INDIAN AVIATION FOCUS – KINGFISHER ADMITS THAT BUSINESS PLAN IS FLAWED

Dino D'Amore
By Dino D'Amore July 22, 2011 19:25

INDIAN AVIATION FOCUS – KINGFISHER ADMITS THAT BUSINESS PLAN IS FLAWED

Things don’t get much better than that in India. There is currently a huge boom in tourism and rising disposable incomes and India’s aviation industry has experienced a sharp rebound in travel demand in recent months. Between January and May, the number of passengers carried by domestic carriers climbed 17.6% to 24.5 million from 21 million in the same period last year.

But this boom does not seem to be helping many full-service carriers. They are struggling to convert bums on seats into profits as cost bases continue to rise. So this is an important juncture for Indian aviation and it can be argued for the first time that if an Indian airline cannot make profits in this market then it needs to completely re-organise its strategy and market placement.

Kingfisher Airlines has been searching for investment for over a year now but it is unlikely that they will get any. Last month Dr Vijay Mallya made a dramatic passing remark saying: “Our business plan can sustain US$90 a barrel of crude or less. We can’t afford more than that. But it is not just a question of the price of fuel. It is the huge sales tax on fuel that really hurts us.”

State governments in India charge airlines a sales tax of between 24% and 35% on aviation fuel, which typically constitutes about 40% to 50% of an airline’s operating costs.

Unfortunately for Kingfisher Airlines oil has been rising steadily for some time now and the spat between the EIA and Germany/Italy this week on a second round of oil reserve releases has seen oil push very close to the $120 a barrel mark.

Kingfisher Airlines is witnessing its business crumble. Last month we reported that two of the airline’s ATR aircraft were grounded because of a cash crunch. This week, 10 Kingfisher flights were delayed by several hours after Hindustan Petroleum, an oil marketing company, refused to supply fuel to the airline citing non-payment of pending oil dues. Kingfisher reportedly owes 5 billion rupees (US$112 million) to oil companies.

We are all aware that Kingfisher Airlines is in trouble but Jet Airways, the largest privately owned carrier in India, slipped into a loss after tax of 2bn rupees in the January to March quarter on the back of rising fuel prices, compared with a profit of 2.2bn rupees in the same quarter last year.
Meanwhile Air India, reeling under a debt load of 400bn rupees, reported a net loss of 60bn rupees in the fiscal year that ended on March 31. This week, the government announced equity infusion of 12bn rupees into the airline on top of the 20bn rupees injected last year. Air India earns 360m rupees a day from its operations but spends 570m rupees daily.

India is the ninth-largest and currently the fastest-growing commercial aviation market in the world. Passenger numbers grew 20% to 52 million last year compared with 2009. It is expected to rise fourfold to 180 million by 2020, but airlines in the market will never be secure while the fuel tax exists. The joke is that the money the government makes from the fuel tax is all being pumped into Air India at this time – Is that an open and fair market to be doing business?

Dino D'Amore
By Dino D'Amore July 22, 2011 19:25
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