Video: Interview with Indian civil aviation minister Ajit Singh

Another interview more on promise, and less on substance.

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Tata-SIA joint venture receives FIPB approval

by Devesh Agarwal

Photo © Devesh Agarwal

The joint venture of Singapore Airlines (SIA) and Tata Sons, Tata SIA Airlines Ltd., to set up a full service airline, has won approval from India's Foreign Investment Promotion Board (FIPB).

The company has an initial capital outlay of $100 million with Tatas holding 51% and Singapore Airlines holding 49%.

Tata-SIA will now have to approach a variety of agencies, many under the ministry of civil aviation, to obtain the slew of regulatory and security approvals, before it can commence operations.

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AirAsia India granted no objection certificate

By BA Staff

AirAsia India today announced that the airline has been granted the no objection certificate by the Ministry of Civil Aviation and will begin the process of obtaining an Air Operating Permit and prepare to kick-start its operations.

AirAsia submitted a request to start a joint venture to begin AirAsia India earlier this year, partnering Tata Sons Limited and Mr. Arun Bathia of Telestra Tradeplace Pvt. Ltd., and was granted a formal approval by the Foreign Investment Promotion Board (“FIPB”) of India two months later in April.

 Mittu Chandilya, Chief Executive Officer of AirAsia India said:

“We are very thankful to the Ministry of Civil Aviation for granting the no objection certificate to us so quickly. This is the fastest an NOC has been granted and with this, we will focus on obtaining the Air Operating Permit.  We will continue with our preparations and get ourselves ready for take-off once the Air Operating Permit is acquired and we look forward towards being one of the dynamic contributors to the development of the Indian aviation industry.”

AirAsia India is confident that it will be able to replicate the success of its counterparts in Malaysia, Thailand, and Indonesia; and enabling people to fly affordably through superior operational performance by emphasizing a focused and disciplined cost structure will tremendously benefit the Indian consumer. Currently, AirAsia India has a fleet of three Airbus A320 aircraft and over 200 members of staff.

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Air India constitutes over 80% of dues to Airports Authority of India

by Devesh Agarwal

Air India is well known for receiving thousands of crores of tax-payer rupees in bailouts, however, the unfettered largesse to the beleaguered national carrier does not end there. The airline is the constant recipient of indirect dole in the form of huge overdues to state-run service providers like the Airports Authority of India which runs most of the airports in India, and the state-owned oil marketing companies like Indian Oil which sell aviation fuel.

While these entities are quick to put private carriers on a "cash and carry" basis if they default, Air India is given a free run of their resources.

Airlines' dues to AAI as of 31-Mar-2013

Last week, Minister of state in the ministry of civil aviation, Mr. K.C. Venugopal informed the Lok Sabha (the lower house of the Indian parliament) on the dues of airlines to the Airports Authority of India. The statement says

AAI takes adequate efforts to recover the dues by regular monitoring. Action is also taken as per the approved credit policy of AAI. Defaulting companies have to pay interest as per AAI Credit Policy on delayed payments. In cases where delay persists, besides encashing the Security Deposit, the defaulting airlines are put on 'Cash and Carry Basis'. Interest @ 12% per annum is charged in respect of traffic dues. Interest on non-traffic dues is charged as per terms and conditions of the agreement which could be either 18% or 12%.

With about 19% of domestic market share, Air India's dues of Rs. 1,539.75 crores, constitutes over 80% of the total dues, while leader IndiGo, whose market share is almost 30%, owes just Rs. 2.89 crore or 0.15% of the authority's total dues.

In March, Minister of state for petroleum and natural gas Ms. Panabaaka Lakshmi informed the Lok Sabha, Air India owes state-owned oil companies Rs. 4,324 crore in outstanding fuel bills as on February 28, 2013. This is more than three times all the other domestic carriers combined.

It will be interesting to see the details on the Interest being charged to Air India, and why they are not being put on a cash and carry system.

Share your thoughts via a comment.

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Your opinion: Question of the week: Is Jet Airways too financially weak? What should existing investors do?

by Devesh Agarwal

Majority of Jet's A330 fleet parked at New Delhi's IGI airport

In what is not a very uncommon development, The Economic Times reports, India's financial markets' watchdog, the Securities Exchange Board of India, better known as SEBI, has written to the Foreign Investment Promotion Board (FIPB), the approver of FDI proposals, expressing concern on the agreement to sell a 24% stake by Jet Airways to Etihad Airways PJSC. SEBI feels that the agreement structure allows India's largest private airline by revenue, to pass into foreign hands, which is not allowed as per the existing law.

Over the last one month the deal has been question by various ministries, regulators, boards, authorities, stake-holders, and members of Parliament, amongst others. Putting aside partisan motives, one obvious fact is emerging; the agreement appears to be extremely lop-sided in unduly favouring Etihad. You can read our earlier analysis highlighting some of the lop-sided provisions of the agreement.

While the debate on these provisions continues, we want to question the financial condition of Jet Airways itself. Without doubt, the debt levels of Jet Airways are high enough to be classified as scary.

However, the question at hand is; what insight does this agreement offer in to the situation at the Indian carrier? Is the situation so dire that the promoters of Jet willing to let go of their airline for a mere $379 million? or did Mr; Hogan's team simply out-negotiate that of Mr. Goyal's?

As its possible control of Jet Airways is whittled away, by the regulators, at point would Etihad walk away from the deal? There are already rumblings, that come July 31, the first deadline for the deal, Etihad might reduce the amount of premium it is willing to pay for Jet. In which case, will Goyal still be interested?

And surely, exiting investors must be watching the scene nervously and wondering what should they do? Hold on? Or jump ship?

Share your thoughts via a comment.

Disclosure: Devesh Agarwal is a shareholder in Jet Airways.

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Bengaluru International Airport renamed as Kempe Gowda International Airport

The renaming of Bangalore's Bengaluru International Airport (BIA) to Kempegowda International Airport received approval from the Union Cabinet yesterday.

The lower house of the state legislature, the Karnataka Legislative Assembly, passed a unanimous resolution on December 10, last year and the upper house, the Karnataka Legislative Council, also passed a similar resolution two days later to rename the airport.

Hiriya Kempe Gowda commonly known as Kempe Gowda I or Bengalooru Kempe Gowda was a ruler under the Vijayanagara Empire, who is considered to be the founder of the metropolis of Bangalore, the capital of the Indian state of Karnataka. Kempe Gowda was a well educated and successful ruler. Noted for his progressive thinking, he ushered the foundations of a modern city with successful planning and building the current city building many temples and water reservoirs in Bangalore.

Bengaluru International Airport (BIA) is the sole airport serving the Bangalore region. It was commissioned and became operational on May 24, 2008. It is owned and operated by Bengaluru International Airport Pvt. Limited (BIAL) a conglomerate majority (74%) held by GVK Group, Siemens Projects, and Zurich Airport, along with two government bodies, the Karnataka State Industrial and Infrastructure Development Corporation KSIIDC, representing the state of Karnataka, and the Airports Authority of India, representing the Government of India, each owning 13%.

