Boeing continues to Improve 737 MAX performance

By BA Staff

The Boeing 737 MAX program continues to make steady development progress since reaching Firm Configuration on the 737 MAX 8 in July.

Engineers have completed an assessment of the airplane's performance confirming an additional 1% fuel-efficiency improvement over the 13% already promised to customers.

Keith Leverkuhn, vice president and general manager, 737 MAX program, Boeing Commercial Airplanes said:

"Program and airplane performance just continues to improve. We have been very disciplined in our approach and continue to realize more benefit for our customers as we retire risk on the program and get further into development. This recent fuel-efficiency gain will widen the performance gap in the single-aisle market, reinforcing the 737 MAX's position as the value leader."

The 737 MAX will feature several new systems that will improve the management of maintenance information. For example, some Built-In Test Equipment (BITE) information will be brought into the flight deck. Today, maintenance technicians access this fault data in the forward electronic equipment bay of the airplane. By bringing this data up to the flight deck, maintenance issues can be resolved faster.

The MAX also will include an enhanced onboard network system comprised of a digital flight data acquisition unit (eDFDAU) and network file server (NFS). These systems will provide a centralized data collection system with more storage capacity, doubling the maintenance data available during flight. The system will be capable of connecting the airplane in flight to airplane operations on the ground enabling airlines to better prepare for potential dispatch issues.

Michael Teal, chief project engineer, 737 MAX said:

"We are enhancing the capability of the 737 MAX to meet the future needs of a digital world. Recognizing that the Next-Generation 737 is already the most reliable single-aisle airplane with 99.7 percent of flights departing on time, we are being very deliberate about any changes we make to the airplane systems on the 737 MAX to make the airplane even easier to operate and maintain. Through careful testing and selective application on the Next-Generation 737 before MAX enters service, we can ensure these systems are ready to enhance the management of our customers' fleets." 

Some of these systems such as the eDFDAU and NFS are under development for initial delivery on the Next-Generation 737 prior to the 737 MAX. Many of these systems were tested during the 737 ecoDemonstrator program last year, showing the value they will provide to airlines operating the 737 MAX.

Engineers continue to make progress on the detailed design of the airplane. Recently the team completed the Firm Systems Definition, which defines the hardware locations for the systems on the airplane.

Leverkuhn said:

"Throughout the design process we'll continue to look for opportunities to improve operational performance, schedule and cost for our customers. We are on track for first delivery of the 737 MAX in the third quarter of 2017."

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Alaska Airlines retrofitting 737 fleet with new, split winglet

By BA Staff

Scimitar split winglets. Photo courtesy Alaska Airlines.

Alaska Airline's Boeing 737s will soon fly the more efficient performance-enhancing split Scimitar winglets, which will reduce fuel consumption by 58,000 gallons a year per aircraft saving the airline $20 million and cutting carbon dioxide emissions by 57,000 tons annually, equivalent to about 11,900 passenger vehicles. The new winglet from Aviation Partners Boeing is called 'Scimitar' due to its resemblance to the mediaeval sword.

Mark Eliasen, Alaska Airlines' vice president of finance and treasurer said:

"Reducing fuel consumption has been a top priority at Alaska Airlines for years. Thanks to the hard work and dedication of our employees, we've cut our carbon emissions by 30 percent per passenger mile since 2004. Investing in split winglets will further reduce our fuel use and continue our efforts to be the industry leader in environmental stewardship."

Among other efforts to lower fuel consumption, Alaska installed lighter inflight food and beverage carts, and instituted procedures such as taxiing on one engine instead of two, a procedure already common amongst carriers in India.

The International Council on Clean Transportation , a non-profit research organization ranked Alaska the highest in fuel efficiency among all 15 major U.S. airlines in a report it released in September.

Winglets save fuel by reducing drag, which allows aircraft to fly at cruise speed with less engine power. Alaska Airlines will recoup the capital cost of installing the new winglets through fuel savings in about two years.

Designed by Seattle-based Aviation Partners Boeing, the first winglet will be installed early next year and the project will be completed by 2017. Alaska plans to install the winglets on 111 aircraft, including most of its 737-800s, -900s and all of its -900ERs. Installation will be scheduled on each aircraft during routine maintenance inspections.

