Indigo gets Frontier and Indian airline industry collapse gathers pace

Dino D'Amore
By Dino D'Amore October 1, 2013 12:56

Indigo gets Frontier and Indian airline industry collapse gathers pace

As mentioned before, all Indian airlines have for the second time in 2013 failed to fill seats on forward bookings following moderate price increases and as such it is proving impossible for airlines within India to operate in the black on the bulk of routes. There is room in the market for a single or maybe two large airlines that will open up the option of air travel to those that have no other choice of transport. Other than that there is room for a low-cost regional operation running turboprops. Now in July when we went into detail on the Indian market we stated that asset managers must beware of Jet, GoAir and in the end all other Indian airlines, we did not go into detail about SpiceJet because we were aware of an impending auditor’s report. Now we find that the independent auditor of SpiceJet, one of the most healthy of Indian carriers, has confirmed that the airlines operating results have been materially affected by the fall in the Rupee, fuel costs and maintenance costs. Stocks of SpiceJet fell nearly 4% yesterday on the news after its auditor questioned the net worth of the airline.

In its 2012-13 annual report, its auditors said: “the company’s accumulated losses has fully eroded the net worth of the company”. This is unsurprising as total operating expenses for FY 2012-13 have increased by at least 30% for all Indian airlines and in the case of SpiceJet this means an increase to Rs. 48,105m from Rs. 37,079m in FY 2011-12. This means that we now should question the ability of all Indian airlines’ (other than state-owned Indian Airlines) ability to raise finance to meet short-term running costs. Against this backdrop I say again what I said in August – Etihad has dropped a total clangor in choosing to invest in Jet Airways when it did (although this has not gone through yet) and it brings into question the Etihad airline investment strategy and again makes it look more and more like that of the late great Swissair which was brought low by just this sort of investment. In fairness to Swissair, at least it took the completely unforeseen 9/11 to bring it down, Etihad is seeing potential problems before any major system shock that would test just how deep those Etihad pockets are. I have word that engine assets are being pulled out of Indian aviation as they go back for maintenance and overhaul. Aircraft lessors do not have this luxury but might wish to take advantage at this stage of any opportunity that arises to assist customers struggling to pay rental by taking back assets, this will do the airlines a big favour in the short term and thus should keep relationships strong. Protect the asset and the relationship.

Besides there is always the US market to put those A320s and 737s into if the APAC region cannot take them.

The federal Bureau of Transportation Statistics announced yesterday that the largest passenger airlines had a net profit of $2.1bn in the second quarter of this year. An increase from $700m profit during the same quarter of 2012 – a wonderful performance by any measure. This accounted to a 9% pre-tax profit in the second quarter, up from 6% during the same period in 2012. The total revenue for all airlines in the second quarter of 2013 was $41.2bn, $871m of that was from baggage fees and $719m was from reservation change fees. Delta had the largest profit at $688m followed by United ($484m), US Airways ($322m), American ($228m) and Southwest ($223m).

So it is a great and wonderful turn of events that Indigo Partners has agreed in principle to buy Frontier Airlines, a move that will see the US ultra-low-cost carrier market expand to three. This brings into focus some of the points raised in AE issue 15 on if the US market can take three ULCCs.

Indigo Partners agreed late yesterday to purchase Frontier from Republic Airways Holdings in a deal largely based on the assumption of debt. The agreement was being reviewed by lawyers overnight and was expected to be announced early today, when terms will be released. The deal will be subject to a number of conditions, including a labour agreement with the pilots.

Now Frontier and Spirit will end-up competing head to head on many routes and it is unlikely that one will not damage the other unless the two airlines make a point of avoiding each other – which at this time is not the case. The first salvos of competition will come. The big difference between Spirit and Frontier is that Frontier has a leading position at the fifth largest US airport – Denver, where it is third largest carrier after United and Southwest. As such it is United and Southwest that will be hit hardest by any Frontier transition into an ultra-low-cost carrier. This might in turn force Southwest to start moving with the times. What is certain is that Frontier represents an ability for Indigo Partners to take the ULCC model one stage further than Spirit could go in the here and now. By having critical mass at one of the largest airfields, it means hub and spoke operations are possible. Many think Frontier will move away from Denver, which would be great for Southwest and United. This would be folly. Frontier has everything in place already in its Denver operations and I think Indigo and Frontier can do it and make a ULCC hub and spoke operation work. We shall see.

Meanwhile Avcon Worldwide are due to meet with Emirates tomorrow as Emirates tries as hard as it can to sell off A340s to Avcon at speed. The Thai Airways board is due to meet on the 18th October to reconsider the sale of one A340 to Avcon or to give back the deposit for the same with costs and expenses. In any event Avcon will most likely not wish to move forward with any more A340 purchases other than HS-TLD (MSN 775) only as they don’t want any hassle like this with three other A340s even the THAI board approves the sale of the same. Given that Avcon want five A340s in total and Emirates have already broken two I would argue that the Emirates team are on the verge of managing to get rid of six A340s out of a total of nine in under a month – Now that would be impressive.

Dino D'Amore
By Dino D'Amore October 1, 2013 12:56
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