Airways), and Paramount, gained passengers. (Fig. 3).

The capacity swapping at Kingfisher group is clearly visible, and when performance of both Kingfisher Airlines and Kingfisher Red is combined, actual passenger numbers went down 10.5 per cent, from 12.56 million to 11.25 million.


The first two quarters of 2008, provided no clue to the excess capacity in the Indian airline industry. The "perfect storm" of increased fuel prices and reduced economic activity started rearing its ugly head towards the end of Q2 (April, May, June), and kicked the industry in it's teeth in Q3, with a mind numbing 25 per cent drop in traffic. (Fig. 4). Q4 has provided some seasonal relief, but Q1 of 2009 will see numbers dropping back again.


With the exception of Paramount, which has a small niche regional market, all the airlines saw massive drops in passengers in Q3. (Fig. 5). Most airlines staged a recovery in Q4, but the surprise is Jet Airways. It's passenger numbers tanked almost 20 per cent in Q3 and continued the downfall by another 15 per cent in Q4.


The market share of LCCs followed the increase in air fares, as passengers shifted from the FSCs. SpiceJet share in Q3 reflected its financial problems, prior to the Ross bailout. (Fig. 6)

It is an ignominious performance that the pioneer in the air travel bubble, Air Deccan (now Kingfisher Red) has lost over six per cent market share over the year. Clearly many of the "first time flier" passengers have chosen not to repeat, either returning back to trains and buses, or moving to other carriers like IndiGo and SpiceJet.


The data highlights the price sensitive nature of the Indian traveller. IndiGo appears to have a winning formula with its low prices and efficient service. Fancy gimmicks do not work. At a time of economic slowdown, the FSCs have to get their act together quickly. By holding fuel surcharges to unjustifiably high levels, they are surrendering ground to the LCCs and surface transport.

IndiGo, Jet Airways, JetLite, and SpiceJet have announced Advance Purchase Excursion (APEX) fares for all purchases made at least 21 days before the flight departure.

Jet Airways offers a fare of INR 250 while JetLite offers a fare of INR 9. The booking and sale validity of this offer is from January 1 to January 31, 2009.

SpiceJet is offering ‘Spicy Hot Fares’ starting INR 99 across its network and is valid till June 30, 2009.

IndiGo's APEX scheme is called 'Early Bird Fares' and start at INR 99.

All fares mentioned above are exclusive of taxes and surcharge, and this is where the kicker comes. The fuel surcharges are still around INR 2,000 for short distance (under 750km) and INR 3,000 for long distance.

I really wish that airlines respect their passengers' intelligence. These APEX fares while welcome, remind me of the earlier times when airlines used to offer a "fly free" concept. After all, we do know basic arithmetic.

Both the European EASA and US FAA have issued emergency Airworthiness Directives ADs for operators of CFM56-5B engines, typically operated on the Airbus A320 family of aircraft, which include the A318, A319, A320 and A321.

Snecma Image
EASA Emergency Airworthiness Directive 2008-228 and the FAA Airworthiness Directive AD 2009-01-01, requests operators of CFM56-5B engines, to monitor Exhaust Gas Temperatures (EGT) for deterioration. If both engines show deteriorations of 80 or more degrees, at least one engine must be replaced according to the new directive. EGT monitoring is a crucial aspect of flight operations.

The emergency directives come after an incident, in which an Airbus A321-200 experienced compressor stalls on both engines during initial climb out on December 15th 2008. While not disclosed, it is suspected, this is the incident involving Air France Airbus A321-200, F-GTAJ, flight AF 2585 from Tunis to Paris CDG, where the flight had to return to Tunis 14 minutes after take-off due to "unspecified engine problems".

The CFM56-5B is a very popular engine with over 60% of Airbus A320 family operators, selecting them.

In India, Indian (now Air India) operates the CFM engine on the new series of Airbus aircraft, part of the 43 ordered by them in 2006. Indian had ordered 20 Airbus A321s, 19 Airbus A319s and four A320s. The older series of Indian's A320 fleet use engines from IAE, as do most of India's private operators, Kingfisher Airlines, Kingfisher Red, and IndiGo, which are not impacted by these ADs.