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Ryanair discontinues legal actions against Belfast Telegraph

Ryanair has dropped legal proceedings against the Belfast Telegraph after the paper issue an apology to the carrier about a number of false claims made in an article posted on the Telegraph website on August 6th. Find the details below.

19th August 2013

RYANAIR WELCOMES BELFAST TELEGRAPH APOLOGY

Ryanair, Europe’s only ultra-low cost carrier (ULCC), today (19 Aug) welcomed an apology issued by the Belfast Telegraph arising from its publication of an article two weeks ago on its website (6 Aug) which made a number of false claims about Ryanair’s fuel policy and safety.

Ryanair initiated legal proceedings against the Belfast Telegraph last Friday (16 Aug), as well as Channel 4 Dispatches, The Daily Mail Online and the Daily Mirror. Within hours of the proceedings being issued, the Belfast Telegraph issued an apology and accepted that Ryanair’s pilots are free to carry as much fuel as they wish to, that Ryanair fully complies with EU fuel regulation, and also the IAA’s confirmation that Ryanair’s safety is “on a par with the safest airlines in Europe”.

In light of this apology, Ryanair will discontinue its legal action against the Belfast Telegraph, but will continue to pursue its defamation cases against Channel 4 Dispatches, The Daily Mail Online and the Daily Mirror.

Ryanair’s Robin Kiely said:

“We welcome the Belfast Telegraph’s apology and its acceptance that Ryanair’s pilots are free to carry as much fuel as they wish, that Ryanair fully complies with EU fuel regulation, and the IAA’s confirmation that Ryanair’s safety is “on a par with the safest airlines in Europe”. In the light of this apology we have instructed our lawyers to drop our legal action against the newspaper. 

Ryanair will not allow any newspaper (or group of non-Ryanair pilots) to defame our industry leading 29-year safety, or to impugn the 9,000 aviation professionals whose commitment to safety here in Ryanair on every flight, every day, is absolute.”

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Opinion: Air India pilots should not resort to scare tactics

by Devesh Agarwal

The Indian Commercial Pilots Association (ICPA) of the erstwhile Indian Airlines, who fly the narrow body A320 family fleet of national carrier Air India is resorting to scare tactics accusing the airline "of arbitrarily changing the flight operating procedures for narrow-body A320 aircraft, affecting flight safety."

The issue revolves around the carrier's decision to reduce the acceleration altitude to 800 feet AGL (above ground level).

Bangalore Aviation readers will recall our report last month on German carrier Lufthansa reducing its take-off acceleration altitude, as a method to save fuel and reduce harmful emissions.

Immediately after take off, an aircraft usually ascends at a constant speed with the flaps extended until it reaches a certain altitude. In an effort to preserve engines, and since most modern aircraft generally do not require the maximum thrust available, a reduced level of take-off thrust is used. When the aircraft reaches a certain initial target altitude, the engines thrust is reduced, flaps retracted, and then the aircraft is switched to climb thrust. Soon after that the aircraft starts speeding up. The altitude at which the speed increase begins is called the acceleration altitude. This is also when the aircraft commences entering a "clean configuration" which is flaps up, etc. - a configuration it will fly in.

In India, IndiGo was one of the first airlines to work on reducing the acceleration altitude. Initially it was driven by safety as a counter measure to avoid bird strikes, so common around Indian airports. The Airbus A320 typically maintains an angle of 15 degrees when it takes-off, till it reaches the clean configuration. This high nose-up attitude prevents forward visibility and thus prevents the pilots from taking any corrective action in case of bird activity. An additional benefit was fuel savings. The airline worked closely with aircraft manufacturer Airbus, and today the airline commences flap retraction at 500 feet AGL and enters a clean configuration before 1,000 feet. The two Boeing 737 operators in India, Jet Airways and SpiceJet too maintain an acceleration altitude of 800 feet AGL.

