Emirates group first half fiscal 2014 net profits up 4%. Airline net profit up 2% to $475 million

by Devesh Agarwal

Emirates A380. Photo copyright Devesh Agarwal.

The Emirates Group, the aviation holding company of the Al Maktoum family which rules Dubai, and the parent of Emirates airline, announced its first half (April to September) results of the fiscal year 2014 (ending March 31, 2014) today.

Group

The Emirates Group revenues reached AED 42.3 billion (US$ 11.5 billion) for the first six months of its current fiscal year ending September 30, 2013, up 13% from AED 37.5 billion (US$ 10.2 billion) at 30 September 2012.

Net profit for the Group rose to AED 2.2 billion (US$ 600 million) an increase of 4% over the last year’s results.

The Group’s cash position on 30 September 2013 came down to AED 18.2 billion (US$ 4.9 billion), from AED 27.0 billion (US$ 7.3 billion) six months earlier. This is after a AED 1.8 billion bond repayment which matured in July 2013, a AED 367 million first instalment payment on a USD one billion Sukuk (Islamic equivalent of bonds), and a AED 7 billion injection back into the business to fund new aircraft, engines, spares and other projects across the Group.

His Highness Sheikh Ahmed bin Saeed Al Maktoum, Chairman and Chief Executive, Emirates Airline and Group said

“The global business environment continues to be challenging. We have stayed agile even as we grow, and this ability to adapt and act quickly has been key to our success. Our investments in the infrastructure of both Emirates and dnata continue to pay off,”

Group employee numbers increased 11.7% to over 75,800 from six months earlier.

Emirates airline

Capacity measured in Available Seat Kilometres (ASK), grew 16.9% on the addition of ten aircraft – six A380s, three 777s and one 777 freighter in the reported six month. 15 more new aircraft scheduled to be delivered to the airline before March 31, 2014, the end of the current fiscal year FY2014.

Passenger traffic carried measured in Revenue Passenger Kilometres (RPK) was up 16.1% with a load factor averaging 79.2% down from last year’s 79.7%. In number, Emirates carried 21.5 million passengers in the six months, since 1 April 2013, up 15% from the same period last year.

Cargo volumes increased 5.2% but the airline has not released the actual performance nomrally measured in FTK (Freight Ton Kilometre) or capacity in ATK (Available Ton Kilometre) .

Emirates airline's revenue, including other operating income, for the six months was AED 39.8 billion (US$ 10.8 billion) up 12% from last year's first half revenue of AED 35.4 billion (US$ 9.6 billion) to return a 2% increase in net profit of AED 1.7 billion (US$ 475 million).

Fuel prices constituted 39% of the airline's expenditures. The Union and state governments of India would be well advised to observe the disadvantage they put Indian carriers to, thanks to their greedy excessive taxation regime which makes fuel between 45%~50% of expenditure.

Emirates launched new routes to Haneda and Stockholm, bringing the total count of new routes launched in the past 12 months to seven including Adelaide, Lyon, Phuket, Warsaw and Algiers. The airline now flies to 137 destinations in 77 countries, up from 126 cities last year in 74 countries. Additional new routes to be added in the remaining part of the fiscal year include Kabul, Kiev, Taipei and Boston.

The airline also celebrated the five year operating anniversary, of its A380 super-jumbo. Emirates' A380s have carried 18 million passengers since its first flight on August 1, 2008 from Dubai to New York.

dnata airport services and infrastructure

dnata (formerly Dubai National Air Transport Association) now operates in 38 countries with revenues including other operating income of AED 3.7 billion (US$ 1 billion), 18% higher compared to AED 3.2 billion (US$ 864 million) last year. Overall profit for dnata rose strongly by 13% to AED 458 million (US$ 125 million).

dnata’s airport operations was the largest contributor to revenues with AED 1.4 billion (US$ 375 million), a 16% increase from last year's first half revenues of AED 1.2 billion (US$ 324 million). The number of aircraft handled by dnata rose 9%, to 141,845

dnata’s in-flight catering operation, which operates the world's largest flight kitchen, in Dubai, United Arab Emirates, recorded strong growth thanks to its acquisition of Servair in Italy in June 2013. Revenues were up 39% to AED 891 million (US$ 243 million). 22.4 million meals were uplifted for the first half of the fiscal year, up a massive 81% from last year.

Revenue from dnata’s Travel Services operation contributed AED 303 million (US$ 83 million), up 16% from the same period last year.

dnata’s cargo handling division grew revenues 4% to AED 546 million (US$ 149 million) on account of increased tonnage mainly for dnata’s UK operation and in Switzerland which rose in total by 2% to 809,236 tonnes.