I must stress that there is no need for passengers to treat these ADs as negative, and Air India has an excellent maintenance record.

PTI reports, Kingfisher Airlines, has said that it would effect fare cut across its network from January 1.

Without specifying the quantum of reduction in fares, in a statement today, Kingfisher Airlines Chairman, Dr. Vijay Mallya said

Kingfisher Airlines will begin the New Year on an aggressive note by slashing fares on its network,

The current low prices of Air Turbine Fuel (ATF) allows Kingfisher to pursue an opportunity to significantly increase market share by offering the fine five star flying experience at reduced fares.

Bangalore Aviation readers will recall, until now, Kingfisher, and its alliance partner Jet Airways, had been saying, fares would be cut only after the government classifies ATF in the Declared Goods category. The proposal of the Civil Aviation ministry is before the Parliament.

This long standing demand of airlines across the board, will ensure there will be a uniform four per cent sales tax on air fuel across the country, unlike the present, where sales taxes range from four per cent to 32 per cent, depending on the state, and accounts for over 35 per cent of airlines' operational costs.

However, several state governments oppose the uniform taxation as it would cause revenue loss to them.

Over the last four months, there has been a sharp decline in ATF prices. While some air carriers earlier this month reduced the fuel surcharge between Rs 200 and Rs 400, they did not touch the basic fare.

Mallya's decision could have its inspiration in the fact that Low Cost Carrier (LCC) IndiGo recently beat both Kingfisher Airlines and its LCC Kingfisher Red, to take third place in market share.

There is no doubt, the losses at the airline are significant. Just two weeks ago, there was news about four Kingfisher aircraft being de-registered. Doubts are rising on the impact of these losses on Dr. Mallya or his core alcoholic beverages business.

December 29, update.

The Times of India is reporting the fare reductions will be in the range of 10% and 15%. Jet Airways is expected to cut its fares by a similar amount, and Air India will follow suit. The LCCs IndiGo, SpiceJet, and Kingfisher Red are also working on the fares.

The disagreement between Kingfisher Airlines and GE Commercial Aviation Services (GECAS) has become murky.

Yesterday, Daily News and Analysis (DNA) newspaper reported

"In a major setback to Kingfisher Airlines, the Directorate General of Civil Aviation (DGCA) has de-registered three of its aircraft on account of rental payment default. These aircraft will be grounded and not permitted to fly on commercial routes.

The airline had reportedly been erratic in paying its lease rental to GE Commercial Aviation Services (GECAS) for four A-320s. Kingfisher Airlines, however, denied a default and obtained a stay order from the Karnataka High Court to prevent repossession of the four aircraft by the firm in September this year.

Senior DGCA officials confirmed that three aircraft have been struck off the records on Thursday. “Three aircraft have been de-registered and one more is likely to meet the same fate next week,” said a senior civil ministry official on condition of anonymity.

The airlines has over a dozen A-320s flying on domestic routes. With a fleet of 50 aircraft, grounding four of them won’t impact the airlines much. But for Vijay Mallya, the DGCA’s action is no less than a bitter pill. De-registration of the aircraft means the airline will have to ground them with immediate effect. An airline spokesperson said: “This issue is sub judice and it will be inappropriate if I comment on the matter.”

This move comes as a big relief for the GECAS. The company is one of the world’s top aircraft lessors. Rattled by the payment defaults, it registered a complaint with the DGCA, asking for permission to repossess four aircraft leased to the airline. The company spokesperson, however, refused to divulge information: “GE treats its business discussions with high confidentiality and is unable to disclose any details.”

Today, as per Dow Jones newswire, Kingfisher Chairman Dr. Vijay Mallya, claims that Kingfisher has returned the Airbus A320 aircraft GECAS, and does not owe any money to GECAS, who is in-fact, withholding surplus Kingfisher funds.