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Analysis: Etihad post strong results; government fears over Jetihad overblown

by Vinay Bhaskara

Abu Dhabi based full service carrier Etihad Airways announced yesterday that it had achieved record revenue growth for the second quarter and first half of 2013. For Q2 2013, passenger revenues grew a robust 8% to $921 million, while passenger revenues for the first half of 2013 hit $1.8 billion, up 13% from $1.6 billion in 2012.

Revenue generated by its code share and equity alliance partners leapt 25% to $184 million in Q2 and was responsible for 20% of Etihad’s revenue for the first half. Passenger traffic as measured in revenue passenger miles (RPMs) and capacity as measured by available seat miles (ASMs) each grew 13% year over year in Q2; the figures were 15% and 12% respectively for the first half of 2013. Etihad added 11 new aircraft to the fleet over the preceding 12 month period (bringing its fleet up to 78 frames), and added new services to Amsterdam, Belgrade, Sao Paulo, and Washington DC (added at the end of March) in Q2.

Clearly, Etihad has achieved a strong pattern of growth in the shadow of its behemoth rivals of the MEB3 +1 (Middle East Big 3 plus One) carriers; Dubai based Emirates Airlines, Doha based Qatar Airways, and Istanbul based Turkish Airlines. A key component of this growth is driven by Etihad’s equity investments.

In addition to Etihad’s proposed 24% investment into Jet Airways creating the so-called Jetihad partnership, Etihad holds a 29% share of airberlin, 40% of Air Seychelles, 10% of Virgin Australia, and 3% of Aer Lingus. Etihad recently secured Australian regulatory approval to increase its equity stake in Virgin Australia from 10% to 19%.  It also announced that it had signed an Initial Memorandum of Understanding (MoU) with the Serbian government to discuss potentially investing in Serbian national carrier JatAirways.

As per the Etihad press release, CEO James Hogan:

…said a significant achievement in Q2 was the improved contribution of the Etihad Airways equity alliance partners, in particular Germany’s airberlin, which has become the largest code share contributor. This reflects increased connectivity between the integrated networks of the two airlines.

And the Etihad results illustrate the case that can be made for the Jetihad partnership. In recent weeks, the Jetihad deal has hit a series of setbacks due to government reticence over allowing control over Jet Airways’ strategy to fall into foreign hands. A report from CNN IBN stated that

Jet's plan to relocate operations and core functions to Abu Dhabi has raised eyebrows as the proposed plan is not consistent with Indian norms, sources said. The co-operative board of the company will have control with 19 foreign nationals nominated by Etihad, sources added, and the government fears losing operation control of the domestic airline Jet.

Civil Aviation Minister Ajit Singh is reportedly sending a note to the Prime Minister’s Office asking Jet and Etihad to rework their deal to allay government concerns that the recent seat sharing agreement in the re-worked Abu Dhabi – India bilateral air service agreement (ASA).

Clearly the Jetihad partnership will benefit Etihad extensively, giving it a solid grip on westbound international traffic from India. And the seat sharing deal indeed does favor Jetihad over other full service carriers serving Abu Dhabi. But the ASA with Dubai is similarly tilted in favor of Emirates Airlines, and Jetihad will only serve to create a strong competitor to Emirates, who has increasingly monopolized westbound international traffic from India.

As to the question of whether Indian norms are being flouted by the addition of foreign nationals… maybe. But is that all together a bad thing? Operating under Indian norms, Jet Airways had fallen into a rut of sustained financial losses and network stagnation. In contrast, Etihad has created robust partnerships with its equity partners and helped re-vitalize them; Aer Lingus is reporting excellent financial results despite recession in Europe and residual demand weakness in its home country of Ireland.

Foreign blood may very well be just what Jet Airways needs to return it to profitability and stability domestically – the expertise of Etihad in running a profitable airline will be invaluable for Jet given the latter’s inconsistent result. And from a practical perspective, Etihad will likely do little to change Jet’s domestic strategy given its lack of expertise in the market. There is even room for some organic international expansion under the umbrella of Etihad; for example Aer Lingus recently announced an intercontinental expansion from its hub in Dublin to San Francisco and Toronto for 2014. Similar opportunities may present themselves for Jet Airways heading eastbound from the new integrated terminal at Mumbai.

I would like to remind readers, this is my view. Your comments, as usual, are requested and welcome.

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Analysis: Will Jetihad lop-sided deal favouring Etihad be corrected or be an eye-wash?

by Devesh Agarwal

Last week's deferral by the Foreign Investment Promotion Board (FIPB) of the proposal of Abu Dhabi based Etihad Airways to buy a 24% stake in Jet Airways has brought to light how the middle-eastern carrier will have an equal or higher say in the functioning of Jet despite owning just 24%.

The deferral has also shed light on the lack of clarity in the government's rules with regards to permitting foreign direct investment (FDI) by airlines in Indian carriers.

The Economic Times reports, the existing shareholders' agreement between the two airlines is structured in a manner to give Etihad the upper hand in the decision making at Jet. Without giving Etihad any specific rights or veto power, by requiring approval of two-thirds majority of the board for even routine decisions, the agreement equates the 24% owning airline to the 51% owning promoter, Naresh Goyal.

In normal circumstances, under the Companies Act, 1956, two-third majority is only required in matters such as capitalisation and dividend declaration issues. Any joint management of an Indian company automatically invites additional regulatory scrutiny, like from the Securities and Exchange Board of India (SEBI).

Some of the aspects of the agreement that were questioned by the FIPB include

• Re-location to Abu Dhabi and co-location of the network and revenue management functions of Jet
• The vice chairman will be nominated by Etihad but no mention on nomination of chairman's post
• If Goyal ceases to be chairman, new chairman to be nominated by the board, not selected by shareholders
• Chairman will not have a casting vote
• Two-thirds majority approval required for appointment and removal of CEO, independent directors, and senior management, and to pass any resolution in the board meeting i.e. for routine issues, contrary to existing law

Operational control too

Operationally too, the agreement shows how Etihad is dominating its Indian 'partner' right from the word go. The agreement stipulates that Jet will, at its expense, re-locate and co-locate its network and revenue management operations to Abu Dhabi. In the first phase functions that will shift include, international and domestic network planning, international pricing for non-India points-of-sale, and management of joint fare filing, and inventory control of the Abu Dhabi hub routes. In the second phase, all functions will shift to Abu Dhabi, including, international revenue management, domestic scheduling and pricing, international pricing for Indian points-of-sale, and inter-line pricing.

Many legal analysts feel the Jetihad deal has been constructed in this manner to afford Etihad almost complete management and operational control of Jet, while helping the middle east carrier to avoid triggering the 'takeover code'. The code is activated either when the investment crosses 25% of a company's shareholding or when the investing company gains ‘control’ of the target company. It is the definition of ‘control’ as per the Companies Act which is now becoming the bone of contention in approving the deal.

