The bad news just does not stop for the domestic Indian civil aviation industry.

Recently released figures show an alarming drop to only 8.6 million domestic passengers for the third quarter of (July-September) 2008, with a miserable 2.68 million passengers for September 2008. This represents a 17% reduction over the same period last year, a 19% reduction from the previous month, and whopping 25% drop from the preceding quarter. Compare this with 33% annual growth in the previous three years.

Most industry experts attribute this drop due to the 25-30% reduction in capacity by airlines, and the 10-15% increase in fares.

Jet group (Jet Airways and JetLite) are still the dominant force in the industry, and with their new found ally the Kingfisher group (Kingfisher and Deccan) control almost 60% of the market.

Despite the deep cuts, flight load factors continue to drop. Experts feel there is an excess capacity of 20% or about 300 flights, which need to be cut, before the demand-supply balance is reached. This is evidenced by the sharp capacity rationalisation undertaken by Kingfisher Red (formerly Simplifly Deccan), which helped the airline raise its load factors from a miserable 39% in August to a more respectable 51.7% in September.

While all airlines have been witnessing a drop in traffic from the beginning of this year, the Kingfisher group shows a sharp decline of over 30% from the first quarter (Jan-Mar) of 2008 to the third quarter (Jul-Sep) of 2008.

The "perfect storm" of collapsing demand, increasing costs, and a global financial meltdown, has truly let loose its fury on the Indian domestic civil aviation industry. The FUD factor (Fear, Uncertainty, Doubt) is further curtailing traffic as India Inc., rushes to save costs. There is no doubt on the severity of the impact. The blame lies squarely with the airlines who followed a herd mentality and blindly rushed in to buying capacity, while growth was at 33% a year.

The airlines may not have had a plan to deal with 33% declines, but without a doubt, they need immediate rationalisation of the insane Aviation Turbine Fuel (ATF) taxation structure, that is killing the Indian civil aviation industry. It is time Mr. Murli Deora and Mr. P. Chidambaram start listening to the pleas of their cabinet colleague Mr. Praful Patel.

ATF price rationalisation may not solve all the problems, but at least, it is a start.

The consolidation in the Indian aviation industry has commenced.

Jet Airways announced, today, it has entered into a codeshare arrangement with JetLite, its wholly-owned, all economy subsidiary as part of its ongoing efforts to offer passengers synergetic benefits when they choose to fly with the Jet group.

As part of the agreement, Jet Airways will place its marketing code (9W) on key domestic routes operated by JetLite (S2), enabling both carriers to offer passengers better connections and a wider network.

Jet Airways’ JetPrivilege members travelling on these codeshare flights* can avail of a range of JP benefits, including the accrual of JPMiles based on class of travel. Moreover, the JPMiles thus earned will be Status JPMiles, and these JPMiles as well as each codeshare flight will also count toward JetPrivilege tier upgrade/ retention. JPMembers will also earn Tier Bonus JPMiles and Online booking bonus for the codeshare flights booked on the Jet Airways website.

Jet Airways Citibank Co-brand Credit Cardholders can use their companion discount vouchers on codeshare routes on applicable booking classes. Exclusively for Platinum members, there will be a waiver of cancellation charges on all these codeshare flights.*

Commenting on the codeshare, Mr. Wolfgang Prock-Schauer, Chief Executive Officer, Jet Airways said, “The codeshare agreement with JetLite will enable both carriers to optimally leverage their respective networks, offering passengers enhanced online connectivity across more than fifty domestic and international markets.”

Mr. Daniel Barranger, Vice President-Sales, JetLite added, “Besides offering passengers seamless connectivity and additional same-day return possibilities on several domestic sectors, this agreement is an important step forward in achieving further revenue synergies between the two carriers, both leaders in their respective market niches.”

Additional codeshare services between the two airlines will be implemented in phases.

*Conditions apply. Please refer to www.jetairways.com for more details

The tumultuous last week in the Indian aviation scenario, which rivalled the best soap opera dramas of Bollywood, Tollywood or Sandalwood, shows no signs of abating.

The popular joke of the day is "Who says there is a CREDIT crunch in India? See all the politicians taking CREDIT" [for 'protecting' the jobs of the Jet Airways staff].

The fight between Petroleum minister Murli Deora and Civil Aviation minister Praful Patel, both from Mumbai, spilt out in the open, with the Oil ministry charging airlines with default, and Patel defending the 'defaulter' airlines.