While this makes interesting reading, I am left wondering, where have the business plans, of the super-successful business tycoon, Dr. Vijay Mallya, gone wrong.

Just last week the Business Standard reported that low cost carrier (LCC) IndiGo has overtaken Kingfisher Airlines to become the third largest carrier in India. It has also replaced Kingfisher Red (the former Air Deccan) as the largest LCC in India.

IndiGo gained two ranks to third position with a market share rose to 14.7 per cent, while Kingfisher Red remained at fourth with 13.3 per cent, and Kingfisher Airlines slipped two spots to fifth with a lowly 11.6 per cent. In October 2008, it was Kingfisher Airlines, Kingfisher Red, and Indigo in ranks three, four, and five, respectively.

Friends and acquaintances in the airline and aviation industry too are scratching their heads, at this sudden downturn at Kingfisher.

Kingfisher Airlines is a passion for Chairman Dr. Vijay Mallya, one he administers personally. Given his world-wide business interests, constant globe-trotting, and resultant demands on his time, is it time for Dr. Mallya to do a Naresh Goyal and let a veteran airline executive like Wolfgang Prock-Schauer step in as CEO, who can devote 24 x 7 and run the airline without interference ?

IndiGo joined fellow airlines Air India, Jet Airways, JetLite, Kingfisher Airlines, and Kingfisher Red and announced a cut of Rs 400 in its fuel surcharge across all domestic routes, today.

IndiGo President Aditya Ghosh said

"Effective December 6th, IndiGo has reduced its fuel surcharge to match that of Air India, Jet Airways and JetLite,"

He said this was aimed at keeping the promise of affordable fares and passing on the benefits of the recent reduction in aviation turbine fuel (ATF) prices to the air travellers.

Fuel cost constitutes between 40 and 50 per cent of the total operational cost of an airline in India

Ratan Tata's words say it all

We cannot replace the lives that have been lost and we will never forget the terrifying events of last night, but we must stand together, shoulder to shoulder as citizens of India, and rebuild what has been destroyed. We must show that we cannot be disabled or destroyed, but that such heinous act will only make us stronger. It is important that we do not allow divisive forces to weaken us. We need to overcome these forces as one strong unified nation

Stay strong Mumbai!!!!!

All domestic airlines report that their operations at Mumbai are largely unaffected and most flights are on schedule. Airlines clubbed their flights to accommodate the expected drop in passengers. Some international airlines like Lufthansa, Air France, Delta, KLM had flight disruptions or cancellations, but operations are expected to normalise by Friday.

As expected, security is extremely tight. All passengers are advised to carry valid official photo identification. If possible carry two pieces of identification. Also, please give yourself extra time to complete the enhanced security checks.

Jet Airways and JetLite have also announced the waiver of cancellation and re-issue charges on their domestic and/or international services into and out of Mumbai, on Thursday, 27 November and Friday, 28 November, 2008 on account of the current situation.

Passengers may contact Jet on 39893333 or the toll free number 1800-22-55-22 for further information or visit www.jetairways.com

SpiceJet CEO, Sanjay Aggarwal's statement is similar to Jet's:

"SpiceJet flight operations are not impacted by the unfortunate incidents in Mumbai. We are offering all passengers who have missed their flights or chosen not to take them from Mumbai, to Mumbai or via Mumbai, a choice of either rescheduling their flights or total refund or creating a credit shell with us. No change fee will apply on any of these transactions. In view of the current situation, we have also beefed up security at all the stations across our network."

I was unable to find any information or have received any similar statement from Kingfisher, IndiGo or Air India, but I suspect they too will follow a similar line.

After steadily loosing market-share, low cost carriers (LCCs) like IndiGo, SpiceJet, and Kingfisher Red (former Air Deccan), have clawed back from 41% during the July-September 2008 quarter, to 46.4% in October.