All of this is hardly surprising. Jet was in dire straits when it went around looking for whoever was willing to invest, and has acceded to virtually every condition demanded of it.

Policy confusions

Another legal issue muddling the deal is the word "effective control". The new FDI guidelines allowing for investment by foreign airlines say that 'substantial ownership' and 'effective control' should be vested with Indian nationals. There is confusion since the term 'effective control' has never been officially defined. The Companies Act, SEBI's takeover code, and the overall FDI policy, have defined the word 'control, but are silent on 'effective control'.

To prod the Jetihad deal along, the civil aviation ministry has reportedly submitted a long list of comments to the FIPB clarifying what it means by 'effective control'. A copy of this has been marked to the ministry of corporate affairs (MCA), the final arbiter of all matters related to company affairs.

For the Indian government, plagued by reforms policy paralysis, this is fast becoming a desperate situation. On one hand, to prove the progress of the few new policy reforms it has announced, it is bending almost every rule in the book, even going so far as to plan allowing foreigners to bypass FIPB approval for investment in the country. On the other hand the Jetihad deal is so lop-sided favouring Etihad, approving will set a bad precedent in law, allowing foreign companies to completely disregard the rights of Indian shareholders.

Jet is in a hard place. Its need for funds is desperate and no one can fault Etihad for trying the most bang for its buck. Even with the most intense lobbying, Jet and Etihad will need to re-work parts of the agreement to make it more palatable, but will this be a real change protecting all shareholders or just an eyewash to get this lop-sided agreement through the scrutiny of an equally desperate government?

Please share your thoughts on this subject via a comment.

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Video: A rather tame interview of civil aviation minister Ajit Singh

The Media India Group recently conducted an interview with Indian civil aviation minister Ajit Singh.

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Opinion: Jetihad deal means India's international market belongs to the MEB3

by Vinay Bhaskara 

When Abu Dhabi based Etihad Airlines announced in late April that it had acquired a 24% stake in Mumbai

Will the MEB3 hold sway?

based full service carrier Jet Airways for $379 million, it marked a paradigm shift in the state of the Indian air travel market. The newly formed “Jetihad” partnership would hold a nearly 18% share of international passenger traffic to and from India, versus 13% for Emirates, and 12% for Air India based on statistics from 2011-2012. However, the recently re-written India-UAE bilateral more than trebles the weekly seating rights to Abu Dhabi, which means that Jetihad will likely hold close to 20% of India’s international passenger traffic by 2017.

When combined with Etihad’s gulf rivals Emirates and Qatar Airways (the so-called Middle Eastern Big 3 carriers), Middle Eastern airlines are will effectively control 40% of India’s international passenger flows, and closer to 70% of westbound international traffic.

In practical terms, this is a net positive for Indian air travelers. Middle Eastern carriers are able to offer lower fares than Western and Indian airlines, thanks to favorable labor conditions and the economies of scale offered by their massive super-hubs (larger operations have lower cost per enplanement because fixed costs like terminal rent and ground services are spread over more flights and passengers). The MEB3 carriers offer the most competitively priced westbound international tickets in the Indian market, and the expanded access thanks to the Jetihad deal will only increase the supply of such tickets.

However when one considers the strategic implications for India’s airline industry, the deal has a profound impact. Jet Airways was India’s premier full service carrier due to the demise of Kingfisher and the poor international reputation of Air India. And India’s government has at least verbally expressed its desire for India to develop both a world-class full service airline and a world class hub airport in Delhi, Mumbai, or one of the other metros.

And in pursuit of that goal, India’s dreams have suffered a major setback.  By default, Jet Airways was the one Indian airline that, had it pursued a sensible strategy and taken full advantage of the upcoming integrated terminal at its largest hub in Mumbai, could have conceivably fulfilled such aspirations (unless Air India is privatized – which the present government is unwilling to do). But with the Jetihad deal; Jet Airways’ position in the global airline market has shifted.

One need only consider the shift in strategy by Etihad’s previous equity investments to predict Jet Airways’ international network moving forwards. AirBerlin once had a worldwide long haul network with several destinations in Asia, Africa, and the Middle East. Following Etihad’s investment however, they cancelled the majority of their eastbound long haul destinations (which can be served via connections through Abu Dhabi). A few core routes (Tel Aviv, Phuket, et. al, are still served on airberlin’s mainline platform, but the long haul network has shifted to focus on services to the America and Abu Dhabi. For Jet Airways, thus the path forward is clear. As far as standalone westbound long haul destinations are concerned, only London has enough demand to survive as a nonstop destination. A core network to the Gulf will likely stay in place because of the short distances, but services to the Americas and to the rest of Europe are likely to flow over Abu Dhabi. Meanwhile, expect expansion of services to Asia and other international markets which cannot be easily served on Etihad code shares.

What this means for the strategic vision of an Indian hub is that Jet Airways’ operation in Mumbai will never turn into a massive connecting powerhouse in the vein of Singapore for Singapore Airlines or Frankfurt for Lufthansa. India will not, in the near future, have its own version of Thai Airways International, or even Vietnam Airlines for that matter. Westbound international travel will flow in volume over Dubai, Abu Dhabi, and Doha with business traffic also being captured by the various alliances as well. Absent a significant change in Air India’s status, India’s international air travel market is now firmly in the hands of the MEB3.

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Three-way analysis: How does Emirates respond to Jetihad?

By Oussama Salah, Vinay Bhaskara, and Devesh Agarwal

Photo copyright Devesh Agarwal

The Indian government often makes curious decisions in setting aviation policy. For example, it encouraged Air India to lower prices to gain market share, causing mayhem in the market place and increasing Air India’s losses. It also recently  allowed Air Asia to expand in India by approving a JV with the Tata and Bhatia group, creating an LCC that will put pressure on indigenous carriers like SpiceJet and IndiGo. The latest example is the quadrupling in the number of seats between India and Abu Dhabi due to the recently concluded UAE-India bilateral air services agreement which will mostly benefit the newly formed Jetihad partnership.

A recent Bangalore Aviation analysis of International Traffic Share in and out of India, showed Jet Airways share at 16.01%, Emirates at 13.04% and Etihad at 1.95%. In one fell swoop, Etihad has not only caught up with Emirates, but has effectively almost doubled its total seat capacity because its strategic partner Jet Airways will have access to almost the same number of seats from the Indian side of the bi-lateral agreement. This is visible with the newest route being launched by Jet Airways - Kochi-Abu Dhabi-Kuwait.

The Indian market is important to the Gulf carriers as it is an important source of demand to MENA (Middle East and North Africa) , Europe, and North America. In particular, the North American market is being developed by these carriers at a rapid pace, and new routes such as Qatar Airways’ upcoming services to Philadelphia are heavily dependent on feed from the Indian subcontinent. The latest India/UAE bilateral almost doubles the weekly seat allocation for Jetihad to Abu Dhabi.