According to Press Trust of India (PTI) report, Civil Aviation Minister Praful Patel recently defended delays by airline companies in making payment of their fuel bills saying they were not defaulters, but the Petroleum Ministry maintained that Jet Airways had defaulted on payment of Rs 259 crore to Indian Oil Corporation (IOC). Rs. 100 Crore = Rs. 1,000 million = $20 million.

After Petroleum Ministry gave details about the dues of Jet Airways and its new found ally Kingfisher Airlines, Patel told reporters in the Parliament that the airline had a 60-day period to make payments. “So they cannot be branded as defaulters,” said Patel. However the Petroleum Ministry countered Patel by saying that Jet had failed to make payments even after expiry of the 60-day grace period. Jet's total outstanding to IOC stood at Rs 859 crore, of which it had defaulted on payment of Rs 259 crore bills, which were due on September 25 and October 5 this year after the expiry of 60-day period, said a senior official.

Similarly, Kingfisher owed Rs 110 crore to IOC, of which Rs 60 crore remained unpaid after expiry of the credit period. Jet also owes Rs 284.3 crore to Bharat Petroleum Corporation Limited (BPCL) while Kingfisher owes Rs 246 crore to BPCL and Rs 525 crore to Hindustan Petroleum Corporation Limited (HPCL). The official further said, “It is not correct to say that we are terming them defaulters just like that. We said they were defaulters because they failed to make payments even after 60-day credit period.”

Petroleum Minister Murli Deora had personally brokered the 60-day credit deal between Naresh Goyal’s Jet Airways and Sarthak Behuria, Chairman, IOC. Deora said last week that he was hurt when Goyal did not keep his word on making timely payments.

The official said both Jet Airways and Kingfisher Airlines had to clear their outstanding at the earliest as state-run oil firms themselves were in difficult times. “Our companies have a social obligation to fulfil. They sell subsidised cooking gas to households and even more subsidised kerosene to the poor. They have been living on borrowed funds and need funds to keep these subsidised sales going," said the official. IOC, BPCL and HPCL together lose about Rs 280 crore on sale of petrol, diesel, domestic LPG and kerosene. “Do you now expect them to sell subsidised fuel to the rich travelling by air?” he said. {This statement reflects the demented thinking of the ultra-smart people, so often found in Government, I have been raving about. Please see my article on how the populist fuel policy of the Indian government is killing Indian aviation.}

The completely lopsided, and vote-grabbing, populist mindset, of both, the Union and various State governments, have left the Government controlled oil companies in shambles. The three companies have not received oil bonds, which are used to compensate for half of the losses they make on fuel sales, for past three quarters. The combined borrowings of the three, which stood at Rs 48,400 crore in March 2007 and Rs 66,900 crore in March 2008, has increased to Rs 1,10,000 crore ($2.2 billion) as of this month. The oil companies are forced by the governments, to lose, Rs 2.85 a litre on petrol, Rs 7.26 a litre on diesel, Rs 29.19 a litre on kerosene and Rs 335.03 per cylinder on domestic cooking gas. The companies are projected to lose Rs 1,47,592 crore ($3 billion) in revenues this fiscal.

The official further informed that Aviation turbine Fuel (ATF) was priced at import parity rates (as if the fuel were to be imported) because around 80 per cent of the crude oil used to make the fuel was imported at international rates. Pricing of ATF was de-regulated on April 1, 2001 and since then it has been governed by fluctuations in the global market. Over the base price, customs duty of five per cent, eight per cent excise duty, three per cent education cess and sales tax at an average of 25 per cent is levied. State taxes and excise duty amounts to about a third of the ATF price.

In the meantime, PTI also reports, Jet Airways Chairman, Mr. Naresh Goyal, met with Finance Minister P Chidambaram to seek tax concessions on aviation turbine fuel as part of measures to overcome the crisis that has hit the Indian civil aviation sector.

According to sources, Goyal met Chidambaram at North Block this morning and drew attention of the finance minister to the problems that airlines in the country were facing. Goyal is understood to have asked Chidambaram to consider the demand of airlines to rationalise taxation and levies on ATF, which has become one of the biggest issues of carriers in India.

It is a known fact, that Mr. Chidambaram does not have any maneuvering room, given the raft of populist measures taken during this financial year, keeping in view the upcoming general elections.

In true television drama style, keep watching for the next episode.

Madhumathi D.S. of the Hindu Business Line reports that the 5 month young Bengaluru International Airport, which was expected to have a dream take-off on the back of phenomenal traffic growth during 2005-08, now seems to be going slow on its expansion plan in the face of a traffic decline.