Indian domestic passenger numbers and passenger numbers growth
January 2007 to October 2008

Source: Centre for Asia Pacific Aviation and Ministry of Civil Aviation

While passenger number rose in October, in the slowing economy, passengers are tightening their belts and looking for lower cost travel options. Full service carriers like Air India, Kingfisher, and Jet, are reluctant to pass on savings like the reduction in fuel prices and reduction in congestion over busy airports, over the last few months. LCCs have removed the congestion surcharge, and have introduced lower fares on advance bookings.

The full service carriers have indirectly increased their incomes by withdrawing commissions paid to travel agents, and have further penalised paasengers by imposing a "transaction fee" of Rs. 350 to 500 to cover for the travel agents' commission.

While full service carriers like Jet typically charge Rs. 7,400 for a one-way ticket between Mumbai and Delhi, LCCs like SpiceJet typically charges Rs. 5,125. The gap between LCCs and full service carriers has grown back to Rs. 1,500 - Rs. 2,000 from a paltry Rs. 400 earlier, which had caused massive passenger defections from the LCCs to the full service carriers.

LCCs have also taken the battle up a notch further, now allowing corporate customers to reschedule and cancel tickets with little or no fees, in a bid to increase their penetration of the lucrative corporate traveller business.

IndiGo and SpiceJet led the LCC charge carrying about 1.2 million passengers each, while Kingfisher Red carried 0.74 million.

The turmoil in the Indian airline industry during the month of October has produced results that can be, only mildly described as, significant. In just four weeks, castles built over the last four or more years, have come crashing down.

By the end of 2008, the Indian airline industry which accounts for less than 2% of the global airline market, will contribute about $2 billion, or over 33%, of the total global losses. This dire, lop-sided situation, which can be attributed to only primary factor – gross imbalance. It is ironic, that the demand – supply imbalance in the Indian airline industry, is resulting in this imbalance between market share and losses share.

How did the situation become so dire?

Over the last 4 years, the Indian airline industry has created this imbalance thanks to rampant and blind expansion. It was all on auto-pilot, thanks to low fuel prices and a robust economy.

In 2008, along came the “perfect storm” and the reality struck home. Skyrocketing fuel prices since late 2007, married to a populist fuel pricing policy by the central and state governments in India which grossly overtaxed aviation turbine fuel (ATF), and sent the already high fuel prices in to the stratosphere, followed by a slowing economy thanks to the global financial credit crises and subsequent meltdown of demand, and uncontrolled costs.

Capt. G.R. Gopinath’s Air Deccan believed in bring airlines to the masses. To expand customer base Air Deccan expanded in to the smallest of cities, and given that, India is an extremely price sensitive country, offered fares that were at par with, or just marginally above, that of the Indian Railways, known to be one of the most economical railways in the world.

Along with with Air Deccan (now Kingfisher Red), low cost carriers (LCCs) Air Sahara (now JetLite), SpiceJet, IndiGo, and GoAir commenced. India seemed destined for low cost paradise, as even full service carriers, Indian Airlines (now Air India), Jet Airways, and Kingfisher Airlines, scrambled to develop low cost fare models of their own.

Thanks to the unbridled expansion, HR costs went in to orbit. From expatriate flight crews to the ground handlers, people were at a premium, and airlines paid, and paid way to well.

Another problem is, India does not have adequate full service airports, let alone, separate low cost airports like Europe and North America.

At all major airports across the country the skies became heavily congested, and it was not uncommon to hear an announcement from the Captain “Ladies and Gentlemen, welcome to Delhi. We are 25th in line for landing, and should land 2 hours from now”. This on a 1.5 hour flight.

The higher costs of full service airports, these delays, and systemic inefficiencies eroded the advantage LCCs in Europe and North America enjoy, i.e., making 9+ flights per day per aircraft, compared to 6 or less in India, and only added to the operating cost burden on all airlines, particularly the LCCs.

As global fuel prices rose, thanks to the fuel taxation policy in India, which makes ATF about 70% costlier than global standards, the impact on airlines was even more severe.

The airlines began to bleed profusely. Unable to sustain, airlines have been raising their prices over the last year, in some non-metro routes, by over 100%. The price sensitive Indian market, particularly in Tier II cities began to slow down.