Dubai has unofficially asked for a doubling of the weekly seat allocation to Dubai and the rights to serve additional Indian metros but officially requested an increase from 54,200 to 72,400 seats per week.

The problem is that Dubai and Emirates airline in particular are in the cross-hairs of the Comptroller and Auditor General (CAG) of India which has criticised the civil aviation ministry for granting excessive rights to the airline during the tenure of Praful Patel as minister. Emirates is facing the "Devil's Alternative". The spotlight is shining bright on it, however, with India accounting for 11% of Emirates huge global capacity, the airline cannot just let Etihad-Jet Airways (Jetihad) just gobble seat capacity.

Elections are looming next year, some very skilful and smart "lobbying" will have to be done.

Another tactic will be similar to Jetihad. Emirates can opt for to invest in one of the remaining India carriers, IndiGo, SpiceJet, or GoAir, in hopes of gaining additional capacity. It is doubtful the promoters of IndiGo who have access to large sums of cash will accept acquisition, GoAir has indicated its willingness, but is too small within India and does not have any international operations yet. SpiceJet is the wild card. Are the Marans ready to dilute or even exit the airline business with their Maxis and Astro business relations under investigation? Emirates is hesitant to invest in foreign airlines after its poor experience with Sri Lankan Airlines, but will the airline have to bite the bullet to keep its India dominance alive?

Another option is for Emirates to code share with one of the large domestic players like Indigo or SpiceJet in order to increase its Indian feed and encourage them to operate additional flights to Dubai. Emirates currently code share on Jet Airways flights from Mumbai and Delhi to Dubai. Flydubai flies only to three destinations Hyderabad, Ahmedabad and Lucknow and would like to increase its Indian presence (which is less than 2% of its capacity). It is capable of serving smaller secondary airports thanks to its fleet of narrowbody 737-800s, and could provide additional feed for Emirates’ super-hub in Dubai. While flyDubai and Emirates are technically separate entities, both are owned and operated by the government of Dubai and increased integration of the route networks is possible.

But code sharing is a short term solution. Ultimately, the real fix has to be driven through the India-UAE bilateral. Emirates needs the increased capacity for itself and flydubai. Emirates can leverage Dubai’s position as a global business hub and destination for Indians to ask for increased services. Indians are the top expatriate investors in Dubai property (9 Billion AED) and the UAE is the second largest trading partner of India with billions of dollars in reciprocal investments. With almost two (2) million NRIs (non resident Indians) living in the UAE, many affluent, the UAE has a solid basis to ask for increased seat capacity in the next round of bilateral talks. However, it would need to find a powerful Indian advocate to help in its cause. Jetihad was able to secure such a large growth in bilateral capacity to Abu Dhabi in large part thanks to the political influence of Jet Airways head Naresh Goyal. It remains to be seen whether Emirates can find a similarly connected individual to help advance its interests, and by extension those of flydubai and even Air Arabia.

Regardless, with the current state of flux in Indian Aviation, Emirates will not stand still in response to Jetihad, expect something to happen, and soon.

Oussama Salah, who blogs at “Oussama’s Take”, is an aviation geek and aviation professional with 35 years of experience in the Mena/GCC airline industry. He is a regular contributor to Bangalore Aviation with his insightful and knowledgeable comments.

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Video: Air India's CMD reflects on the last 18 months

by Devesh Agarwal

Rohit Nandan has completed 18 months as the Chairman and Managing Director of national carrier Air India. Under his tenure, the national carrier appears to have embarked on a path which it hopes will result in a turn-around.

The renewed efforts at the airline coupled with the implosion of Kingfisher Airlines, have certainly produced some positive results, which we, at Bangalore Aviation, hope will continue to magnify. There are many sceptics, including me, who doubt, under government control, the carrier will ever return to the required levels of efficiency and performance so critical to a profitable airline.

In an interview with Media India Group, Nandan says

"I am happy that after 18 months, things are changing. There is some element of hope. Our financial performance has started looking better. Our flights are fuller. Our on-time performance is 85 per cent which is at par with the industry."

"Today, I can say with confidence that 2012-13 will be ended positively and the prospects of 2013-14 will be better."

Nandan also covers the 787 Dreamliner which is currently grounded, its expansion plans and other topics.

As usual comments are welcome.

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Guest Post: India scraps Aircraft Acquisition Committee

by Ashwin Jadhav

The aircraft acquisition process for airlines in India

The Indian government has scrapped its aircraft acquisition committee (AAC), meaning domestic airlines will find it easier to import aircraft. After allowing 49% FDI (foreign direct investment) by foreign airlines, in the Indian airline sector, the government last week moved a step closer to liberalizing the civil aviation space by abolishing the AAC, a nodal agency which until now cleared requests by airlines and private individuals seeking to import aircraft.

The AAC individually scrutinized each request to import an aircraft into the country, often delaying the process. Axing the scheme, which was only introduced a year ago, will help to "liberalize the market," India's Civil Aviation Minister, Ajit Singh has said.

Domestic airlines will still have to report to the Directorate general of Civil Aviation (DGCA) to register an aircraft before it enters the country, however, the softened rules should support the country's ambition to grow its air travel industry.

Streamlining the process

For most airlines, the aircraft acquisition process begins with an initial valuation agreement with the manufacturer. Following this process, the airline conducts a need assessment, cost analysis and market research aligned with their short-term and long-term strategies.

These processes can be completed in any order, depending on constraints, and are finalized by identification of the candidate aircraft. Usually 2-5 aircraft are short-listed and further narrowed down based on factors like purchase price and aircraft performance (fuel consumption, range, payload, ceiling, weight/balance, capacity, etc.).

Once the aircraft to be purchased is confirmed, a proposal has to be submitted to the aircraft acquisition committee (AAC). The committee was formed in October 2012 “to consider, examine and make recommendations on all proposals for permitting import or acquisition of aircraft for various purposes”, but had increasingly become more involved in commercial and operational decisions.

An objection or delay in the AAC verdict meant that the entire process had to be initiated from inception. This would include rewording agreements, reassessing the market performance and reconsidering the number of aircraft to be purchased. In the recent past, airlines had started objecting to the delays in the meetings of AAC to clear their aircraft orders, saying this adversely affected their commercial decisions to acquire and fly new planes and, hence, profitability.


Approval by the committee would originate negotiations with the manufacturer, which would subsequently be followed by a purchase agreement, legal verification and final delivery of the aircraft. As airlines in India do not purchase their aircraft directly, a leasing agency would be involved, taking over the contract at this stage. The airline would sign a dry or wet leaseback agreement with the leasing company. Once the sale was final, the aircraft would become operational into the airline fleet.

A step forward

The abolishing of the ACC will result in streamlining of the entire aircraft acquisition process in India, a step that could potentially improve the financial health of airlines in India. After Thursday's move, airlines will only need the initial no-objection certificate from DGCA and an in-principle approval to import planes. "The in-principle nod is needed for meeting RBI norms that mandate some sort of government clearance before allowing a commercial entity to make payments to a foreign company," Ajit Singh added.