“There has been a dramatic fall in monthly traffic for all airports in India since June 2008. We are currently conducting a study on the current trend and based on the results, which will be out in two-three months, we will take a decision on our next expansion plan,” the operator, BIAL, said in response to queries from Business Line.

Until a couple of months ago, BIAL CEO, Mr Albert Brunner, was hoping to take up a mezzanine expansion now and a larger Rs 3,500-crore phase 2 in early 2009 with a second terminal, pending the board’s clearance.

Bangalore's traffic numbers, reflect the overall slowdown across the country. BIAL said, “The overall annual growth of passenger volume [at Bengaluru International Airport] has dropped to 3 per cent since June 2008” compared to an anticipated 8 per cent growth rate.

The Southern sector has been especially dented. “There has been a drop of approximately 15 per cent in the flights operating in the Southern sector (Kochi, Coimbatore, Hyderabad, Chennai) from Bangalore since May 2008. The Mumbai, Kochi, Coimbatore, Delhi, Goa, Hyderabad, Chennai and Pune routes have collectively seen a 12 per cent reduction in the number of flights,” as per BIAL sources.

The dip could also not have come at a worse time than now for BIAL, which is awaiting the Civil Aviation Ministry’s clearance to start collecting a user fee (UDF) from domestic fliers leaving the city. The UDF is one of the main revenue sources for its ambitious expansion plan.

BIAL started collecting a user fee of Rs 1,070 each from its outbound international passengers from the first day of its operations.

The May, June, July period is lean all over India, but traffic has continued declining instead of picking-up in late August and September as it does every year. Clearly the "FUD Factor" (Fear, Uncertainty, Doubt) of the global economic melt-down is having its effect on the psyche of India Inc.

Bangalore’s air traffic, the third highest in the country, was until a few months ago the envy of some other larger cities. BIA opened in May 24, taking over 10.1 million annual passenger traffic from the HAL airport. In fact, the traffic growth was so large and unforeseen – from 4 million in 2005 to over 10.1 million in FY 2007 – that BIAL had to insert two unscheduled expansions into first phase of the project in 2006-07, a move that pushed the project cost from the original Rs 1,400 crore to Rs 2,500 crore.

That happily poised graph has changed its course downwards. Even as BIA completed 100 days in late August, the writing was on the wall. Peak hour traffic did not grow to match the capacity, though BIA handled 2.42 million passengers, on the wing of 30 per cent rise in international airlines and air freight carriers into the city.

From 170 flights per day and 340 air traffic movements (ATMs) when it launched, BIA will now end the Summer ‘08 season with 162 flights (324 ATMs) per day. Winter ‘08 flights would see a small 1.5 per cent gain with 165 flights (or 330 ATMs). According to the operator, “Although the domestic air traffic reflects a [fall] of 1.5 per cent, the overall positive growth is due to the increased international flight operations from Bangalore.”

This is in spite of adding six new international carriers since it began services - Dragon Air, Tiger Airways, Oman Air, Air Mauritius and most recently Kingfisher Airlines and Jet Airways. International flights, BIA said, have increased over 230 per cent year on year for the Winter season.

BIAL said the domestic UDF, once cleared, will be part of the airline ticket cost; the airlines will collect it while issuing tickets, as directed by the Directorate General of Civil Aviation. BIAL plans to set up counters to collect the fee by cash or credit card from those who have booked their tickets in advance but will be flying from the levy date.

UDF has become a double-edged sword for BIAL. They are facing the "Devil's Alternative". Imposition of UDF will have its impact on an already weak aviation scenario, and not imposing UDF, will have disastrous consequences on the finances of BIAL. I do not envy Mr. Brunner's seat at this moment, he has some very delicate balancing to do, and hard choices to make.

All I can offer is my support during these tough times.

SpiceJet today announced the appointment of Sanjay Aggarwal, as Chief Executive Officer (CEO) with immediate effect. Aggarwal takes over the position from Siddhanth Sharma. Prior to his current responsibilities in SpiceJet Aggarwal held the position of Chief Operating Officer and Chief Strategy Officer for Flight Options.

Previously Aggarwal had worked as senior director of Marriott International and had also been Manager of Financial Planning for the maintenance, reservations and internal consulting areas of US Airways.

Commenting on his appointment, Sanjay Aggarwal said, "I believe that SpiceJet is well positioned to grow rapidly as a low cost carrier, and I am delighted to have the opportunity to help the company achieve its potential."

