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Airline Restructuring, Bombardier, Commercial Airliners, Low Cost Airlines, Major Airlines, Regional Airlines

ABSTRACT: India’s LCC (low cost carrier) SpiceJet is in trouble, finally restructuring after 5 consecutive quarters of losses, just today it’s stock dropped 13.8%, as lessors start repossessing aircraft, yet 9 months ago it made a $US 4.4 billion order for 42 Boeing B737-8 MAX, now out of money ? where is the financial planning ? is the restructuring too late, again ? when will India’s airline industry be profitable with such low yields and high costs ? time for Air India to go bankrupt finally ? and yet LCC IndiGo is making money and orders 250 Airbus A320neo’s ready to dominate the Indian market with up to 528 Airbus A320/321’s by 2026 !

The airline industry in India is a bloodbath, everyone except LCC (low cost carrier) IndiGo and possibly GoAir is bleeding cash, with high operating costs and very low yields, the market is now facing another major bankruptcy after Kingfischer Airlines with SpiceJet in big trouble. India is the most under served airline market in the world (passengers per population) with 0.06 trips per capita (North America is 1.6 trips/per capita) and has so much potential as India is expected to grow by 9.6% per year (CAGR-compounded annual growth rate) for the next 20 years to 0.26 trips per capita, 4 x current travel propensity, but in the meantime Indian airlines are loosing money, will any current airline have the sustainable business model and financial resources to be around 20 years from now ?

In fact, just this morning, SpiceJet Ltd. lost 13.8% of its stock value in a big sell off of 28.6 million shares as aircraft are being repossessed as the airline has been unable to pay its lease rentals. This is shaping up to be another Kingfisher Airlines fiasco, same scenario, repossessions of aircraft, unpaid employees, curtailed operations, parts stripping from aircraft to keep others flying while talking up the story that some unannounced strategic investor “White Knight” will emerge soon.

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Once high flying SpiceJet has had to down scale operations from around 39 Boeing B737-800/900ER’s down to 22-24 now, as aircraft are being repossessed by lessors, yet 9 months ago it ordered 42 Boeing 737-8 MAX aircraft worth $US 4.4 billion, don’t you need to have some credit to buy such a large volume of aircraft anymore ? did Boeing not  check out SpiceJet ? or is it about out selling Airbus at any cost now ?  

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As of this morning, it is reported that 22 to 24 Boeing 737-800/900ER’s are operational out of roughly 33 x B737-800’s, 6 x B737-900ER’s while the fate of the 15 x Bombardier Q400’s is unknown at this time. This comes only 9 months (March, 2014) after a $4.4 billion order for 42 B737-8 MAX aircraft ? what were they thinking ? and sadly there are several other airlines around Asia in the same boat, over optimistic growth forecasts, yet the reality is negative cash flows for many where CASM (cost per ASM) > PRASM (passenger revenue per ASM, which is load factor x yield). In India the problem is high costs and low yields, carriers are discounting heavily when they cannot afford to be, cannot have CASM higher than RASM, that equals doom sooner or later. In India, you have to deal with expensive foreign pilots, high state taxes on fuel, cannot out source much, be it maintenance, ground handling, which is common for LCC around the world, in India you have to keep it in house for now.

The only salvation I see is possibly SIA (Singapore Airlines International) coming to its aid, since SpiceJet and SIA’s struggling LCC subsidiary Tigerair have a interline pact since Dec 2013, where they sell each others flights in each others reservations systems, or will IndiGo make a play for SpiceJet ?

Air IndiaAir India expressair india regional

Air India B747-400 (above left), Air India Express B737-800 (above center) and Air India Regional CRJ-701ER (or CL-600-2c10 as all Challengers and CRJ are from the same Type Certificate, just stretched from 12 to 108 seats !). The government airline has lost billions of dollars over the past 50+ years, last year only $US 806 million a 28.5% net loss margin-a rather good year for the airline, and never mind the destruction the airline has done to the airline industry as it distorts the competitive landscape competing with private airlines which are all but few are in red. Time to dump Air India, and level the playing field, it is what the airline industry needs in India, is newly elected Prime Minister Narendra Modi (BJP) strong enough to make such a bold move ? he has the majority of the 790 seats in parliament, and finally the Indian Congress Party is gone from power.

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India is a disaster for airlines, government owned Air India/Air India Express/ Air India Regional (17% domestic market share only) is as always loosing big money, which the government covers, which saw 2013-2014 net loss of 5,000 Rs crore (+/- $US 806 million) on revenues of 17,500 Rs crore (+/- $US 2.82 billion) -28.5 net profit margin ! and that was suppose to be a good year, and comes on the back of a $US 1.1 billion grant/aid package in 2012 and $US 4.9 billion grant/aid package in 2013 (apparently only ½ of that was actually given). This airline is a black hole for tax payers money, its latest bailout calls a full turnaround by 2021, it won’t happen, The government has just given the go ahead to 6 new airlines, which is on top of recent new up starts like Vistara and Air Asia India (part of Malaysia’s Air Asia the biggest LCC in Asia) which are offering promotional fares as low as $US 16 one way and this reckless pricing to compete is what is killing the industry, so more airline bankruptcies will surely occur in the next 2-3 years.