The impending Jet-Etihad deal and the soon-to-be-launched Air Asia India will now see more planes coming to Indian skies without any trouble from the ministry. Between December 2011 and March 2013, nine airlines that operate in India sought permission to import 97 planes and all were granted permission.
At present India has only one commercial aircraft for every 3.2 million population, compared with Philippines that has one for 9 lakh people, China for every 1.14 million and Brazil, one for every 6 lakh citizens.

Ashwin Jadhav is an aerospace engineer by profession and works in the Flight Operations and Air Traffic Management domain.

Editor's note: As usual comments are welcome. I am sure Ashwin will welcome your feedback.

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AirAsia JV approved. Aviation ministry officials seek policy clarification

by Devesh Agarwal

India's Foreign Investment Promotion Board (FIPB) today gace an in-principle approval to the Joint Venture (JV) company proposal of AirAsia, the Tatas and the Bhatias. The stated goal of this JV company is to form and operate an airline most likely AirAsia India, based out of Chennai.

As per a report, the JV will initially invest about Rs. 80 crore (approx $14.5 million), well above the minimum Rs. 50 crore requirement to start an airline. The JV will now have to approach the aviation regulator The Directorate General of Civil Aviation (DGCA) for obtaining a permit to start and operate an airline.

On the same day there is a report of senior aviation ministry officials clarifications from the Department of Industrial Policy and Promotion (DIPP) on whether the JV proposal complies with the Government's guidelines on FDI in Indian carriers by foreign carriers.

Bangalore Aviation readers will recall, just about two weeks ago, I had raised this very point in my article.

When the cabinet approved the policy on September 14, 2012, the press statement said

"......there has been a need to consider financing options available for private airlines in the country, for their operations and service upgradation, and to enable them to compete with other global carriers. Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions, and a vital gap in the country’s infrastructure"

The doubt stems from the lack of clarity in the guidelines on whether the revised FDI policy also allows investments in to fresh start-up airlines, in additional to the stated policy of existing airlines.

If allowed to invest in start-ups, it will enable foreign carriers to bypass infusing funds into existing Indian carriers, thus defeating a stated goal of the policy.

Then it will be the Indian tax-payer finally bearing the debt burden of these Indian carriers, who are largely financed by tax-payer paid "public sector" banks.

It will be interesting to see further developments, though I feel the proposal will go through. The Tatas are an extremely methodical, competent and powerful company. Behind the scenes, they will have worked tirelessly to ensure no embarrassment due to a public rejection.

Share your thoughts via a comment.

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Air India to receive another Rs. 5000 Cr. equity infusion in fiscal 2013~14

by Devesh Agarwal

As per the budget for fiscal 2013~14, presented yesterday in parliament, the Indian government has earmarked another Rs. 5,000 crore (about $900 million) for equity infusion into ailing national carrier Air India.

This is the second tranche of a nine year, Rs. 30,000 crore (about $ 5.5 billion) tax-payer funded equity infusion, which is part of a turn-around plan for the carrier. The current budget initially provided Rs. 4,000 crore, which has been subsequently increased to Rs. 6,000 crore in the revised estimates. In fiscal 2011~12 the carrier was given Rs. 1,200 core as extra-budgetary support. The budget documents also claim that Air India will additionally generate Rs. 1,318.60 crore through internal and extra budgetary resources in 2013~14.

Civil aviation minister Ajit Singh informed the Indian parliament via a written reply that Air India has turned EBITDA (Earnings Before Interest, Depreciation, Taxes and Amortization) positive of Rs. 48.75 crore between April and December 2012. A drop in the ocean of red, as the carrier had annual losses of Rs 7,853 crore in fiscal 2011~12, has debt exceeding $10 billion, and current operating losses of Rs. 2,554.02 crore for the period from April to December 2012. (Air India has operating revenues of Rs. 11,400.44 crore and operating expenses of Rs. 13,954.47 crore).

The Economic Survey for 2012-13, tabled in Parliament yesterday, claimed that Air India is expected to achieve positive EBITDA in the current fiscal, and the carrier has registered performance improvement such as on-time performance at 85 per cent, passenger load factor at 70.9 per cent and yield at Rs. 4.31 per revenue passenger kilometre during the April~October 2012 period.

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Opinion: Approving AirAsia-Tata airline will derail goals of FDI in aviation policy

by Devesh Agarwal

The announcement that AirAsia is joining hands with the Tatas and Bhatias with the intention to start a new airline in India will put the a significant policy dilemma in front of the Government of India related to foreign direct investment (FDI) in civil aviation by foreign airlines, and might just land-up derailing the goals of the fledging policy.

While the policy is not explicit, so as to avoid any problems before the Competition Commission of India (CCI), the policy is framed to help the weak balance sheets of existing India airlines, and more importantly the banks, many of them government owned, who have already loaned vast sums of money to this sector.

When the cabinet approved the policy on September 14, 2012, the press statement said

"......there has been a need to consider financing options available for private airlines in the country, for their operations and service upgradation, and to enable them to compete with other global carriers. Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions, and a vital gap in the country’s infrastructure"

Two weeks after the policy was announced, India's civil aviation minister, Ajit Singh, told the Business Standard

“We are not giving licences for greenfield airlines. As of now, FDI (foreign direct investment) in aviation can come only through existing airlines."

Indian civil aviation minister Ajit Singh.

The statements and policy are logical.

Thanks to years of regressive policies of the Indian government, and the ludicrous taxation structure, especially on aviation fuel, Indian carriers carriers' balance sheets are awash with red ink.

Air India has over $10 billion (over Rs. 55,000 Crore) in liabilities, while Kingfisher Airlines is in for over $3 billion ($16,000 Crore).

Even the country's more "financially stable" carriers like Jet Airways and SpiceJet has are stress situations with skewed financial ratios, and growth strongly hampered by a lack of capital.

With much of the money being siphoned in to Air India, and the financial implosion of Kingfisher, Indian financial institutions neither have the funds, nor the appetite, to lend any more to the airline sector. FDI is needed.

However, if foreign airlines are allowed to set-up new greenfield airlines, they need not risk investing in the existing airlines. They can start fresh, with no liabilities, benefit from not making or suffering past mistakes of operations or policy, bring in expertise and massive financial strength, and blow away the fledgling domestic sector.

We have already seen this happen in the international sector, where the government in its infinite "wisdom" required Indian carriers to operate for five years before they could fly international, while allowing even newly formed foreign carriers to operate to India, thus giving foreign carriers time to establish themselves with nil to minimum competition. Today, Indian carriers are restricted to the sidelines, while the unofficial national carrier of India is not Air India, but Emirates; with India contributing over 11% of the airline's total capacity. No small feat, considering Emirates is the world's third largest airline by seat capacity.