Wilbur Ross, who led the recent $100 million cash infusion program into SpiceJet, added, "Of the many candidates, Sanjay was by far the most impressive. He is precisely the right person to lead the existing highly capable management team in turning SpiceJet around."

K.V. Subramanya and Anil Kumar Sastry at the Hindu report that the domestic passenger traffic at Bengaluru International Airport is down. Short-haul domestic air traffic has dropped drastically, and shifted away from the air to surface transport like buses, trains and cars. BIAL is suffering the double blow of a slowdown in the domestic aviation industry which has forced increases in air fares. The new airport's remote location and 1 hour commute only adds to its woes.

The full report :

Passenger traffic, particularly in the domestic sector, at the Bengaluru International Airport (BIA) has come down since June.

In the initial days after the opening of the airport, BIA handled around 172 flights a day — international as well as domestic. However, the airport now handles only 162 flights while the domestic traffic has come down by 1.5 per cent, according to sources at the BIA.

The passenger traffic did not pick up at the BIA during late August and September as was seen in other airports in the country. The overall annual growth of passenger volume in the country had dropped by three per cent, the sources said.

However, the trend was not unusual, as according to the global trend, September was a lean season for the aviation industry, the sources claimed. Although there had not been any flight suspensions to or from the BIA because of the fall in traffic volume, there had been some ad hoc or unscheduled cancellations of flights in the past two months due to “operational reasons.”

However, during the winter 2008 schedule, the number of flights would go up to 165 a day, the sources added.

Meanwhile, major airlines have been witnessing decreased load factor on domestic routes, particularly short-haul ones.

While the average load factor had been around 70 per cent, on some routes it was as low as 20 per cent, said a senior official of a private airline. While two private airlines used to operate two flights a day each to Mangalore, they were likely to operate one each, after the flights registered just 20 per cent load factor.

Similar has been the case with many private carriers operating on short-haul routes, namely Hyderabad, Chennai, Coimbatore, Kochi and Thiruvananthapuram.

However, the overall positive growth at BIA, despite the fall in domestic air traffic, was due to the increased international flight operations from Bangalore, the sources explained.

In the last four and a half months, six new international air carriers had started operations in Bangalore: Dragon Air, Tiger Airways, Oman Air, Air Mauritius and most recently Indian carriers Kingfisher Airlines and Jet Airways. The total increase in international flights was around 230 per cent as compared to last year’s winter schedule, the sources said.

Beneficiaries

The reduction in number of passengers on short-haul flights has benefited bus operators and the Railways. The load factor on trunk routes had increased substantially since the opening of the BIA.

Anwar Hussain, Senior Divisional Commercial Manager, South Western Railway, Bangalore, said while important trains on trunk routes always used to run packed, the load factor on Shatabdi Express (Mysore-Bangalore-Chennai) had considerably increased. It used to be around 75 to 80 per cent earlier, he added. On the other hand, wait-list on trains on important routes had become lengthy, Mr. Hussain added.

The Karnataka State Road Transport Corporation (KSRTC) and RTCs of neighbouring States too introduced more buses connecting Bangalore with important destinations in their States. KSRTC Director (Operations) K.S. Rajkumar said the corporation recently signed inter-State agreements with its counterparts.

According to the Press Trust of India, German flag carrier Lufthansa, today said, it will act as a mentor to Indian state carrier Air India to become a member of Star Alliance, a global grouping of top airlines.

"Lufthansa is the mentor for Air India and we will work together to get the latter on board the Star Alliance," the German airlines' South Asia director Werner Heesen said here.

However, Heesen said his company had no plans at present for financial investments in India.

"Financial investments are not on the strategic map of Lufthansa for India," he said when asked about the airlines' plans for South Asia in the wake of the current aviation industry crisis.

He said Lufthansa currently operated 55 flights from seven Indian cities to three destinations in Germany--Berlin, Frankfurt and Munich.

All Lufthansa flights have nearly 60 per cent bookings from travellers of Indian origin, he said. "Indians form about two-thirds of the total passengers on our flights from Delhi, Mumbai, Chennai, Bangalore, Hyderabad, Kolkata and Pune," Heesen said.

So, Lufthansa was consciously planning its routes to suit Indian travellers. "Also, we are ensuring that Indians get to feel at home by including all types of Indian cuisine, Indian attendants speaking the languages of different regions and in-flight entertainment with local content," he added.