Domestic airlines don't fly in sync

MUMBAI: India’s airline bosses have been holding a series of closed-door meetings over the past several weeks and for a good reason too. It’s not often you have a market that has shown a growth of 72% y-o-y, and the leading players reeling under losses.

The point was driven home forcefully on Tuesday, when market leader Jet Airways declared a second quarter of losses. Jet enjoys the highest market share and the best yields in the industry, so the situation is unlikely to be much better for others. Basically, these meetings have pitted full service carriers like Jet, against low-cost carriers like Deccan.

Jet Airways and Air Deccan occupy the top two slots in the Indian aviation market and carry over 50% of the passengers domestically. Both face common challenges like shortage of trained manpower, high cost of fuel and infrastructure bottlenecks. But, the similarity ends here. They have different approaches to the pace and the manner of capital expenditure, the kind of passengers they want to carry and the financial nerve to withstand the current bloodletting.

Consider the pace of capital expenditure to start with. It took Jet almost 13 years to reach a fleet size of 42. Deccan already has that many planes and has 90 more on order. Deccan’s strategy is to spread out the fixed costs over a large base, an intrinsic part of the low-cost model. But, some feel Deccan has expanded too fast without paying attention to the nitty-gritties like flight delays and other complaints. In contrast, Jet’s expansion has been at a measured pace, even now.

The manner of capex is the other differentiating factor. Jet takes deliveries of aircraft on its own books and is able to claim depreciation for some years. Within 4-5 years, the market value of the aircraft is significantly more than the book value, and the aircraft can then be sold for a sale and lease back. Last year, Jet earned Rs 270-crore on sale of five aircraft and another Rs 161 crore for the first six months of the current fiscal. Many airlines are short on cash and go for immediate sale & lease back transactions on new aircraft.

Given that the costs are different for the two airlines it is no wonder that both want different customer profiles. To fill up seats, Deccan offers low fares. In fact, the airline has an ongoing scheme of six rupee tickets (plus taxes, of course).

The company has been successful to some extent — load factor for the quarter ended June ’06 were 79%. Jet on the other hand, prefers to keep the yields high even if some seats remain unfilled. Jet’s load factors have fallen in the past few quarters but its margins remain the best in industry. Deccan is targeting first-time flyers with its fares. On the other hand, with loyalty programs and corporate tie-ups, Jet is targeting frequent flyers and business travellers, who are not price-sensitive and offer better margins .

So why are both losing money? Jet’s losses over the past six months stem from two sources — falling capacity utilisation and lower yields. Yields are lower because of its inability to increase prices. For the quarter ended September ’06, Jet’s occupancy factor has fallen 6.2% to 65.6%. While Jet’s operating costs have increased by 28% it revenues have increased by only 8%.

Air Deccan has enjoyed a load factor of 79% for the quarter ended June ’06 — which is high, compared to other domestic airlines. However, the company recorded a net loss of Rs 110 crore on a turnover of Rs 430 crore.

At this rate even if Deccan were to fly all its planes completely full it will still be running in losses. Unfortunately, Deccan does not have the financial reserves of Jet, which has Rs 1,900 crore in cash though Deccan has raised Rs 450 crore recently. It needs to improve yields, but it should not leeway to raise fares. Something will have to give sooner rather than later.