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Destination Anywhere
After burning millions of dollars on domestic tracks, comes the $4 billion plan to raise cash. How do they plan to spend it and what (if any) remains the sole means to save Indian aviation giants from doomsday? STEVEN PHILIP WARNER analyses…
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 Expansion and going global, therefore, seems to be the ‘mother of all’ reasons behind this money-raising jamboree. But is there another viewpoint? Syed Sagheer, Aviation Expert, PINC Research provides a probable radical motive – that of consolidations and further acquisitions. “Smaller players like GoAir and SpiceJet
can see imminent acquisition by
big players. Private investment in these companies has also dried up making them vulnerable for acquisitions. Money raised can be used for buy-offs as well,” he professes, adding that, “Improvement in scale of operations is the only way airlines can break even…”
An interesting change in the sectoral landscape is the go-global wind that has started blowing of late; of course, fuelled by postponement of Kingfisher’s plans to fly abroad (as policy regulations only allow airlines which have completed five successful domestic years to fly overseas). However, for fear of sounding overenthusiastic, one should not overlook the fact that this indeed appears a logical solution for the ailing sector, to get its promises back on track (remember 2003 and the Air Deccan fairytale?).
“More than three-fourth of the total international traffic in India is handled by foreign airlines. So we have a huge opportunity there. We can use our network more efficiently – using our domestic network to feed international and vice-versa,” says a Kingfisher official. True that there would be the initial investments involved (for fleet expansion, crew, technical support, training, offices, et al) when these aviators start international operations, but for Indian airliners going abroad seems to be the only option left to break into the profitability zone. Says Hick Bailey, Expert, FitchRatings International, “Given the high cost of operations and overcapacity in the domestic market, airlines will bleed to death if they aren’t soon allowed to fly abroad…”
So how can we statistically prove the cost-saving and revenue-earning logic? In an exclusive 4Ps B&M research, we discovered that the most profitable airlines in the world are also the ones which have maximum international presence (refer Figure 1). British Airways (international presence of 97% and $4.2 billion in profits over the past five years), Lufthansa (95% and $3.6 billion), Air France (91% and $5.7 billion) and NorthWest Airlines (44% and $1.4 billion) made profits while the entire global aviation lost in excess of $10 billion during the past half-a-decade. To further quantify the advantages that can be gained from international presence, revenues earned per unit distance is also highest on international routes (refer Figure 5).
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 Small wonder that for Indian operators, flying on international routes seems to be the next logical step to establish profitability as their hallmark. Even in the Indian context, the only private airline that has made profits in the past one year was Jet Airways, which earns about 30% of its revenues from international operations. The airline also hopes to take this level to up to a mind-boggling 50% by end of 2008 and also garner annual collections of $3 billion by that time! Surely, projected international flights will make Jet stand a good chance of achieving estimated revenue targets.
After Jet’s flights to the US were cleared in August 2007, it has been making a good game out of the opportunities and is on an aggressive process of route rationalisation, already having established Brussels & Shanghai as its global hubs. With 3,198 international flights as on December 2007 (a rise of 84.8% over October-December 2006) and $208 million in revenues from non-domestic operations, revenue contribution from international front adds up to 37% of the total (as on December 31, 2007). Since Goyal has plans to take that level to about 50% by end-2008, that alone spells higher profits for Jet (considering that international long-haul flights guarantee greater margins). Seems, this one is more serious about making money than about harping over market shares!
Some critics have also expressed fears about the long gestation periods in international operations and the high-cost implications thereof. However, as Sagheer puts it well, “The aviation industry in itself is a long gestation industry as investments are huge and break-evens happen very late. Long haul flights are more lucrative than short haul flights as the customer is less price sensitive and flight economy improves with a long range flight.” So though the load factor in such planes will be lower, yield per passenger will be higher. Even Albert Tjoeng, Asia Representative, IATA asserts, “Initially all players incur huge costs while going international, but if the right strategies are adopted then I don’t see why Indian carriers should not make big profits on international routes. ” Understanding this, it’s no surprise that Kingfisher too is hedging its future over international skies, despite the initial cost setback of $250 million required for starting its international operations.
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