What worries you today? Nothing new – India and Russia

Dino D'Amore
By Dino D'Amore December 17, 2014 15:26

What worries you today? Nothing new – India and Russia

The fundamentals of the Russian economy now closely resemble those of 1989 when the USSR collapsed. The Ruble is seemingly now in freefall after losing 11% yesterday even though Russia increased interest rates to 17% – a clear sign that the central bank is running out of ammunition. The hyper-inflation is now making it virtually impossible for companies to sell products in the domestic market as prices need to change by the day. We are all aware of the contributing factors that are killing the Russian economy and so it is for us here to stick to the potential effect this will have on aviation? The facts, as reported previously here cannot be argued with – International transits have fallen off of a cliff in 2014, caused in part by the Kremlin telling all state workers that they are to holiday domestically. That sharp increase in domestic transits held-up the airlines in 2014, but in 2015 we can expect Russian domestic transits to fall rapidly as the economic collapse takes its toll. On top of this privately-owned airlines have been forced to take-on debt and lease aircraft in US dollars as the Kremlin dictated that all fleets had to be renewed. At the same time Aeroflot was given preferential treatment on routes and all sorts. The bottom line: Aeroflot is as safe as houses but will feel pain in 2015 while all other airlines in Russia have to be put on a watch list for 2015 no matter how wonderful their past performance has been.

Meanwhile in India: SpiceJet flights have resumed says an airline official but we are unable to confirm if this is the case. This comes after the Indian government asked banks to lend working capital to the airline and asked the fuel and airport companies to take the airline off of cash and carry and put it on 15 days payment terms.

Just over three years ago, almost to the day, I stated here that SpiceJet would fail unless there was a significant change in the general dynamics of the business model or the way that customers/potential customers think in India, mainly due to the fact that Air India under government sponsorship was killing the airline market with crazy sales. I got quite a bit of stick for that, but we stand by the findings as always. Then a few months ago we confirmed that lessors need to get assets out of the airline as planes were being stripped for parts. Since then we have been promoting the potential plus sides of the airline where and when possible. If you look hard enough there is always something and so it is today in the airline’s darkest hours. As we all are aware, the airline is all but out of working capital and is on its knees, but I would argue that by allowing SpiceJet to book seats through to March 2015 the Indian government has turned the airline’s fate into a political issue and as such is sending a strong indicator that they will not let the airline fail. Of course it could just be a miscalculation by the Indian government and they maybe have not considered nor have any care about the obvious political fallout if the airline fails between now and March after the government has expressly allowed them to continue booking passengers.

Indian aviation has always been at the mercy of government manipulation (although not on a scale that compares with Europe), and this is quite obviously set to continue. As such we could question how any independent airline could possibly plot a future course through this minefield and indeed it is a fact that the decisions taken over the past 24 hours have once again held-up an airline that should have failed. But in the case of SpiceJet, the airline management is able to clearly show that the Indian government put it in this situation in the first place.

But let us say that SpiceJet did receive the capital it requires to carry on business……In that event what has changed? Nothing other than fuel costs due to oil falling. In this regard the airline is lucky to be able to state that they could continue operating in the black on routes, but it still does not change the fact that this airline and some others like it in India need to look back at what works and what clearly does not. Again I find myself arguing that Air Deccan with its turboprop model is the one that domestic carriers in India need to be emulating/tweaking, especially after various state authorities lowered ATF prices for turboprops.

Dino D'Amore
By Dino D'Amore December 17, 2014 15:26