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Cathay Pacific Group - financial and operational results for 2012

by Devesh Agarwal

Cathay Pacific Group FY2012 overall results

Hong Kong based, Cathay Pacific Group reported an attributable profit of HK$916 million (approximately $118.08 million) for 2012 – an 83.3% fall compared to the profit of HK$5,501 million reported for 2011, even though turnover for the year increased by 1.0% to HK$99,376 million (approximately $12.81 billion). Earnings per share fell by 83.3% to HK23.3 cents. (US$1=HK$7.75. 1HK$=INR6.99).

With a strong presence in the air cargo services area, the continuing slowdown in the Eurozone countries during 2012, and their resultant impact on the exports from China and Hong Kong, affected the group. The Group was also adversely affected by the high price of jet fuel, and pressure on passenger yields due to increased competition. The Group has investments in Air China, which also showed a significant decline due to similar reasons.

Cathay Pacific results FY2012 - pperating statistics

Annual passenger revenue for 2012 was HK$70,133 million, up 3.5% from 2011. Capacity was increased by 2.6%. The Group's two airlines (Cathay Pacific and DragonAir) carried 29 million passengers, up 5% from 2011. Passenger load factor fell 0.3%. Yield increased by 1.2% to HK67.3 cents, largely due to higher fuel surcharges but fuel prices increased 1.7%.

Economic uncertainty caused corporate customers to belt tighten, which pressured yields in the premium classes, while strong competition on key routes and the same economic FUD (fear, uncertainty, doubt) factor squeezed the economy class yields. Cathay does have a reasonably portion of its fleet as older fuel guzzlers, which made long distance operations under cost pressures. Cathay Pacific announced measures designed to protect its business in an environment of high fuel prices and weak revenues. The group accelerated the retirement of the less fuel-efficient Boeing 747-400 passenger aircraft and withdrew four Boeing 747-400BCF (Boeing converted freighters) from service.

Annual cargo revenue fell 5.5% to HK$24,555 million. Capacity decrease of 3.1%, helped keep yield for Cathay Pacific and Dragonair, unchanged, at HK$2.42. Cargo load factor dropped 3% to 64.2%.

Cathay Pacific Group FY2012 - sales by geography. Indian sub-continent and middle east is the smallest contributor

Fuel remained the most significant cost, and even discounting the effects of fuel hedging, increased by 0.8% to account for 41.1% of total operating costs. Fuel, as a percentage of total operating costs decreased 0.4%.

Through 2012, the Cathay Pacific Group kept a clear focus on its key strategic goals: developing its network and its Hong Kong base; maintaining and enhancing the quality of its services; strengthening its relationship with Air China; and maintaining a prudent approach to financial risk management.

On the passenger side, Cathay Pacific added frequencies on routes to India, Japan, Malaysia, Singapore, Taiwan, Thailand and Vietnam and introduced a new service to Hyderabad in India last year. Dragonair added frequencies on routes to secondary cities in Mainland China and introduced or resumed flights to eight destinations in 2012. In the first quarter of 2013, Dragonair is launching another four new destinations. On the cargo side, Cathay Pacific introduced freighter services to Zhengzhou, Hyderabad and Colombo last year.

Cathay Pacific Group FY2012 - capacities, load factors, and yields by geography

During the year, Cathay Pacific introduced a new Premium Economy Class product, a new long-haul Economy Class seat and a new Regional Business Class seat. See images and read details here and here.

Cathay Pacific and Dragonair received 19 new aircraft as part of their fleet upgrade plan. At the end of the fiscal, the Group had 92 aircraft on order for delivery up to 2020. An order was placed for six Airbus A350-900 aircraft in January 2012. In August the Group ordered 10 Airbus A350-1000 aircraft and converted an existing order for 16 Airbus A350-900 aircraft into an order for 16 Airbus A350-1000 aircraft. In March 2013, Cathay Pacific entered into an agreement with The Boeing Company under which it agreed to buy three Boeing 747-8F freighter aircraft and cancel the agreement to purchase eight Boeing 777-200F freighters that were entered into in August 2011. Under the agreements, the Company also acquired options to purchase five Boeing 777-200F freighters and The Boeing Company agreed to purchase four Boeing 747-400BCF converted freighters, which were taken out of service in 2012 and early 2013. The transaction is part of a package of transactions between the Group, The Boeing Company, Air China Cargo Co., Ltd and Air China Limited.

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Jet Airways Q2 FY 2012~2013 quarterly results financial analysis

Photo © Devesh Agarwal. Used with permission.

India’s largest private carrier, Jet Airways, reported a net, post-tax loss of Rs. 99.7 Crore for the second quarter of fiscal year 2012-2013, representing a sharp improvement from the Rs. 713.6 Crore net loss recorded in the same period last year.

This 84.8% improvement in results, pushed Jet Airways’ net margin up to a very manageable (-)2.4%, that too in what is typically the worst quarter for India’s airlines.

The sharp rise in revenues is the primary driver of these improved results.