The flap with the pilots appears to be, that a Regional Director issued the norms instead of a senior person like a Director Flight Operations, or a Director Training and it is altogether possible the egos of these pilots are bruised. On the flip side, I acknowledge that proper procedure and protocol should be followed, but my issue is the public scare tactics the pilots are resorting to. It hurts the image of an airline, and it hurts the image of the pilots themselves, who are already perceived as a pampered and selfish lot. Today's companies are teams and employee loyalty is a critical component to their very survival.

Air India is making a change that is already being practised by its fellow airlines, and one that will save it money.

I, for one, would expect to see the pilots of the ICPA support such proven cost saving initiatives.

Do feel free to post your comment in agreement or disagreement. I would like to hear from other pilots, especially A320 pilots. Just request to keep the comment clean and civil. We do have the young generation reading this site.

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Lufthansa to lower take-off acceleration altitude globally to save fuel

Lufthansa is set to change its take-off procedure for all departures outside Germany, and implement one standard, worldwide.

As of 1 June 2013, the airline will lower the acceleration altitude, for using the climb thrust and for further accelerating by its aircraft that are taking off, from 1,500 feet (approx. 457 metres) to 1,000 feet (approx. 305 metres).

What does 1000-foot acceleration altitude mean?

Immediately after take off, an aircraft usually ascends at a constant speed with the flaps extended until it reaches a certain altitude. Modern aircraft generally do not use the maximum thrust available at this point, but rather a reduced level of take-off thrust. When the aircraft reaches an initial target altitude, the engines’ thrust is switched to climb thrust.

As the aircraft continues to take off, it has to accelerate so that the flaps can be retracted and it can climb to its cruising altitude at a higher speed.

As passengers we experience this flaps retraction, which leads to a momentary reduction of lift in the wing, by a sinking feeling.

Soon after that the aircraft starts speeding up and the nose is raised higher to continue the climb.

The altitude at which the speed increase begins is called the acceleration altitude.

By reducing the altitude from 1,500ft to 1,000ft above ground level (AGL), decreases the wind resistance when the flaps are retracted, thus lowering fuel consumption. Lufthansa expects that changing the procedure at Frankfurt alone would save around 2,200 tonnes of fuel per year and a reduction of around 7,000 tonnes of CO2 emissions. Globally, Lufthansa will save around 6,000 tonnes less kerosene, around 18,000 tonnes less CO2.

A reduction in the acceleration altitude from 1,500 feet to 1,000 feet is permitted under ICAO (International Civil Aviation Organisation "pronounced Eye-Kay-Oh") regulations and is standard practice at most German and international airports and is already used by many airlines as it leads to lower fuel consumption and a reduction in CO2 emissions.

Lufthansa has already notified the German aviation regulator the Luftfahrt-Bundesamt (LBA), or "Federal Aviation Office" of the modified procedure, and has received approval. The German Federal Ministry of Transport, Building and Urban Development have already granted Lufthansa permission to change the procedure.

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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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IBM Analytics helps Jet Airways save $6 million per year

IBM analytics is enabling Jet Airways, to accurately calculate, track and report aircraft emissions, allowing the airline to use advanced analytics to map the carrier’s carbon emissions, optimising its fuel usage by detailed analysis of each flight.

This is part of a strategic 10-year business transformation agreement, the airline signed with IBM, in 2010. IBM's Integrated Emission Management System is used to analyse and calculate individual aircraft emissions, and comparison of flight records and fuel usage data contained in multiple systems ranging from internal aircraft systems to regional navigation data and flight records.

Sudheer Raghavan, Chief Commercial Officer, Jet Airways said

“In FY 2011/12, domestic air traffic grew at a rate of 12.9%, creating a huge demand for fuel which accounts for a major expense for any airline. Creating an energy efficient airline is a top priority and we are committed to the environment and a greener world. With IBM’s solution, Jet Airways will be able to evaluate carbon footprint not only at the fleet level but also at the aircraft level. It will help us optimize the fuel usage and thereby create a positive impact on the environment,”

IBM provides the carrier, application management services including ERP, flight operation, revenue management, roster and crew management, cargo management, customer relationship information system, aircraft maintenance and operations system, baggage reconciliation system and sales force automation.

