Indian LCCs spread wings

With increased international allocations, cheaper fares and a better image than full-service counterparts, budget airlines are changing the landscape.

As Asian aviation undergoes a transformation amid high fuel prices, India has allowed foreign airlines to acquire stakes of up to 49% in domestic carriers. Though structural issues and cost challenges remain, the sale-and-leaseback model is boosting the international aspirations of the country’s low-cost carriers (LCCs).

Short-haul international traffic from India to South and Southeast Asia as well as the Gulf states and Central Asia is projected to grow by 10% in 2012-13. IndiGo and SpiceJet are changing the market dynamics by opening up new international routes to low-cost competition as the federal government grants private carriers additional access to bilateral entitlements.

While incumbent network carriers Air India and Kingfisher Airlines have cut back their international networks, SpiceJet, IndiGo and Jet Airways are planning to expand after being granted additional international seat allocations.

India’s Ministry of Civil Aviation granted approval to private carriers for several international routes to Asia and the Gulf earlier this year ending Air India’s right of first refusal for international bilateral entitlements.

IndiGo has received approval for 63 new international services per week, of which 28 are to Dubai and seven to Jeddah, in addition to services to Bangkok, Singapore and Kathmandu (28 weekly flights in total).

SpiceJet can now operate 49 new overseas services, including to Bangkok, Hong Kong, Dubai, Riyadh, Guangzhou, Male and Kabul.

Jet Airways has 56 new weekly international services including 14 to both Singapore and Kuwait, and seven each to Dhaka, Chittagong, Dar-es-Salaam and Male.

The expanded international allocations for the trio add up to 176 flights a week, up significantly from 53 earlier.

The Middle East allocations are part of efforts to address the imbalance in capacity on routes between India and the Middle East, currently dominated by Gulf-based Emirates, Etihad and Qatar Airways, which also operate beyond to the United States and Europe.

Indian carriers hold only a 34% share of India-Middle East capacity, and a smaller 28% share of India-Southeast Asia capacity.

With losses running into the billions of rupees, many Indian airlines face an uncertain future on returns. In the last reported financial year (2011-12) to March 31 this year, Jet Airways — India’s largest carrier by market value — reported a loss of 12.36 billion rupees. Kingfisher lost Rs 23.28 billion and SpiceJet Rs 6.05 billion.

To make matters worse, all three have highly leveraged balance sheets: Jet has debts of 135 billion, Kingfisher 70.57 billion and SpiceJet 8.6 billion rupees.

Even major international airlines have posted losses — Qantas ($253 million), Lufthansa (13 million euros) and Air France-KLM (809 million euros). Other perennially successful carriers have seen declines in their profits: such as Singapore Airlines by 69% to US$269 million,

Air China down 43% to $1.12 billion, and Emirates down 72% to $409 million.

The restrictive environment in which airlines have to operate makes matters worse. The International Air Transport Association (IATA) says that unless issues of high taxes and infrastructure costs are addressed, India may struggle to take off even if foreign investors are allowed to enter the sector. The big reason is jet fuel costs, which are 45-50% of an airline’s total operating cost in India compared to the global benchmark of 20-25%.

Even international airlines have to pay nearly 15% more for refuelling in India. Aviation turbine fuel (ATF) prices in Delhi are Rs 73,711 per kilolitre — almost an eight year high.

To expect Indian domestic carriers to remain profitable even after paying 50% more for fuel than their global counterparts is unfair, said SpiceJet CEO Neil Mills. The airline plans to ship in consignments of fuel from Singapore to two south Indian ports and then send them by tanker trucks to airports wherever logistically possible. SpiceJet spends about 2 billion rupees a month on fuel and expects a substantial saving through direct imports.

“In July-August 2008, crude oil was $150 a barrel and the exchange rate was 38 rupees to a dollar. At that time, ATF prices were the highest. Now crude is at $113 but the rupee is down to 56 to a dollar and jet fuel is more costly than ever before. All these factors together means a tough cost environment for airlines,” said Mr Mills.

“After the latest hike, our fuel bill has gone up 7.7% or by 5 million rupees a day. The cost environment is getting progressively worse instead of improving.”

High airport fees have not helped the cause of domestic carriers either. In April, Delhi International Airport Limited (DIAL) raised its fees by 344%. The cascading effect in recent months has been a net decline in passenger traffic.

In August, passenger traffic fell 3% on a month-on-month basis, after declines of 11.8% in July and 5.6% in June, official figures show.

Indian aviation experts say that while FDI is welcome, the sector will remain underutilised unless policy and infrastructure reforms are undertaken. Aviation minister Ajit Singh agrees. Among the changes he favours is making ATF a “notified product”, subject to a uniform sales tax of 4%.  Once jet fuel is officially listed, petroleum ministry regulators will then be in a position to keep a check on prices.

About the author

Writer: Tony Arora