Financial and operating parameters

Jet Airways grew revenues by more than 25.8% in the last quarter buoyed by the general improvement in the revenue environment following the implosion of Kingfisher Airlines. Unit fares (revenue per available seat kilometre – R/ASK) were up more than 25.5% year over year, though this was matched by a 2.8 point drop in passenger load factor (PLF) to 75%. The fall in domestic PLF (where fares rose the most) was particularly precipitous, falling 6.5% to a low 65.6% from 72.1%.

The fact that Jet Airways still posted a loss despite close to 26% growth in unit revenues is simply proof of how far the industry had fallen and how much ground there is to still make up. Fuel expenses have finally begun to level off, though they still increased more than 14.5% on a per available seat-kilometer (ASK) basis.

In this quarter the culprits were instead the amorphous “Other Operating Expenses” line on the Profit and Loss (P and L) statement, which jumped 25.9%, but especially aircraft lease rentals, which jumped a whopping 49.3%!!!

During an analysts conference call, Bangalore Aviation raised the issue of the sharp rise in aircraft lease rental costs with Jet Airways management, and they responded:

“The lease rentals have gone up for two major reasons. We added six aircraft which were on ownership basis on the previous quarters which are now on a lease basis so effectively we did a sale and leaseback on them. We also added as compared to the last year 8 leased aircraft into the system, 6 of which were 737-800s and two of which were 737-900s and more importantly the rate of exchange impact. For the last year same quarter the rupee to dollar was largely at 45-46 to a dollar and this year it was more like a 55-56 so that is a 20 odd percent impact in terms of lease cost, which is 100% dollar denominated. So 20 plue percent is because of the rate of exchange impact, the balance is because of change in the mix of owned versus leased as well as incremental leased aircraft that we got into the fleet.”

Unfortunately, the declining performance of the Rupee, with the macro-economic and political factors behind that, represent a significant headwind that is, and will continue to, hamper the Indian airline industry for several quarters to come, though year over year comparisons will become easier assuming the Rupee stabilizes at current levels. When so much of the world economy is run on US dollars, this type of valuation for the local currency hurts airlines the most.

International Operations

Once again, the dichotomy of Jet Airways was apparent – the international operations, which had temporarily swung into a net loss during the fuel spike over the past year, swung sharply, improving 119% to a robust net, pre-tax profit of Rs. 45.2 Crore versus a net loss of Rs. 238.3 Crore a year ago. Meanwhile, the domestic operations continued to falter, posting a Rs. 153.5 Crore net loss (though this was a 67.7% improvement year over year).

Jet Airways has been aggressive in suspending non-profitable destinations, and from a pure financial perspective we applaud most of the moves that Jet Airways has made in recent months in terms of consolidating capacity on its international network and simultaneously shedding unprofitable routes while adding capacity on profitable sectors. In particular, Jet’s recent move to terminate Delhi-Milan, which has long been rumoured to have been unprofitable, and in our opinion, is superfluous to Jet ‘s core international strengths.

On the subject of Jet’s tumultuous European operations, Bangalore Aviation also queried Jet Airways management on our report of a planned Bangalore Munich flight. During the analysts call, Jet confirmed that the flight is indeed planned to operate towards the end of the winter schedule, but details are still being worked out.

Outlook

Looking forward, there are both challenges and opportunities for Jet Airways. If the general improvement in conditions for the Indian airline market hold, the traditionally strong, third fiscal quarter (October through December) should be highly profitable for Jet Airways.

We are optimistic the airline is focussing on the bottom line in many aspects, including value added income from in-flight sales of food, route rationalisation, and building flexibility in its fleet. In particular, the adding of business class in to JetKonnect which offers Jet the flexibility to shift aircraft between the low cost JetKonnect into the full-service Jet Airways will allow them to take full advantage of the temporary boom in business class demand during the next few months.

Jet will continue to face issues of brand confusion due to the common configuration of JetKonnect and Jet Airways aircraft, and the airline also risks becoming uncompetitive to the business traveller as it cuts back on routes. Jet also has to integrate the soon to be delivered A330-300s into their fleet and international operations. This will increase operational complexity, and will render the carrier's Boeing 777-300ER fleet in to further irrelevance, both of which will increase costs and drive down profitability.

On the positive side, fuel prices are stabilising, and for the first time in the last four years, fares are rising in India. Jet Airways is poised at the cusp, it is up to the team at Jet Airways to deliver a few quarters of great results.

With inputs from Devesh Agarwal

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Exclusive interview: Giorgio De Roni - CEO GoAir - Part 2: We first deliver results, we do not over-promise.

Continuing from part 1 of the interview with the the soft spoken CEO of GoAir, Giorgio De Roni, who has quietly turned around the Wadia family promoted airline from a rock bottom position, dismal market share, and reputation for frequent cancellations, to a top performing contender in the Indian airline industry, with some of the best performance parameters in the industry.

In the concluding part of this broad ranging two-on-one interview with Devesh Agarwal and Vinay Bhaskara, De Roni, shares his management mantras, techniques and methods utilised in the turn around of GoAir.