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FDI is not a panacea; but a step in the right direction

When new Indian civil aviation Minister Ajit Singh announced that the national government would soon begin the process of allowing 49% foreign direct investment (FDI) by international carriers into India’s airlines Tuesday, India’s flailing airline industry breathed a heavy sigh of relief. Following a 75 minute meeting with finance minister Pranab Mukherjee, Singh stated, "the question was to allow foreign airlines to participate in FDI. I discussed it with the finance minister and he has agreed. We will bring out a note for the Cabinet now." Cabinet approval is not a foregone conclusion; however the wishes of the aviation minister are expected to hold considerable weight.

The result is in part a validation of the theatrics exhibited by Kingfisher Airlines and their flamboyant CEO Vijay Mallya late last year, with the dramatic cancellations/capacity reduction that they enacted in November appearing to pay off. Regardless of the validity of their duress, Kingfisher at the very least appears to have finally created a meaningful discussion around the legal environment for airlines in India: hopefully allowing the market to be re-structured into a more equitable and less restrictive model.

49% is a very significant figure for a pair of reasons; firstly, it is typically the maximum FDI allowed in most Indian sectors. Earlier figures that had been bouncing around included 24% and 26%, with the latter expected to be the upper bound of the cap. However, the dire financial situation of Indian carriers, which may have been exaggerated by the safety audit performed by the DGCA earlier this month, apparently convinced the government to soften its opposition even further. Secondly, a 49% investment cap ensures that foreign carriers would be able to control at least one (possibly more) seats on the boards of directors of Indian carriers, allowing these foreign airlines a voice into the decision-making of IndiGo, SpiceJet, Kingfisher, Jet Airways, and GoAir. The importance of this clause cannot be understated. A large chunk of the Indian airline industry’s problems can be attributed to mis-management by airline leaders (especially with regards to capacity discipline- or lack thereof). Allowing well-managed foreign airlines a voice in the affairs of Indian carriers could improve their management.

Not all FDI is Equivalent

That being said, there are 3 different types of FDI that will result from this decision. For the purposes of this article, I am dubbing them stabilization FDI, partnership FDI, and profit FDI.

Stabilization FDI is most directly applicable in the case of Kingfisher (though it certainly could apply to Air India as well). In their November 2011 crisis, Kingfisher noted that it especially needed equity to survive their short term financial crunch. Lack of liquidity might have forced Kingfisher to shut down (though it obviously did not), and in that scenario, a concerned foreign airline (probably a Kingfisher partner or potential partner) could have stepped in to save the company. For example, British Airways and its OneWorld partners have a vested interest in the survival of Kingfisher Airlines (as their gateway feed partner for the rapidly growing Indian market), and as such would have likely stepped in to prevent a collapse of Kingfisher.

FDI by British Airways would also be partially qualified over the long term as partnership FDI: which allows foreign carriers to dictate partnerships in strategic markets such as India. This avenue is open to any carrier who needs a local partner in the region, and is not unheard of around the world. Delta Airlines has launched a recent expansion into Latin America, buying partners like Gol and Aerolineas Argentinas through equity investments. If SkyTeam were to jointly invest in Jet Airways for example, they’d be engaging in partnership FDI.

The third type of FDI is one that is already technically possible for private foreign investors; investing in airlines for the return (profitability). Airlines tend to attract an unhealthy amount of foolhardy, romantic, investments. But the actual return on invested capital (ROI) is typically so low that smart private investors stay away. However, another airline’s definition of sufficient profitability is typically very different from that of an average citizen, and as such; foreign airlines could be lured into investments in the Indian market by tantalizing growth and tangible, if marginal, profits. This sort of investment would primarily be directed towards IndiGo, as well as potentially Jet Airways and SpiceJet.

FDI alone will not return the sector to profitability

While FDI is a good first step in solving the endemic issues affecting the Indian airline industry, it will ultimately take a whole lot more for a true return to profitability. FDI will help solve the liquidity problem of airlines and allow them to more easily stabilize in times of crisis. But the government has not yet attempted to ease the pressures of high fuel prices; which drove the losses of most Indian carriers in 2011 and are created in part by exorbitant fuel taxes. The market distorting influence of Air India has not yet been expelled, and the team that negotiates India’s bilateral hasn’t been enhanced in any way.
From the airline side, FDI will not prevent them from mindlessly expanding capacity, though it could make their business decisions sounder. And passengers are not going to pay more to fly because of FDI: the expectation of low fares will persist into the foreseeable future.