India's largest private carrier, Jet Airways, is negotiating with Abu Dhabi based Etihad to sell them a 24% stake for about $300 million (Rs.1,600 Crore), which is a premium considering Jet's total market capitalisation (mcap) is just Rs.4,575 Crore. Just as a comparison, AirAsia Berhad mcap is Rs. 12,842 Crore.

Jet leads Indian companies with a sky-high debt to equity ratio of 84 times, almost 1,000% of the next company in the list, or 4,300% of the 1.95 of AirAsia). Its total debt is in excess of Rs 11,030 crore. Thanks to losses over the years, the company's reserves have depleted almost 50%, thus declining equity, and leading to the increase in the company's debt to equity ratio. The airline needs to raise equity capital by inviting FDI from foreign airlines.

Earlier this week, the Chairman of Etihad, Sheikh Hamed bin Zayed al-Nahyan, delayed the deal citing concerns on policy flip-flops by the government. How will Etihad view an approval to an "India AirAsia"?

That will have to be gauged in the time to come, but, for certain, allowing foreign airlines to set up greenfield airlines will have a negative impact on the attractiveness of existing airlines, and by extension the health of their debts, and the health of the Indian financial sector.

Even as an unabashed believer in capitalism, in my humble opinion, while an "India AirAsia" will lead to lower fares and more competition, ultimately it will be we tax-payers who will be left holding the proverbial bag as the government will be forced to bailout the banks.

Allow foreign carriers to set-up greenfield airlines, but after a period of time, may be three years, for now, get them to invest in Jet, IndiGo, SpiceJet, GoAir, and if the government ever comes to a logical sensibility, Air India.

I am advocating the same approach as of Mr. Ratan Tata, a leading member of the "Bombay Club" which over 20 years ago, proposed a similar go slow approach on liberalisation.

As usual, your thoughts, comments, feedback and counter-views are welcome.

The video below is a panel discussion on FDI in civil aviation, soon after the policy announcement, from NDTV. If you cannot see it on mobile or on the RSS feed, please visit the main Bangalore Aviation website.

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Indian Aviation Review 2012. Part 2: The airlines' analyses

by Vinay Bhaskara

As promised, here is the second part of Indian Aviation's 2012 review, with an airline by airline analysis of the events in 2012.

Air India

2012 was another banner year in Air India’s agonizingly slow death spiral. Whether it was yet more labor turmoil related to the still not completed merger with Indian Airlines, a botched Entry Into Service (EIS) for the Boeing 787 Dreamliner (though admittedly 2013 has not exactly been a banner year for the 787 thus far), or a will they/won’t they attempt at selling off a portion of the Boeing 777-200LR fleet, Air India once again set new records for mismanagement.

The 787 EIS, while botched, is still an incredibly positive step for Indian and global aviation. The 787 is currently plying select flights between Delhi and Tier 1 metros (Kolkata, Bangalore, Chennai, et. al) as well as international flights to Dubai, Frankfurt, and now Paris. Even with Air India’s relatively uncomfortable configuration (18J/238Y) and atrocious interiors, the 787 is still a step forward in terms of product quality (read our trip report and review here). And as the airline integrates more 787s into its fleet, hopefully its good onboard product (the meals in Economy are excellent) will become more recognized.

See our cabin photos and cabin video walk-through here.

Routes wise, the year was mostly maintenance of the status quo, though parts of the long haul network were temporarily dismantled during the pilot’s strike. Toronto – the loss leader of the long haul network might not be coming back, which is finally a sensible move from Air India’s route planning department. Air India has appeared to settle on Delhi T3 as its primary long haul hub, which is fine with as long as they stick to it.

The strike of course was a microcosm of the broader challenges facing Air India; over-entitled employees asking for even more benefits (some highly unrealistic) despite market leading compensation. But from a practical perspective, Air India needs to get the labour situation sorted out as soon as possible. There are several inefficiencies that arise from having two “airline(s) within an airline” and Air India can hardly afford to lose more money.

During the last third of 2012, the airline was goaded in to action by the Ministry of Civil Aviation, Mr. Ajit Singh. We have not been given financial statements for almost two years from now, but here’s a (not-so) bold prediction, while Air India lost thousands of crores in calendar year 2012, its losses will be lower than from the years before.

GoAir

On the whole, GoAir had a relatively quiet year, at least by the standards of Indian carriers. It added the 13th A320 to its fleet, and with only 7 more current generation aircraft coming, it is pursuing modest growth for the foreseeable future. On the routes front, it added Chennai to the network but was otherwise quiet. I wonder however at the order for 72 A320neos. It’s viability is heavily reliant on GoAir getting approval to fly international routes as well where there is less competition and more room for individual airlines to secure their own niches.

Of course the most important fact about GoAir is that they are profitable, as Bangalore Aviation exclusively revealed in an interview with GoAir CEO Georgio de Roni back in October. Ultimately, that is the only metric that matters in this industry, and the following quote from Mr. de Roni was music to the ears: “Yes, we have a more cautious approach to growth. We are exclusively targeting profitability and not really market share.”

IndiGo

With no publicly available financial and operational data available for IndiGo, it is hard to qualitatively evaluate the airline. However, the major trend was a decided shift towards international expansion. IndiGo as well pushed towards international flying, though with a slightly different strategy than SpiceJet.

After launching services from Mumbai and Delhi to Singapore/Bangkok in Southeast Asia (Mumbai-Singapore/Bangkok have since been terminated and replaced with Chennai/Hyderabad – Singapore) as well as to Dubai and Muscat, it instead focused its 2012 efforts on growing its operations on the heavily trafficked route(s) to Dubai, adding services from Chennai, Hyderabad, and Kochi. It also added Kathmandu to the network with service from Delhi.

However, there is some question as to the viability of IndiGo moving forward. Already, reports have emerged that IndiGo is not operationally profitable and that its finances are supported primarily by high revenue from sale-leaseback of its fleet of Airbus A320 aircraft. Notwithstanding a potential collapse in the sale-leaseback market for current generation A320s as next generation re-engined products enter the market; IndiGo will thus have to maintain its high rate of A320 deliveries to keep delivering profits. They currently have 68 orders for the current generation A320, as well as the (formerly) record-setting 180 A320neos on order. But the question for IndiGo becomes, how will they adequately utilize all of these new aircraft?

Already with just 62 A320s in the fleet, IndiGo has found it hard to find enough flying. Beyond capacity dumping on Metro routes, the list of routes in India that can handle A320s is pretty much saturated by LCCs already. International operations are pretty much IndiGo’s only venue at this point, with the Gulf being the largest market within easy range of the A320s. IndiGo can replicate much of Air India Express’ market to the Gulf, though the process of securing flying rights from the Indian government is sure to be a challenge. In our opinion, IndiGo thus made a strategic blunder in committing to too many mainline aircraft and not ordering a turboprop like the Q400 or ATR 72 for service to relatively untapped tertiary markets.