Q: How are things developing at GoAir and in the Indian airline industry as a whole over the past year?

Well the industry is going through a challenging period due to many issues in the market.

Certainly and foremost the cost of fuel and taxation on fuel. We have recorded an increase of 7%, which is a huge increase given that fuel represents more than 50% of our total costs.

Then we have a market that I’m fully confident and sure that in the medium to long term is growing. But unfortunately in the latest few months, we have recorded a drop in respect to last year, and that is a big concern in the short period.

We have some infrastructure bottlenecks and again this is penalizing airlines in India.

That said, I remain confident in the growth of the Indian aviation sector. We might require some revision of the regulatory environment which is a little bit old fashioned. If I’m not wrong the base of the legal framework is dated 1934, so even before the Chicago Convention.

I feel that some commitment from the government to revise and improve efficiency in the system is necessary. I feel confident that all stakeholders will be able to deliver us such an environment.

In my view, a country with 1.2 billion people should have a much stronger aviation sector. Definitely there is an opportunity to create a hub in India, and there is probably also a space for more than one hub. But we need some efficiency in all of the systems.

Q: Till a little more than a year ago, GoAir did not enjoy the best reputation in the industry in terms of dispatch reliability. In the last 1.5 years, that has turned around literally 100%. GoAir ranks, right at the top in terms of least cancellations and best on-time performance. Can you share with us what were the issues confronting GoAir and some of the steps you took to solve them when you joined the airline?

Well I think that quality to customer is one of the pillars of any airline, and we are committed to deliver value for money. Definitely I am aware that in the past, GoAir was suffering in terms of on-time performance. We are now averaging around 90%. And notwithstanding the high on-time performance, we also have high aircraft utilization, because in July we achieved 13 block hours per aircraft per day, which is remarkable for a narrow-body airline.

I think that the only thing that I am trying to reach within the organization is trying to deliver consistent strategy, and a consistent approach throughout the management team and down to the front line. We are investing hugely in terms of training and hugely in processes and procedure. We were IOSA approved [IATA Operational Safety Audit] at the end of 2010. Since it is a 2 year approval, we are now going through the renewal of that certificate. All these aspects are contributing to keep our quality and standard of performance high.

IOSA? We didn’t know that you had undergone IOSA. We only knew that Air India had undergone IOSA.

Well, one of our characteristics is not to overpromise, but first to deliver the result and then communicate. Sometimes my shareholder [Wadia family] blames me, saying that we [GoAir management] should be more proactive in communication.

Well my view is that we have to communicate only what we are able to deliver. And definitely IOSA is a good achievement.

But in the end, does a passenger choose GoAir for being IOSA certified? No I don’t think so.

I think that it is more important to deliver on-time performance, and good service, both on-board and on the ground. And that is why we are investing significantly in training.

Q: You mentioned that GoAir is achieving 13 hours aircraft block utilisation time, That is almost 20% or 30% more than IndiGo or SpiceJet. You appear to have probably the best aircraft utilization in the country?

Well last year we received an award by Airbus for being the best operator of the A320 in whole of Asia Pacific, Middle East and Africa in our fleet size. [Editor's note: A320 behemoths AirAsia and IndiGo are in the same geography]

And this is remarkable because of course the higher utilization continues to keep fixed costs more efficient , but also it is remarkable because it is accompanied by a very good on-time performance.

Q: How long are you looking at keeping the same level of aircraft utilization?

I hope that as soon as we get approval, we can start operating on international flights and increase the aircraft utilization by adding some flights at night. Of course on a daily basis we need to carry out maintenance checks on all the aircraft. And these keep the aircraft grounded for 3.5~4 hours every day, so the limit for the utilization is 20 hours.

We have a turnaround time of between 25 and 30 minutes depending on the size of the airport and efficiency of the airport in providing turnaround services. And that’s the limit I cannot go beyond.

Because our first departure is at 05:15 and our last arrival is at 01:00 the following day. Of course not all of the aircraft have such an intensive utilization, but we manage to have a pretty good utilization.

Q: So does this high utilization change the timeline on heavy maintenance checks for the A320s?

We do have C-checks. Another policy of the company is to keep the fleet as young as possible, because this brings efficiency in maintenance and efficiency in fuel consumption, and a good product to our customer. It means that C-checks. Yes we have undergone 8 C-checks for the fleet. These keep the aircraft grounded for around 3 days. We outsource the C-check maintenance. We also have engines updated but considering that we have spare engines, the high utilization is not as much of a concern.

Q: Many Indian carriers are moving to the concept of "power by the hour" with engine manufacturers. Is GoAir using this business method?

[Editor's note: In this business method, airlines agree to pay engine manufacturers a unit price per hour of usage of the engine. The manufacture is then responsible for the performance and maintenance of the engine.]

We do not do so currently, but we are exploring this method. If it saves us money and helps us improve our despatch reliability we will consider it most strongly.