But the approval of FDI is finally a step in the right direction. Hopefully, it will be the step that catalyzes a chain reaction to solve the problems catalogued above.

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Latest AMR financial results validate American Airline's large narrow-body order

Earlier today, AMR corporation, the parent company of American Airlines, announced its financial results for the third quarter of 2011. Traditionally, the third quarter is the strongest financial quarter for US airlines. However, AMR posted a net loss of $162 million, $0.48 per diluted share. This stood in contrast to their $143 million net profit in the third quarter of 2010.

American showed singificant strength on the revenue front, with a 9.1% increase to US $6.4 billion. Seat-mile revenues were up by 8.7% as well, reflecting growing demand and broad capacity restraint in the US market. The carrier's Latin American operations showed particular strength, with seat-mile revenues up 20% vs. 2010: 25% in South America alone.

And American looks poised to make continual incremental gains in revenue. The carrier plans to cut close to 3% of its capacity in the fourth quarter of 2011, and has stated that advance bookings are at similar levels to those of 2010. These capacity cuts will limit American's year-over year capacity growth to just 1.2% on a consolidated basis.

But despite these positive indicators, American's financial results were disappointing; primarily due to the sharp rise in fuel prices. In a narrative similar to the one given by Indian carriers to explain their results in Q1 of FY2012, American attributed a large portion of its loss to the increase in fuel prices. American's fuel exepenses rose 39.8% year over year, by US $642 million.

Fuel represents close to 36% of American's operating costs, and consequently AMR's seat-mile costs jumped by 10.1%, more than wiping out the incremental revenue gains. American's fleet of McDonnell Douglas MD-80 aircraft (and to an extent the fleet of Boeing 757-200s) is a severe disadvantage for the carrier. These aircraft are 25-30% less fuel efficient than current generation aircraft, and the potential fuel cost reductions of re-engined 737s and A320s can reach 40%.

Earlier this year, American Airlines announced a large order for 460 narrowbody aircraft, split equally between current and next generation aircraft. When news of the order broke, numerous airline analysts questioned the rationale behind the order, citing American's financial troubles, and large debt load (net debt of $12.6 billion at the end of Q3). While there certainly is validity to the idea that limiting capital expense can be more important than improving fuel burn, American's fleet is so inefficient that improving fuel burn should have a larger positive effect on their financial results than the negative effect of added capital expense.

To illustrate this point, just a 15% reduction in American's overall fuel expenses (which a conversion of the entire MD-80 fleet to current generation narrowbodies could achieve) would have saved the carrier more than US $340 million this past quarter. And maintenance costs, which represennt roughly 5.44% of American's operating expenses, would decrease as well (at least early in the life cycle of the new aircraft as well). aircraft rent represents just 2.6% of American's operating costs, and thus even a 50% rise in rents would have a smaller overall effect on the bottom line than the reduction in fuel prices.

American's latest quarterly loss illustrates the unique challenges faced by the carrier. Already locked into unproductive labor contracts, American's fuel inefficient fleet of MD-80s is the largest restrictor on its overall profitability. While American's recent order might increase capital expenses, their third quarter results illustrate that the fuel efficiency gains are likely too large to pass up.

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Analysis of Kingfisher's Q1 Results

Continuing the series of Indian carrier financial analyses, today we take a look at Kingfisher.

Previous Analyses: SpiceJet

Following the trend of most Indian carriers, Kingfisher posted a drop in net income; facing a net pretax loss of Rs. 3.90 billion vs. a pretax loss of Rs. 2.64 billion in Q1 2011.

As compared to SpiceJet, Kingfisher did not see many operating improvements this quarter.