In parallel, along came the economic slowdown. Demand slowed, and passengers across the board began tightening their belts. The bottom fell out of the market, as passengers shifted from the skies back to rail and bus. At the same time, new airports at Hyderabad and Bangalore were commissioned in the first half of 2008, these airports are far away from the city, and the long and costly commute, along with the rising air fares, totally erased demand in the regional routes, the demand-strength on which LCCs had based their massive expansion plans.

Domestic traffic has contracted over the last four months, declining by as much as 19% in Sep-08. Growth has fallen from 33%+ to over -20% within the span of just six months.

Indian domestic passenger numbers and passenger numbers growth: Jan-07 to Sep-08

Source: Centre for Asia Pacific Aviation & Ministry of Civil Aviation

In desperation, airlines have been resorting to steps, hitherto unthinkable, to stop their bleeding and cash burn.

To bolster yields per flight, airlines have cut capacity by 17% in the six months Apr to Sep 2008, and the further increase in prices have had even more impact on demand. Jet and Kingfisher entered in to an alliance, which left the jaws of most Indians agape on the floor, given the severe competition between them. Staff, including precious flight crew, started getting the axe. CEOs of three airlines are no longer there. Despite a 20%+ reduction in fuel prices (thanks to taxation cuts and falling crude prices), no fare reductions are being passed on to the passenger. The massive fleet expansions have been put on hold. Aircraft deliveries are being delayed. Aircraft already produced are being sold off to other global airlines. Aircraft in the fleet are being returned back. Disagreements and litigations will ensue, but the airlines have no choice. Their backs are against the wall.

The reduction in fuel prices will provide short term relief, but the outstanding fuel bills of the airlines are gigantic. Capacity reduction will have its impact only if properly rationalised with demand.

While, domestic demand crashed through the floor, the one bright spot was international traffic growth, which has remained consistently robust at 10% year-on-year for the first half of FY 2008-09. However, as the global economic slowdown has started taking its toll on international travel, many carriers, such as Singapore Airlines, Finnair, Austrian, British Airways, and KLM have announced capacity cuts and withdrawal of service. At the same time, with the Middle East being a robust market, Gulf carriers continue to grow. Emirates has become the largest foreign carrier in India and will aggressively expand from 132 to 163 weekly services over the next six months.

I am reminded of the Chinese saying “may you live in interesting times”. The rest of 2008 and whole of 2009 is going to be very interesting indeed. The medium term growth for the Indian airline industry is bright, but only for those who survive.

Kapil Kaul, CEO, Indian Subcontinent & Middle East, The Centre for Asia Pacific Aviation, gives us a look behind the scenes…

Jet-Kingfisher alliance - the unthinkable happens

The Jet Airways-Kingfisher alliance, which although unthinkable just a few weeks ago, is a reflection of the current fragile state of the market. The primary objective of this arrangement is to bring together the two largest players in the market, with overlapping networks, to reduce capacity and align it with demand, whilst at the same time being in a position to influence fares. At this stage, it would appear that this alliance will lead to extensive engagement and integration between the two carriers.

Key elements of the alliance will include code-sharing; interline and special prorate agreements; network rationalisation; joint fuel management; common ground handling; GDS integration; frequent flyer reciprocity and human resource sharing.

The alliance is yet to take-off in any meaningful way, to date there have been some initial meetings, but it is too soon to expect any concrete steps. The initial focus will be on network, commercial and revenue management issues. Both carriers are hoping that a reduction in capacity, optimisation of their respective networks, higher yields and lower fuel prices, together with the generally strong demand in the third quarter, should reduce losses. The future of the alliance depends on both carriers seeing equal and measurable improvements in performance.

Jet Airways restructuring

Jet Airways is similarly restructuring its domestic and international operations. Jet has reduced its capacity in H1 2008/09 by 13%. The combined seat production of Jet and JetLite has declined from around 56,000 daily seats in April 2008 to 50,000 in Sep-08.