Q: Can you share some of your operational numbers? What are your average number of flights per aircraft per day?

We operate roughly 100 nonstop flights, but the network is constructed to offer as many “via” [connecting] opportunities as possible, particularly via Delhi and via Mumbai. And we carried roughly 3.5 million passengers last year and we have a target of 5.5 [million]. Why? Not only due to the increase of aircraft, we grew capacity by 22% as well.

Q: So you will be targeting growth up to 5.5 million passengers this year?

Yes 5.5 million. Due to increasing capacity by 22% and a higher seat factor. We also slightly increased the productivity by 15 minutes – which is peanuts. But at the end of the day, we can deliver some positive results.

Q: How many rotations do you achieve on average per aircraft per day?

We achieve 7.6 legs per aircraft per day.

[Editor’s Note: Mr. De Roni clarified that he meant 7.6 one way flight segments per aircraft per day.]

Q: Can we ask you for CASK or RASK numbers? (Cost per Available Seat Kilometre, Revenue per Available Seat Kilometre)

Sorry No.

Q: You mentioned the enhanced connectivity that you are looking at through Delhi and Mumbai. Looking forward, how much do you want to grow connections? Will it play an increasing role in the business model or will the primary focus still be point to point connections (P2P)?

Well the main focus will continue to be on point to point, but definitely connectivity might increase without diluting the overall revenue. Furthermore, we also must consider that due to some infrastructure bottlenecks, it wouldn’t be easy to add additional slots in Mumbai or at peak times in Delhi. So we also have a strategy to increase our presence in other areas of the country. We are already relatively strong in the Northwest; in Jammu and Kashmir we are the market share leader in Srinagar. We have recently deployed second aircraft nonstop at Bangalore Airport and the January A320 delivery will be most probably deployed in the South of the country, bypassing both Delhi and Mumbai.

Q: What do you see happening in Mumbai with regards to an integrated terminal? Will it be something similar to Delhi where you have an LCC terminal and a separate integrated terminal.

First of all, I am not Indian and I am not particularly able to forecast Indian decisions. And even if I am able to forecast, since it is sometimes a frustrating experience, I prefer to keep to what is the final the result.

Because media coverage is unpredictable – one week they say that FDI will be approved by Friday, the next Saturday, it is next month, and the next month, it is in a few months time.

So I have the habit of let’s see what happens and planning consequently.

Q: The reason we ask is that if in Bombay they structure the integrated terminal similar to Delhi, will the cost structure be similar to Delhi?

Yes. And it will create inefficiencies in the cost structure if we have to share activity between two terminals. So I do hope that this kind of consideration will be analyzed before any sort of decision is made.

[Editor's note. Please see part 1 of this interview where Mr. De Roni explains how high fees are impacting Delhi airport with reduced traffic]

You recently asked the DGCA to grant you a waiver from the 5-year and 20-aircraft rules for international flying. How confident are you in receiving a waiver, and would this signal a shift in strategy towards more international flying?

No, the core business will remain domestic. I personally see a strong potential for more growth domestically, considering that only 60 million passengers travelled by air last year out of 1.2 billion people.

If there are opportunities to fly internationally, I feel relatively confident to be authorized to fly internationally.

We already have, as you know, the 5 years of experience required, but we are flying less than 20 aircraft. I do not see why foreign airlines are allowed to fly international flights to India with just 1, 2, or 3 aircraft and Indian carriers are not allowed.

In my view, allowing GoAir to fly international, will increase opportunities for employment, flows of currency and tourism, and will serve the economy of the country better, and at the end of the day, it will create a dynamic competitive environment to the benefit of the final customer.

[Editor’s Note: Just to give some examples of this disparity. Avia Traffic Company, an airline with 5 aircraft that is banned in the EU, is allowed to operate in to India. Bhutan's Druk Air with just 3 aircraft, and several sketchy Afghan airlines with very small fleets, operate non-stop international services into Delhi? Yet GoAir with its now sparkling reliability and safety record is not allowed to do so?]

Q: Looking at your network, Mumbai and Delhi seem to be roughly equal in size. Will you increase in Delhi?

We are slightly more present in Delhi, historically due to a lack of slots in Mumbai. But definitely also due to the fact that the cost in Delhi has increased greatly. Thus the expansion plan will mostly be outside Delhi.

Q: One thing we’ve noticed is that the bulk of the expense at Delhi Airport seems to have occurred on Terminal 3. Yet GoAir, SpiceJet, and IndiGo passengers, who do not use T3, are made to pay fees for T3. Your comments?

Unfortunately, this is the common approach to airport development. And with this kind of approach we have weaknesses in the efficiency of the system. We have to survive anyhow.

Thank you sir for the revealing details. It was a pleasure.