• Revenue was a (relative) bright spot, at Rs. 1,881.64 Crore, up 14.7% YOY from Rs. 1,640.57 Crore
• Passengers carried were up just 9% to 3.41 million, lagging behind the industry as a whole
• Passenger yield was up 6% to Rs. 5,007
• Absolute non fuel costs were up 10.7%, while absolute fuel costs jumped a whopping 44.3%, on capacity growth of 6%, a 3% increase in the number of departures and a 3% increase in total block hours.
• Seat-kilometer revenues increased 9%, while seat-kilometer costs were up 16% year over year; seat-kilometer costs excluding fuel increased by 3%
• Interest expenditures by Kingfisher on its debt were Rs. 305.8 Crore, down YOY but still representing a gigantic 16.2% of overall revenues
• EBTIDA Profit (which measures operating results before taxes, interest, depreciation, and loan amortization) was Rs. 5 Crore; Rs. 44 Crore profit domestically, and Rs. 39 Crore loss internationally.
• International: R/ASK up 25%, C/ASK up 17%
• Domestic: R/ASK up 6%, C/ASK up 15.5%

Observations:

Kingfisher is currently operating at an unsustainable level of debt. When interest expenditures are 16% of revenues, your balance sheet has officially reached toxic levels.

But the net loss by Kingfisher should not necessarily be looked at as a referendum on the viability of the airline as a whole. As I mentioned above, interest payments were equal to almost 75% of the overall net loss. EBITDA profit indicates that Kingfisher's airline operation is profitable, but the company is not at current debt levels. Perhaps a US-style bankruptcy reorganization and/or a capital infusion from its OneWorld partners could help this?

The international market for India seems to be stabilizing. During the 2008-2009 slowdown, and even into 2010; there was a fundamental over-capacity internationally. But Kingfisher saw almost 25% seat-kilometer revenue growth on a 7% increase in capacity; shaving 20% of the EBITDA results. Kingfisher looks to be increasing its marketshare slightly (passengers carried were up 13% from 290,000 to 320,000), though it still has a ways to go before catching up to market-share leaders Air India (I use the term leader very loosely here) and Jet Airways. As the airline integrates itself into the OneWorld alliance of carriers, additional growth should be seen on the international side; especially in the lucrative premium segment.

Domestically, Kingfisher suffered many of the same issues that plagued both Jet, and SpiceJet. Capacity growth outpaced the increases in demand, and with fuel trending higher during the quarter, that Kingfisher managed to make an EBITDA profit is a remarkable feat in and of itself. Part of the secret behind Kingfisher's success was strict capacity discipline; ASKs increased 5% while RPKs grew almost 10%. This kept yields from falling off a cliff, as they ticked upwards 2% to Rs. 4,389.

One troubling factor is that seat-kilometer cost excluding fuel increased. In the high fuel environment that India currently faces, Kingfisher must maintain stringent discipline on non-fuel costs if it is to remain viable. They tried reducing wages, but the negative reaction from its employees stopped that plan of action.

-Vinay Bhaskara

Twitter: @TheABVinay

Contact me at vinay@bangaloreaviation.com

Please feel free to comment on the post below

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India Budget 2010: Impact on the aviation sector

Keeping in mind the five year term of the Lok Sabha, the first year is the thank you budget, years two and three are the hard and bold budgets, year four is the status-quo budget, and year five is the populist budget meant to garner votes. With coalition politics in full sway, the union budget is also now subject to election needs of regional coalition partners like the TMC, DMK, and the NCP.

Mr. Mukherjee faced no election pressures this year, year two, of the UPA's second term. With no election pressures, the Finance Minister of India, Mr. Pranab Mukherjee missed a golden opportunity to take some bold initiatives in Budget 2010.

He did however raise indirect taxes by almost Rs. 46,000 crores which also includes re-introduction of customs and excise duties of petroleum products. He also broadened the base of services which will now come under the service tax net.

Service tax of 10.24% which until now was levied only on international travel in business and first class and showed up on tickets as JN has now been expanded to include all classes and all travel. My understanding is the the service tax will be levied on the total ticket price excluding the statutory taxes of governments.

The scope of the taxable service ‘Air Passenger Transport Service’ [section 65 (105) (zzzo)] is being expanded to include domestic journeys, and international journeys in any class.

Airports have not been spared either. Service tax is now levied on all services provided at airports, whether to passengers, or importers/exporters, or to airlines. There will be a price rise along the entire value chain.

