Kingfisher is India's smallest airline, but sector's looking up

Are the fortunes of the heavily troubled Indian aviation industry set to take a turn for the better?

Quite possibly, says a report in Business Standard. A reduction in over-capacity caused by significant flight cancellations by crisis-struck Kingfisher Airlines have led to improved yields for other local carriers. The trend looks likely to continue if oil prices don't spiral out of control.

"The finances of airlines would improve in 2012-13 on the back of better pricing of tickets due to rationalisation of capacity. Capacity addition would also be moderate and the airlines would make money," Kapil Kaul, chief executive officer (South Asia), Centre for Asia Pacific Aviation (CAPA), told the newspaper.

Last month, a report by Kotak Institutional Equitiesalso noted that yields (revenues per passenger per kilometre) had stayed strong in the January-March quarter because of constantly reducing capacity by Kingfisher.

Still, an improving fourth-quarter won't make up for all the pain of the past. CAPA expects airlines (including Air India) to post a cumulative loss of $2.5 billion for 2011-2012.

Kingfisher has become the smallest airline in India. Reuters

Don't expect any miracles in fourth-quarter earnings either because operating costs for airlines continued to climb. Business Standard points out that while domestic fares for the March-ending quarter climbed 15-18 percent from the previous quarter, it was offset by a 15 percent increase in jet fuel -- the largest expense item for airlines - and a 11 percent depreciation in the rupee.

For now, expectations for the current financial year are mixed. While at least one expert told the newspaper thought airlines could start making profits in the current quarter itself, there are plenty of others who believe airlines will continue to post losses for at least a while longer.

Better days ahead?

There's no doubt the mood, nevertheless, is turning mildly upbeat.

A recent Wall Street Journal report noted that rapidly-expanding Gulf airlines are interested in investing in airlines such as SpiceJet and debt-laden Kingfisher Airlines as the government mulls a proposal to ease restrictions on investments by foreign airlines in local carriers. SpiceJet's chief executive, Neil Mills, said the airline has been talking to Gulf carriers, but until the government clears the proposal, any talk of a deal at this point was hypothetical.

Another report fromGulf Newssaid UAE-based Emirates Airline is open to investing in an Indian airline. Investments from foreign airlines could bring in much-needed cash for local carriers, especially Kingfisher Airlines, which in a remarkable turn of events, has gone from being India's largest domestic carrier to India's smallest in the space of six months, according to CAPA.

The airline is likely to hold on to that status for some time to come, as it struggles to cut costs. On Thursday, the airline began the process of importing jet fuel in a move that could help bring down its fuel bill but present substantial and costly logistical challenges. According to a Dow Jones report, the airline is in talks with Reliance Industries for supply and storage infrastructure for fuel imports. SpiceJet also said it received approval for direct jet fuel imports.

Nevertheless, as always, high oil prices can play spoilsport. CAPA cautions the Indian airline industry couldlose more than $2.5 billion in 2012-13if oil prices touch $135 a barrel, according to Indian Express.

Conclusion: While it's not all gloom and doom for airlines anymore, it's not sunny skies either.