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Opinion: India's airlines are safe to fly

Over the past week, a serious fight has erupted between India’s aviation regulator the Directorate General of Civil Aviation and the airlines, with a number of serious charges being espoused by the DGCA. In a bluntly worded financial audit that Bangalore Aviation (as well as most of the internet) has acquired, the DGCA lists out several “safety” violations that India’s airlines are supposed to have committed.

The report comes to the conclusion that with regards to Air India Express and Kingfisher, “A reasonable case exists for withdrawal of their AOP [operating certificate], as their financial stress is likely to impinge on safety.” In addition to these two, the rest of India’s airlines were all found to have safety issues, with the DGCA concluding that their financial troubles could also negatively affect the safety of air travel.

Over the past week, the DGCA met with all of the private carriers to discuss their various troubles; and Kingfisher reacted with damage control, stating that it would return to flying a full schedule by 2012, and claiming that its safety violations were overblown. IndiGo reacted with a public and detailed response, while the rest of India’s carriers have yet to weigh in. Despite the sensationalist headlines reported in the Indian media, the DGCA will not be forcing any carriers to shut down.

"We have met all airlines in the past few weeks on the issue of financial stress. Kingfisher was called in today. There is no threat of closing any airline. All airlines are under stress," explained Bharat Bhushan, the DGCA head.

That being said, let’s take a look at the actual report, and assess the validity of the DGCA’s concerns. IndiGo has already detailed its response, so we’ll examine the violations detailed for Air India Express and Kingfisher; the carriers singled out by the report.

Kingfisher:

1. A third of the fleet being grounded is not, in and of itself, cause for safety concern. Simply put, Kingfisher has grounded the aircraft for lack of spares- that suggests compliance with DGCA rules, not an ignorance of safety. Qantas has at times grounded its A380 fleet for safety concerns; yet that carrier is praised for their attention to safety while the DGCA is criticizing Kingfisher for performing a similar act

2. See #1: Kingfisher is short of engines; the fleet is grounded. Would the DGCA prefer that Kingfisher fly these aircraft without engine spares?

3. While the lack of spares obviously has troubling consequences (grounded fleet), Kingfisher is ultimately choosing to ground these planes as opposed to flying them without spares.

4. Cannibalization of parts is not unheard of. For example, in the United States, low cost carrier Allegiant Air has found it more economical to purchase used McDonnell Douglas MD-80s and cannibalize those for parts to maintain their operating fleet of MD-80s.

5. MEL Extensions, which refer to changes in the minimum equipment list (number of aircraft parts) that airlines are required to have on hand at any given time, are common practice around the globe. According to IATA: “Under certain conditions, such as a shortage of parts from manufacturers, or other unforeseen, situations, air operators may be unable to comply with specified repair intervals. This may result in the grounding of aircraft. To preclude that from happening, a MEL Item Repair Interval Extension Program has been instituted that will allow operators, under controlled conditions, to obtain extensions to MEL repair interval.” While it is troubling that Kingfisher is resorting to MEL extensions due to fiduciary difficulty, ultimately, the carrier has not yet resorted to flying without parts.

6. The loss of 24 pilots is potentially serious; India’s fast growing aviation sector is placing increased strain on the country’s (relatively) small pilot base. But 24 pilots is a smaller loss than many of Kingfisher’s rivals. This outflow could have an effect on pilot rest and therefore effectiveness; but is not yet severe enough to affect overall safety

7. Kingfisher not operating a full schedule of flights is irrelevant to a discussion of the airline’s safety; and in our view, the capacity drawdown was as much a business decision as a maintenance one.

8. Most of the employees have not been paid salaries for 2011; relevant only to the extent that disgruntled employees might not be as safety conscious as committed ones; a tenuous connection at best.

Moving on to Air India Express (AIX):

Picture copyright Devesh Agarwal. All rights reserved.

1. FOQA, or flight operations quality assurance is very important with regards to aviation safety; as it measures exceedances of, or a divergence above set flight parameters (e.g. pitch exceeds safe limits at some point during a flight). FOQA exceedances are normal occurrences, to which the US Federal Aviation Administration FAA typically requires carriers to respond by “fixing” the problem, or building in more safeguards against it. From a flight safety perspective, therefore, a failure to take corrective actions for events in June is alarming. Obviously these incidents were not severe, as the DGCA has not yet grounded AIX. But this is perhaps the most valid concern raised by the DGCA against the two airlines we’ve covered. The 14 incidents cannot be judged; if the non-availability is because those flight crew have been fired or have left their job; then there is nothing that AIX could have done. On the other hand, if the carrier has been shielding these employees, then there may be a more serious problem. The increase in FOQA exceedances in 2011 is troubling, but means nothing without context; were the number of incidents per number of flights operated by AIX greater in 2011, or did incidents rise proportionally to the increase in number of flights?

2. The pilot and instructor shortage is an issue insofar as much as it restricts the carrier’s capacity growth. It could lead to a shortage of trained employees and place additional stress on current ones. But the broader trouble has been caused as much by parent Air India as anything, and as such; the blame cannot be laid solely on AIX.