The definitions of the taxable services, namely the ‘Airport Services’ [section 65 (105) (zzm)], the ‘Port Services’ [section 65 (105) (zn)] and the ‘Other Port Services’ [section 65 (105) (zzl)] are being amended to provide that,-

1. all services provided entirely within the airport/port premises would fall under these services; and
2. an authorization from the airport/port authority would not be a precondition for taxing these services.

On the fuel front, air passengers are going to feel the pinch when the oil marketing companies revise the price of aviation turbine fuel on March 1, 2010. With global crude prices increasing sympathetically with increasing demand as Asian economies recover, the effect is going to multiply.

Unlike 2008, airlines now are smarter, and with reasonably healthy demand, will be quick to pass on the fuel price increases in the form of increased fuel surcharges.

Everyone transacting at an airport, including passengers, can get ready for serious price jumps.

This does raise an interesting situation. Asian economies are recovering and forcing an increase in global fuel prices, which is impacting the whole world. The United States and European economies are still very fragile and residents of these countries face the daunting prospect of an expensive summer season without a corresponding income generation.

Coming back to India, the lack of credit off-take is symptomatic of the lack of capacity augmentation to cater to the rapidly rising demand and this is reflected in the supply shortage inflation the country is experiencing. With the new taxes announced today, Petrol is already up almost Rs. 3 and diesel by almost Rs. 2 per litre. These increases will only add to the inflation spiral as price of goods and services will increase.

The inflation spiral will force demands for salary increments from staff and price increases from vendors, both of which were suppressed until now thanks to the economic slowdown. The improving economy is also putting pressure on the HR front as more job opportunities open up, and there is bound to be attrition which will increase costs due to recruitment and training. Vendors too, have more market opportunities, and both airlines and airports will be hard pressed to retain suppliers.

Low fare airlines face the dilemma of passenger demand that is price sensitive. For full service airlines, premium and business traffic is generated by fresh investment by industry, and the lack of credit off-take is a cause for concern. The customers of airports, are airlines, and troubles flow downhill.

Clearly tough times are ahead.

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Airlines face future oil shock during recovery period

It is difficult to believe that the global economic slowdown commenced one year ago.

Since July 2008, airlines across the world began to cut back on their seat capacity, and parking their aircraft. In it's July 2009 report on trends in the supply of airline flights and seats, the Official Airline Guide OAG reported that airlines are offering 315 million seats which represents a 1% drop when compared to a year ago. Reality is hidden in the fact that this chart is relative and in actuality the availability and demand has stagnated in to an extended L shape leaving airlines, still in the doldrums.

The global economy is still down in North America and Europe which is turn causing a lack of demand in the export driven economies of China, Korea, Japan, Taiwan and the ASEAN tigers. In India thanks to the large domestic market, there are modest signs of economic recovery with industrial production, core sector production, freight loading all in positive territory.

A key contributor to the collapse of the global economy was the soaring fuel prices in the first half of 2008. Nations across the world and their citizens were wondering when, not if, crude oil would cross the $200 per barrel mark. The chain reaction of crashes - economies to demand to oil prices, made us focus on more immediate priorities and we have conveniently forgotten that the core issue of unbridled demand for oil has still not been addressed. As economies settle down fuel prices are beginning to harden.


David Beckerman, vice president OAG Market Intelligence, said,

“Airline capacity is often cited as a barometer of economic confidence. Carriers adjust their fleet and services in anticipation of market demand for air travel, which is vulnerable to corporate cost management and to disposable income of leisure travellers at times of financial uncertainty."

A stabilising of economic activity is translating to a gradual but steady increase in oil prices, but at the same time job losses and corporate cost cutting continue. This lag is natural as companies and individuals adopt a 'wait and see' approach before commencing expenditure. In the mean while, rising oil prices will impact the bottom lines of airlines while top lines will fail to rise thanks to the lag of passengers returning to the skies.

Grilled sandwich anyone? For airlines the worst is still to come.

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Fuel populism killing air transportation

India, the world's largest democracy, has a sorry record in sound and bold economic administration. Populist measures abound, and nothing is sacred or immoral in the perpetual quest to obtain and then secure the "gaddi".