Jet is actively pursuing a cost reduction strategy - staff rightsizing is a key element of this and has been implemented actively at JetLite. The recent attempt to do so at Jet Airways was poorly timed and managed, resulting in a significant media and political uproar. However, other measures include a zero commission structure, a focus on direct distribution and e-commerce, renegotiating GDS fees and other measures. Maintenance and operational issues are currently under intensive review.

On the other hand, investment is being made in strengthening areas considered weak, such as the overseas sales network which has not been making a sufficient contribution to the international routes. Targeted sales and marketing initiatives are being pursued to enhance revenue and yield.

The integration of Jet Airways and JetLite continues and although the process has been longer and more challenging than anticipated, positive results are expected to be seen shortly.

As a result of focusing on core operational and commercial issues over the last six months, the Jet Airways/JetLite combine has increased its market share lead over Kingfisher/Kingfisher Red and has posted much healthier load factors in the last quarter.

Seven B737s are being returned prior to the end of this year, while five B777s are being leased to Turkish Airlines, allowing for capacity on North American routes to be better aligned with demand. These routes have been under significant pressure. Deliveries due in the next 12-18 months are being deferred and no new international routes are expected during this period.
JetLite is expected to operate with a full strength of 24 aircraft shortly with the return of two CRJs from maintenance.

Kingfisher rationalising its capacity

The first steps of rationalisation can already be seen: Kingfisher Airlines has sold five A340-500s, which would suggest that plans to launch non-stop services to the US have been shelved for the time being. The current fleet of five A330s has two aircraft being used for the Bangalore-London route, with the remaining three aircraft yet to be deployed: routes under consideration are Mumbai-London; Mumbai-Singapore and Mumbai-Hong Kong.

On the domestic front, seven A320s are being returned in Nov/Dec and further reduction is still expected. Some A320s may be redeployed on short-haul international routes, primarily to the Middle East, where they can be used for back-of-the-clock operations. The ATR fleet is also under review, Kingfisher is reportedly not happy with the performance of the regional aircraft.

No expansion in the fleet is expected for the next 12-18 months.

The focus is on achieving commercial stability, stemming cash losses and addressing issues related to the integration of Kingfisher Red. The next 12-18 months will be a time of consolidation in terms of people, systems, operations and commercial issues and to restructure the cost base to compete more effectively.

SpiceJet and IndiGo consider their futures

The two largest independent LCCs are taking a cautious approach with respect to capacity expansion, SpiceJet has leased five of its aircraft to other airlines and is operating with a fleet of 15 aircraft. Its second quarter results were significantly below expectations and continued performance at this level will set the stage for further realignment.

IndiGo has also leased two A320s to Turkish Airlines and is evaluating fleet induction plans for the next 12-18 months.

Both carriers will benefit from lower oil prices and are launching some fare initiatives to stimulate the market. SpiceJet is currently the more vulnerable of the two carriers, despite its recent cash injection by a US-based private equity firm.

Air India ill-equipped to handle current environment

Air India is expected to show continued weakness in its domestic operations. The Jet-Kingfisher alliance will further accelerate this.

Air India is possibly the only domestic airline in India which does not have a modern yield management system - most fare decisions are taken manually.

Internal issues related to the merger between Air India and Indian, staff morale and a public sector mindset, continue to play havoc with its operations.

A massive cost-cutting exercise is under way which includes:

• Fuel conservation measures, for which IATA is assisting with an efficiency gap analysis;
• Older, less fuel-efficient B747s and A300s are being retired and leases on B747s and A310s are not being renewed. Of the 111 aircraft on order, 38 have been delivered, which has reduced the average age of the fleet from 14 years to ten years;
• International operations are being reviewed and the network is being restructured, including the suspension of certain loss-making routes;
• Reduction in weight and category of inflight catering.

However, Air India lacks the management strength to navigate the significant issues which it faces to be able to effectively challenge other players. Furthermore, with political impediments to rightsizing its workforce of 35,000, achieving a viable business model will remain tough.