3. #3 goes hand-in-hand with #2; shortage of pilots is not a safety threat unless the carrier attempts to operate more flights than the safe level with a lower level of pilots. The reduced schedules indicate that Air India Express has not committed the aforementioned error.

4. FDTL, or flight and duty time limitations, limit how long an in-flight airline employee (pilots and cabin crew) can be on the clock; mostly flying, transiting, or performing checks. FDTL is typically handled by crew schedulers, and while doing it by hand is tedious, it was performed successfully for years before the onset of computers. Air India too is still on hand-written FDTL, and while this reduces the economics of their crew scheduling and increases the DGCA’s pain in checking compliance, there is nothing inherently wrong in calculating FDTL by hand.

5. And #6 really; training is a tough business; and as long as Jet Airways’ 737-800 simulator has close to 100% commonality with AIX’s, the issue is non-existent. Moreover, the pilots only use the simulators to get a feel for flying the aircraft; the individual airline tendencies are usually learned on actual aircraft.

Based on the analysis I’ve done above, it should become apparent that the DGCA has overstated some of the safety concerns while noting other items that really shouldn’t be concerned. While the report does raise a few valid concerns (AIX’s FOQA adventures being chief among those), its broader conclusion is shoddy. Carriers are facing financial troubles, the DGCA’s thinking goes, and thus are likely to skimp on maintenance and impugn safety.

This is simply not true. Most airline managers understand that public confidence in their carrier’s safety, once lost, can bankrupt the company. A chilling example is the crash of ValuJet flight 592 in the United States in 1995. That accident so frightened the American public, who fled the airline in droves, that ValuJet was forced to change its name to AirTran in an attempt to stave off bankruptcy. Thus while airlines are often seen skimping on things like food, employees, etc., you almost never see airlines attempting to save money on maintenance beyond improvements offered by the manufacturers themselves. In fact, carriers like Kingfisher and AIX have been revealed by this report to have acted in the interests of safety. Rather than over-extend their pilots or fly aircraft without spares, they instead chose to reduce schedules and ground fleets, at great financial loss.

Ultimately the Indian airlines are still safe to fly. The DGCA and a sensationalist Indian press have blown these issues way out of proportion. Problems faced by Kingfisher and AIX are marginal at best; and those two carriers were considered the worst of the bunch. Ultimately, one wouldn’t stop flying American Airlines during their bankruptcy for fear of their safety; and so it should be for Kingfisher and the rest of India’s airlines as well.

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Kingfisher Airlines posts Rs. 469 cr loss in Q2 FY 2012. Pays 22% of revenue as interest and finance charges

Contrary to its claimed cash-starved position, Kingfisher Airlines has actually performed relatively better than its counter-part listed private airlines counter-parts in India.

In a perverse silver lining to the ongoing fiscal crisis at Kingfisher, the airline slid from a net loss of Rs. 263 Cr. in the first quarter of fiscal year 2011~12 (FY12) to a net loss of Rs. 469 Cr. in Q2 FY2012, an increase of 78%.

In comparison, Jet Airways, increased its losses by 354%, and low fare carrier SpiceJet increased its losses 233%.

Highlights of the Q2 results are:

• Quarterly net loss for Q2 FY12 of Rs. 469 Cr., up from a loss of Rs. 231 Cr Q2 FY 2011. The airline claims the savings on interest and other costs were offset by a steep hike in fuel prices and the weakening of the Indian rupee, which negatively impacted 70% of the cost base.
• Operating revenue increased 7% from Q2 FY2011 to Rs. 1,528 Cr,
• EBITDA loss of Rs. 271 Cr, vs. profit of Rs. 55 Cr, in Q2 FY11
• EBITDA margin declined from +3.6% to -16.7%
• EBITDAR loss of Rs. 23 Cr. vs. profit of Rs. 307 Cr, in Q2 FY11
• EBITDAR margin declined from +20.3% to -1.4%

• Number of flights increased to 32,926 up 9% from the same quarter last year
• Capacity measured in ASKs (Available Seat Kilometres) grew 17% to 4,414 million
• Performance measured in RPKs (Revenue Passenger Kilometres) grew 12% to 3,337 million
• Passenger load factors fell 3% to 76%

What is worrying is the massive increase in costs, especially fuel costs, without a comparative increase in revenues. Despite an increase in costs of 11%, average revenue per passenger grew only 2%

• Overall Revenue per ASK (RASK) declined 8% from Q2 FY11 to Rs. 3.69 and passenger RASK declined 7% to Rs. 3.09.
• Overal Cost per ASK (CASK) (calculated on EBITDA cost) increased 11% to Rs. 4.31 while fuel CASK increased by 45% to Rs. 1.85.
• The efforts of the airline to reduce costs, especially interest and finance seem to be bearing fruit with Ex-fuel EBITDA CASK decreasing 6% to Rs. 2.46 from Rs. 2.61 in Q2 FY11.