Jet Airways

The year for Jet Airways was more mixed. The airline restructured its operations and saw rapid fare growth in the second half of the year as Kingfisher fell apart. They also fully embraced the power of sale-leaseback and made some good product decisions including unification of their low fare brands, (long overdue) reconfiguration of the 777-300ER fleet, and replenishment of the regional fleet. The flip side of course, is that Jet Airways still lost money overall for the year, but there steps in the correct direction.


I am a big fan of the international network restructuring; the most notable changes being the elimination of Brussels-JFK, Chennai-Brussels, Delhi-Milan, and Mumbai-Johannesburg, as well as several cuts to regional international flights. In today’s high tax, high-fuel environment, it represents smart capacity management which is not exactly a strong suit for Indian carriers. The benefits have already been seen, as Jet’s recent quarterly results have shown a marked improvement in international yield and brought revenues more in line with costs.

The A330-300 was inducted at the end of 2012, and the choice of the A330-300 was a smart one. The aircraft has very low unit costs (cost/available seat kilometer) and is a good tool for routes that have a lot of visiting family/relatives (VFR) and leisure traffic in economy class, and limited premium traffic. Moreover, the low economy class unit costs are especially important considering the growing competition for economy class travel from MEB3+1 rivals like Emirates, Etihad, Qatar Airways, and Turkish Airlines, all of whom have very low seat mile costs.

Similarly, reconfiguring the 777-300ERs into a higher density configuration will drive down unit costs on the flights to London-Heathrow. The 10 abreast configuration is rather uncomfortable but it is a necessary evil in competing with the MEB3+1. Emirates also has 10 abreast seating in its 777-300ERs. However, Jet should have gone further and stripped the extremely heavy First Class product from its 777-300ERs, thereby allowing the aircraft to do nonstop India-US flights.

Adding the ATR 72-600s is a good move, whether for replacing the existing ATR 72-500s, or for growth to combat the steady expansion of SpiceJet’s Q400 operation and expand on less competitive regional routes. Either way, it offers improved technology and fuel burn over the ATR 72-500 and should help bolster the regional operations at Jet.

The move by Jet Airways to consolidate LCC operations under the JetKonnect brand was a good one, as it helped reduce (but not eliminate) the brand confusion surrounding Jet’s multiple brands and service levels. However, the actual integration process has been slow, and the brand clarity is still lacking. When Kingfisher fell apart, much of the Konnect capacity was quickly converted back to full service to help fill the premium capacity void so perhaps there is some merit to the idea in terms of product flexibility.

Sale leaseback helped bolster the finances for Jet, even leading to a profitable Q1 for fiscal year 2012-13. But in general, the financial performance left something to be desired. Hopefully 2013’s finances will show improvement for Jet.

Kingfisher Airlines

2012 was a horrific year for Kingfisher, with the airline getting itself grounded and its airline operating license not renewed.

The depths to which this once mighty airline has fallen was symbolised by the suicide by the wife of one of its many unpaid employees, citing financial troubles. All this while the junior Mallya was tweeting about cavorting with hordes of models in sunny sands.

The government is still awaiting a viable business plan from the promoters, which will see scores of vendors including airport operators, fuel companies, and employees getting paid.

We’d like to do due diligence to Kingfisher with a proper eulogy. However, we will wait to see if Vijay Mallya can pull a proverbial “rabbit” out of his hat and resurrect Kingfisher before we write that post. Stay tuned!

SpiceJet

As with Jet Airways, 2012 was a mixed year for SpiceJet. On the positive side, the carrier grew its regional Q400 operation by leaps and bounds with great success and launched and announced several international routes. However, once again SpiceJet struggled financially, posting one quarterly profit over the course of the calendar year. It also failed to secure funding for an expansion of its Q400 fleet which signals a degree of market skepticism over SpiceJet’s business plan.

The expansion of the Bombardier Dash 8-Q400 turboprop operation was a very beneficial step for SpiceJet. The Tier I Metro routes between Chennai, Delhi, Mumbai, Bengaluru, Kolkata, and Hyderabad are heavily saturated with low cost and full service competition, and even the routes between Tier I and Tier 2 Metros are starting to reach that tipping point in many cases. The best point of expansion thus becomes the tertiary and even quaternary destinations like Vijaywada and Pondicherry where SpiceJet tends to have a monopoly or at worst duopoly with a full service carrier. Initial loads and yields for the Q400 fleet were very strong, that too from the relatively weak market of Hyderabad. As the operation expanded, SpiceJet began to shift capacity towards stronger business markets like Bangalore, Chennai, and Delhi, and the Q400 operation continued to grow in scope and reach.

First SpiceJet Q400 leaves Toronto for India

The Q400 fleet has the benefit of operating under special rules from the Indian government including reduced fuel taxes as well as takeoff and landing charges (ostensibly to grow air service to regional airports), so the Q400 operation is certainly a strong performer in SpiceJet’s tepid overall finances. The full order of 15 Q400s is now complete, and while SpiceJet has options to purchase 15 more from Bombardier, unfortunately it cannot find financing for the next 15 deliveries, which it desperately needs to expand the regional operation.

Internationally, SpiceJet launched several new destinations and flights. It already operates to Dubai, Riyadh, Colombo, Male, Kabul, Kathmandu, and will launch services to Guangzhou in 2013. It was smart for SpiceJet to make its primary international base at Delhi, as this is the largest base of VFR and leisure origin and destination (O&D) travel most likely to use a LCC. Overall, international expansion is necessary for any of India’s LCCs to utilize their fleet given the saturation of domestic routes with enough demand to support 737-800 and A320 size aircraft, and the Indian LCCs have all committed to significant fleet growth.

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Indian aviation 2012 review Part 1: Overall trends

by Vinay Bhaskara

This is part 1 of our 2012 review of Indian aviation. Part 2 will come next week with a carrier by carrier review of  2012 in Indian aviation. 

When the story of Indian commercial aviation in 2012 is told, the overarching narrative across almost the entire industry will be one of cautious optimism (though Kingfisher Airlines obviously belies this trend). But the theme I’d rather focus on is capacity discipline, or rather the change that single handedly catapulted the Indian airline market back to some semblance of normality. If you remember my 2011 reviews for US and Indian aviation respectively, one of the biggest themes was how capacity cuts pushed the US airline industry to steady profitability, while the Indian airline industry added to much capacity and commensurately reported record losses.

It’s incredible how simple the airline industry can often be; it really boils down in many cases to the simple supply-demand equation. Match supply to demand and price accordingly; control supply to raise prices when your costs increase and you can maintain profits. This is basic microeconomic strategy yet the tendency in the airline industry has always been to chase market share at the expense of profitability.

The specific numbers are particularly heartening. Since March of 2012, monthly capacity growth in the domestic Indian market has not crossed 3% except in May after averaging more than 12% over the previous 20 months. And in the last part of the year, capacity actually decreased sharply, falling to -7.0% in October 2012, and -5.9% in November 2012.

