Running an airline in India is a mugs’ game. Once defined as the simple business of “getting bums on seats”—more “bums” means better bottomline—the way the Indian industry is being run, one wonders if the “bums” are paying enough for the seats they sit on.
Thursday’s newspapers said Kingfisher’s auditor was tut-tutting about the poor state of its balance-sheet. Without owner Vijay Mallya putting in more equity, the airline is on a crash course, with accumulated losses eroding more than “50 percent of its net worth.”
Look at the carnage. Kingfisher hasn’t seen black since 2005. Market leader Jet Airways hasn’t sniffed profits since 2007-08. SpiceJet has got a whiff, but has accumulated sackfuls of losses (Rs 720 crore) in the past. In the first quarter of 2011-12, Jetmade a loss of Rs 123 crore after many accounting adjustments, Kingfisher lost a whopping Rs 264 crore, and SpiceJet Rs 72 crore.
One figure tells it all. Between last year and now, the three listed companies – Jet, Kingfisher and SpiceJet – destroyed Rs 6,600 crore of shareholder wealth, a drop of 59 percent when the overall market (as measured by the Nifty index) fell only 13.48 percent.
As for Air India, the less said the better. When last heard of, it had racked up losses of Rs 22,000 crore against a shrinking market share – and its management is accumulating frequent flier miles to-ing and fro-ing between Delhi and Mumbai, trying to wangle thousands of crores in equity infusion. What it needs is an infusion of cyanide.
The airline business is clearly a value destroyer. And it’s doing it all by itself, without help from Praful Patel.
Or is it? In India, there is clear line dividing successful (or near successful) airlines from the rest. And that line is drawn in sand. It divides the pure low-cost carriers (LCCs) with a clear business model (SpiceJet, Indigo) from the ones who operate both full-service and low-cost carriers (Jet, Kingfisher, Air India).
It’s the full-service carriers (FSCs) that are bleeding profusely for they have a confused business model. They have fallen between two stools.
The world over, there are five keys to airline success: costs, costs, costs, costs, costs. This is where the LCCs score over the FSCs.
The first cost in this bums-on-seats business is a four-letter word – CASK, or the cost per available seat kilometre. It helps to have more bums on seats, but the critical thing is to have the lowest possible seat cost per possible bum. CASK is a metric that measures what it costs to fly every seat for each km of distance.
Indigo and SpiceJet are the industry champs in CASK, though clearly comparable figures are not available. A Forbes India report quotes
Citibank’s airline industry analysts Jamshed Dadabhoy and Arvind Sharma as saying that “the capital costs per passenger for full service airlines have jumped several fold over the last few years, while those of budget airlines have remained stable or moved up very little. SpiceJet, for instance, has a CASK of between Rs 2.30-2.40 while the number for Jet Airways is around Rs 3.60.”
The second cost to control is debt. Debt brought Air India down, with some help from Praful Patel, who was the Civil Aviation Minister when the airline suddenly ordered 50 medium and long-range aircraft for $7.2 billion when the management thought 18 would do. The resulting debt laid the airline low. It current debt: a crippling Rs 42,570 crore.
Contrast that with what Indigo and SpiceJet have cannily done. Both take aircraft only on lease. Even if they buy them, the aircraft are resold to financiers and leased back. Says Antique Stock Broking, which put a buy on SpiceJet in July: “The company has used an asset light model for business growth with sale and leaseback strategy. Its entire fleet is currently leased and the strategy has helped the airline to keep its debt levels to minimum, avoiding debt burden. This strategy has paid off SpiceJet very well and it stands out distinctly amongst its competitors. The company has managed to survive the downturn and grow, while competing players are finding it difficult to expand the fleet due to heavy debt burden.”
Jet is better off compared to Air India, but it is still tottering under debt. In a recent interview, Jet’s Senior Vice-President (Finance) Mahalingam Shivkumar agreed that debt exceeded its airline assets. He said: “We have a debt of about Rs 13,400 crore, out of which Rs 9,000 crore is our acquired aircraft. Against that, we have an asset worth Rs 9,000 crore and we have a balance of Rs 4,000 crore.”
The market agrees. Rs 4,300 crore is the value of Jet’s drop in market capitalisation over the last one year.
The third cost is fuel. Thanks to rising fuel prices over the last one year, SpiceJet’s fuel costs as a percentage of sales have moved up from 37 percent to 56 percent of sales, but if its balance-sheet is looking prettier than its competitors’, its not because it is able to drive better bargains with the oil companies. Aviation fuel costs the same for everybody. So what makes the difference?
Aircraft age. Keep your aircraft fleet young, and you get fuel savings. Says the Forbes article on Indigo: “Indigo has six-year sale and leaseback agreements for most of its planes. The lessor takes the planes back after this and the airline can induct a brand new one in its place. Though at a cost, this is effectively like a perpetual elixir of youth. The most important financial implication is that it never has to undertake the ‘D’ check, where the aircraft is completely stripped down and airlines often discover the need to spend on major repairs. This check is usually done when the plane is about eight years old.”
The average age of Indigo’s fleet, as indicated by aviation website www.airfleets.net is 2.4 years. It’s a fleet-footed toddler in Indian airspace. Go Air’s average fleet age is also a stripling 2.5 years. SpiceJet’s birds are a bit older at an average of 4.7 years.
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