Interest charges have declined 8% from Rs. 363 Cr. to Rs. 333 Cr., but still remain at toxic levels. Kingfisher Airlines is paying out almost 22% of its operating revenue as interest and finance charges alone. Compare the Rs. 333 Cr. of interest charges to the Rs. 279 Cr. paid by the airline as aircraft lease rentals in Q2 FY12.

Domestic operations saw a 5% increase in revenues this quarter compared to a year ago, and delivered an EBITDA margin of -17% in Q2 FY11 when compared to +10% in Q2 FY11. Fuel costs jumped to 40.7% of operating expenses this quarter, up from 29.5% in the same quarter, a year ago. Non-fuel costs too increased to 68.5% of total revenue from 64% a year ago.

International operations continue to remain a drag on the airline. Poor network planning and an ultra-luxurious cabin product which delivers fewer seats per flight conspire to add to the woes of the Kingfisher. Despite an 11% increase in revenues in Q2 FY12 compared to Q2 FY11, the EBITDA margins increased to -20% in Q2 FY12 from -15% in Q2 FY11. RASK increased 8% compared to 12% increase in CASK.

Strategic investor

During press interviews the Chairman and Managing Director, Dr. Vijay Mallya disclosed that Kingfisher Airlines is in discussions with an Indian strategic investor. Speculation is rife whether the investor is one of India's largest and most trusted business houses the Tatas, or the Sahara group which sold Air Sahara to Jet Airways and recently invested $100 million in to Dr. Mallya's Force India Formula 1 team.

Airbus A380 deliveries deferred, again.
Kingfisher has a pending order on Airbus S.A.S. for five A380 superjumbos. In the same briefing, Dr. Mallya announced that the airline's plans on this order have been deferred for at least five years for now. This is the third time the airline has deferred delivery of its order.

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Comparison of 1Q operating parameters of Jet Airways, JetLite, Kingfisher, and SpiceJet

India has three airline groups which are listed on the stock market and therefore regularly release information on their quarterly and annual financial and operating performance.

Jet Airways group comprising of full service carrier Jet Airways and its low cost subsidiary JetLite, (the low fare service Jet Airways Konnect's numbers are rolled in to those of Jet Airways), fellow full service carrier Kingfisher which includes its low fare Kingfisher Red service, and low fare carrier SpiceJet.

Instead of the usual droll numerical comparisons, we thought about experimenting by presenting a comparison of operating parameters of these airlines. Vinay is working on comparing the financial numbers and should have his analysis soon.

We request and welcome your feedbackon this method. Please click on any of the slides for a larger view.

Slide 1 compares the basic numbers -- totals, domestic and international,  in terms of numbers of departures, the total block hours the aircraft in the fleet flew, the capacity measured in Available Seat Kilometres (ASKs), and performance measured in Revenue Passenger Kilometres (RPKs), from the first quarter of this Fiscal year 2011~2012, and the first quarter from the last fiscal i.e. 2010~2011.

Slide 1 - Operating parameters - capacity and performance

Slide 2 compares the domestic and international performance of Jet Airways and Kingfisher. JetLite and SpiceJet are not included as JetLite does not have international operations and SpiceJet's international operations are extremely limited. While Jet has remained fairly steady, it is clearly observed how much the international operations of Kingfisher have improved in terms of RPKs from last fiscal to this fiscal and its resultant effects on the percentage shares.

Slide 2 - International and domestic operations comparisons

Slide 3 goes towards the financial angles of operating parameters. Cost and revenue per ASK (available seat kilometer) is measured. The costs of fuel which airlines have little control over and the non-fuel costs, over which they have complete control are compared. For ready reference the cost of fuel as a percentage of total cost is indicated.

Thanks to absurdly high fuel taxes, Indian carriers are forced to pay as much as 59% of their total costs towards fuel. Compare this to a global norm of 20%~30%. This norm is also reflected on the costs and revenues per ASK for domestic operations compared to international.

Slide 3 - Financial aspects of operating parameters

In a nation which constantly seeks value, forcing such high costs on Indian carriers only disadvantages them in their quest to grow the markets. Indian airlines are further disadvantaged as they are unable to reap efficiency advantages over much of their cost -- i.e. a 10% improvement in efficiency will only produce at best a 5% impact on total cost compared to 7%~8% for a non-Indian carrier.

It is also observed that Kingfisher managed to retain its operational profits in the black despite surging fuel costs, by improving its R/ASKs (revenue per available seat kilometer), while every other airline lost money for every ASK it flew. However, the international operations are still a huge money drain on the beleaugered airline. While Kingfisher has the best premium cabin of any Indian carrier, Dr. Mallya should question whether his airline can afford these flights of fancy. Kingfisher is also let down by its astronomical debt servicing costs which eats up an astounding 16.25% of its revenues.

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