Fuel pricing in India is a prime example.

Officially, the "Administered Price Mechanism" was abolished in 2002, but today, the Indian government has a greater control on the fuel market and prices than ever before. Private operators have been driven out of the market, and only the Government owned companies survive.

Government have become addicted to their windfall fuel tax income. In the last 6 years, fuel tax collections have increased almost 250% to a staggering Rs. 170,000 Crores (Rs. 1.7 trillion or US$ 41 Billion).
Indian bureaucrats have learnt well from the Europeans and their "tax and spend" Keynesian economic models. Fuel taxes are greater than the cost of the fuel. In Bangalore, when we pay Rs. 57 for a litre of Petrol, Rs. 32 is taxes, only Rs. 25 is the cost of the actual fuel. Internationally, the cost High Speed Diesel ex-refinery (excluding taxes, duties, levies, etc), is marginally higher than Petrol. Yet, in India, Diesel costs 35% less than Petrol, thanks to lopsided tariffs and populist driven subsidies.

The one fuel that is truly free in pricing is Aviation Turbine Fuel (ATF). Thanks to the government induced haemorrhaging, and the traditional, but wrong view, of air travel being a luxury, oil companies are using deregulation on their favourite whipping boy -- ATF. In India, ATF costs double than prevailing international prices.

The results are plain to see. Despite being leaders in the global airline growth story, airlines in India, today, are bleeding, and bleeding bad. Losses in 2008-9 fiscal, are expected to cross $2 billion. Unable to sustain, in sheer desperation, airlines are hiking air fares, cutting back schedules, deferring aircraft deliveries, laying off staff, even considering importing their own fuel.......... in short, anything, to cut down losses.

This has resulted in air traffic crashing all across India. In Bangalore, the shining example of India's air traffic growth, from an annual growth rate of 33% year on year, for the first time since 2001, air traffic is actually falling to levels below that of the previous year.

Additionally, due to the remoteness of BIAL airport, regional air traffic is decimated, with air passengers switching to trains and buses instead. We might be tempted to say "so what". But we overlook the productivity aspects in the slower transit time of trains and buses. And in today's globally competitive economy, productivity matters.....a lot.

The operators of the Bengaluru International Airport, BIAL, now face an additional quandary. The airport terminal is reportedly, under capacity, and needs immediate expansion. Till now, their primary source of revenue, has been landing charges levied on flights. Thanks to a reduction in flight operations by the airlines, their income stream and cash flows have been reduced. So BIAL is increasingly forced to rely on passenger based User Development Fee (UDF), which has both the Government and passengers united in their opposition.

An imposition of UDF by BIAL on domestic passengers will only aggravate the already bad situation, and result in a further compression of air traffic. A downward spiral into a bottomless pit.

A possible solution requires bold decisions. Something both the political and administrative establishment in India are not known for.

• Government has to pledge at least 10% of its fuel taxes towards public transportation infrastructure. My friends in the auto industry will hate me for this suggestion, but our cities are choking in their own growth.
  
• ATF pricing should be reduced to international price parity. Ex-refinery, and taxes, union and state. Everyone should share the burden, including the airports and airlines. They must pass on the savings and re-invigorate the market, not use it to butress their bottom lines. The downstream impact of the aviation industry is far greater than the losses sustained by price reduction. We must not forget, every aircraft purchased by India, results in huge "offsets" i.e. mandatory exports of other goods and services.
  
• A moratorium on UDF for at least 12 months by all airports in India. Keep costs low. It will pinch, but the increase in flight operations will butress some of the revenue loss.
  
• Allow HAL airport to handle regional air traffic. By sticking to its hardline, BIAL will only continue to drive passengers away from the air, to trains and buses. A negative for all stake holders, including the citizens of Bangalore.
  
• Diverting part of the regional traffic to HAL will also give BIAL breathing room, and delay the need for investment in a costly second terminal, till global economic conditions improve.
• Forget a "temporary terminal". Passengers will not accept travelling 50km, paying a UDF, and then using a "tent".

This is just one view point. Other constructive suggestions are welcome via the comments section.

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