It is important to note that all of this was sparked by the demise of Kingfisher, which had already pulled lots of capacity out of the market before its shutdown. While some mourn the loss of an airline that dared to dream big (and indeed there will be plenty of time to eulogize in 2013), I say that it was a necessary sacrifice insofar as much as the goal was to ensure a viable and sustainable airline industry.
While this process has certainly raised fares in the short term, I’d argue that that is good for the Indian market, in the sense that it will drive long run sustainability. Any unreasonably high fares are obviously bad for the consumer, but the flip side is that fares need to reflect the cost of operation, and through most of 2011 and into 2012, they just weren’t doing so.

The stabilization of fuel prices is another key contributor to the stabilization, if not quite success, of Indian airlines. Over the course of the year, rising oil production from unconventional sources and the easing of tensions in the Middle East after the Arab Spring have pushed the price of a barrel of oil (West Texas Intermediate measure) down to around $90 per barrel, where it has stabilized. While this has not reduced costs any versus 2011, the stabilization has at least bought the Indian carriers some time to reorganize their operations to operate in a high cost environment.

It is interesting to note that the Indian carriers face many of the same challenges as the broader economy. As economic growth slows to an anemic (by BRIC standards) 5-6%, the demand for air travel will continue to soften, not in the least because discretionary purchases like air travel are often among the first cutbacks made by consumers during economic slowdowns. Whether or not this derails the shoots of positivity amongst Indian carriers depends a lot on the government, more specifically the Ministry of Civil Aviation.

2012 was a good year in the Indian government’s management of aviation. The primary achievement of course, was the approval of foreign direct investment (FDI) by foreign airlines, as well as several other smaller rule changes that made the operating environment slightly more conducive to India’s airlines. (The move to end required flying to Northeast states early this year is also very beneficial).  But the main goals for India’s government in 2013 should be to reform the convoluted and confiscatory fuel taxation structure which has been crippling Indian aviation. A reduction in fuel taxes as well as unification under one single national tax combined with reduction in the sometimes exorbitant airport fees charged by places like Delhi Airport (which are hurting traffic growth beyond the existing economic slowdown) would be a very good agenda for the Ministry of Civil Aviation in 2013.

Turning back to FDI, whether or not Etihad buy a stake in Jet Airways in the near term, the clash around FDI in Indian aviation mirrors a broader question that pervades Indian aviation, and even the economy. At some point, India will have to decide whether it wants to let foreign carriers have expanded access and control over the market, or continue to support the Indian airlines. The former option can take two forms, first through direct investment, but also through expansion of bilateral capacity for carriers like Emirates, who has hit its 54,000 seat bilateral capacity limit. And the question is really something that the Indian people will have to make a decision on in the near future.

Basically, the choice lies between two paths. The first is to give foreign carriers near complete access to the Indian market. This would drive significant traffic growth, expanding affordable air travel to the growing middle class. However, this option would likely preclude the development of a robust Indian airline industry. So the question for India moving forward is, would it rather maximize the air service provided to its citizens at a quality price, or strategically opt for a strong aviation sector. My personal preference is towards economic growth, which is best achieved by maximizing aviation growth and lowering prices, but it is really a question for the broader Indian citizenry to decide.

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DGCA made a bad financial decision in shutting down Kingfisher Airlines

Earlier this month, now shutdown Kingfisher Airlines, once India’s largest private domestic carrier, reported a huge net pre-tax loss of Rs. 1115.5 Crore for the second quarter of Fiscal Year 2012-13. The performance was by far and away the poorest quarterly financial performance out of any Indian airline in the last few years, though that is to be expected given their shutdown at the end of the quarter.

Revenue performance was abysmal, falling 87.1% on a year over year basis (keeping in mind that FY 11-12’s Q2 was the last quarter of full Kingfisher operations – the first really big capacity cuts hit in November of that year). Fuel expenses were better year over year on a per ASM basis (mirroring the performance of the general industry), and operating margins as a whole did not decline as much as one would have expected (from -98% to -127.5%), though they were obviously atrocious. The main culprit was, as usual, interest, finance, and restructuring charges which contributed the remaining 850 odd Crores worth of net loss. But at this point, the drivers behind Kingfisher’s poor financial performance are well known.

What is more interesting to consider is the question of whether the DGCA made the correct move in shutting down Kingfisher pending a recovery plan. Keep in mind that the Indian government, through its network of state owned banks, is the primary holder of Kingfisher’s more than US $1.4 billion worth of debt. Thus it is in the government’s best interest for Kingfisher to minimize its losses, thereby limiting the further accumulation of debt as well as making Kingfisher slightly more attractive (though still a money pit) for foreign investors. While the DGCA is not operating in response to the same incentives as the general government of India (GOI) and State Bank of India, the two can certainly act in concert to minimize the impact on the public. First, let us simply throw away the ridiculous assertion that financial troubles would drive safety concerns at Kingfisher; this sort of event rarely occurs outside of the hellholes of the Third World, and the incentives for Kingfisher to skimp on safety are simply not in place. Notice that even as it cut the rest of its expenses by hook or crook, the level of maintenance expenses per available seat kilometer remained constant for Kingfisher over the past year. Any airline knows that the minute it compromises safety is the minute it loses viability as an airline in the eyes of the public. But even absent this factor, it would still make sense for the DGCA to shut down Kingfisher if the airline loses more money operating than shut down.

Since the financial and “restructuring” costs will remain regardless of whether Kingfisher carries passengers or not, we can focus our analysis entirely on the operating results on the balance sheet. Based on the data presented in the quarterly results, we can conclude that shutting down has cost Kingfisher around Rs. 220 Crore worth of revenue for Q3 (typically among the strongest Indian quarters). On the flip side, Rs. 160 Crore worth of fuel expenses are no longer accrued, as are a certain percentage (around 35% based on the auditor’s notes to Kingfisher’s financial statement) of the “other operating expenses.” Remaining expenses, including aircraft lease rentals, maintenance, depreciation and amortization, and longer term ground leases will still be accrued. So the total savings that Kingfisher gets from not operating is around Rs. 215 Crore, whereas they are forgoing Rs. 220 Crore worth of potential revenue, not to mention the benefits of operating in increasing the attractiveness to foreign investors. Thus the math suggests that the DGCA made a bad financial decision in shutting down Kingfisher.

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MAPS: New international flying rights granted to Indian carriers

India's erstwhile civil aviation ministry has granted new international flying rights to both national carrier Air India, and private carriers Jet Airways and SpiceJet.

First up is Air India, which received flying rights for  several new routes from its Delhi and Mumbai hubs.

The Sydney and Melbourne rights give credence to the idea that Air India plans to begin operations on the Kangaroo route. 

Meanwhile, Jet Airways received a mix of routes from Delhi and Mumbai as well.

Of these routes, Mumbai-Zurich and Delhi-Tashkent are the best prospects (especially the former if Jet Airways is able to secure a place in the Star Alliance). Finally, SpiceJet secured a potpourri of international rights, though a couple could be used to augment their burgeoning central hub in Delhi.

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