In short Air India is a bottomless money pit, the bests for the Indian airline industry is to shut it down, and let the private airlines operate in a free market environment, its operation only distorts the market and creates more problems for the others and there is no need for it, private investors are more than willing to put money into the Indian aviation market, as the economy is growing and people are becoming richer, they prefer to fly 90 minutes than drive on poor roads or take a crowded, noisy and slow train for many more hours than flying. With 1.2 billion people, it is not hard to see it will be a huge market once the Government gets out of the way and stops hindering the industry, the survivors of the next 3-5 years will become the BIG players in the Indian airline industry.

At this point in time, the airlines best positioned for the future in India are IndiGo (31% market share), Jet Airways (22% market share and Etihad as Alliance partner, GoAir (9.2% market share). Air Costa and new start-up Air Asia India, I think we will eventually be saying good bye to Air India, SpiceJet and most of the new start-ups. The business situation is slowly changing, the Indian Congress Party is finally out of power, plans for new airports, improved ATC and some moves to coordinate the reduction of taxes on fuel is underway in all 29 states in India, so hanging in and waiting for better days is the best course, as Mr. Jeh Wadia of Go Air says “I am running a marathon” pace yourself slowly and steadily that is the best advise for all Indian airline CEO’s for now.

Lets look at ‘some’ of the airlines that have failed in the past 20 years in India, the probability of failure is high in India for any new airline, its all about poor capacity discipline, poor yield management, poor government policies, poor management, corruption and the Air India ‘Effect”.

1. Archana Airways 1991-1999

2. Paramount Airways 2005-2010

3. VIF Airways 1993-1996

4. Vijay Airlines 1981-1997

5. MDCR Airlines 2007-2009

6. Kingfisher Airlines 2005-2013

7. Indus Airways 2006-2007

8. Air Deccan 2004-2007 merged with Kingfisher

9. Indian Airlines 2004-2007

10. Vayudoot 1981-1997

11. Air Sahara 1993-2007 bought by Jet Airways, was turned into JetKonnect but now under Etihad guidance that brand too is going away.

Meanwhile LCC GoAir (88% of flights are domestic) is cash flow neutral, Air Costa is still around and ordering new aircraft ? Vistara is a new start up but probably too late in the game, new Air Asia India a JV with TATA Group, could do well as a LCC in India to early to tell whileiJet Airways is loosing money so fast it had to sell 24% of itself to Etihad Airways earlier this year and their newly appointed CEO Mr. Kramer Ball has a major turnaround to perform, if he can do it, then he should take over from Etihad Airways CEO James Hogan one day ! he did a great job at Air Seychelles but India is a different market, where controllable costs are few, government stifles growth with poor infrastructure, taxes (especially high on JetA fuel), too many regulations and off course corruption (no one talks about it).

Right now SpiceJet is cancelling flights every day 50-70, as it tries to create a ‘realistic schedule’, which is hurting the brand, significantly. The parts stripping is serious, we saw how bad it was at Kingfisher Airlines, seems its common in India to take parts from grounded aircraft to keep operations going, real bad news for lessors ! you get your aircraft but its AOG and you have to spend lots of money to just fly it out of India.

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The Bombardier Q400 of SpiceJet, it has 15 because it had to operate domestic routes before it could go international with its network, I am sure Bombardier does not want them back, moving Q400’s is not easy these days.

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Could be more bad news for Bombardier, having to take back 15 x Q400’s now, would not be good, as Q400 continues to struggle on the sales front, as it gets beat by a wide margin by the ATR-72-600 everywhere you look globally.

Can COO Sanjiv Kapoor save the SpiceJet ? well after 5 quarters of heavy losses you would think restructuring would have started a long time ago ? yes it is talking to investors, but back in May it confirmed it was talking to investors, that is 7 months of talk, now the schedule reduction probably means that either they have no investor and have to operate only cash positive routes or an investor wants to see drastic changes before any investment is made.

Apparently SipeJet has meet with the Aviation Minister to get help getting a moratorium period extended as presently the airline is on a cash and carry plan, it has to pay the Airport Authority of India (AAI) first then it can fly.

Side note, my money is on IndiGo in India, a LCC airline which was co-founded by Mr. Rakesh Gangwal former CEO/Chairman of US Airways Group between 2003 and 2007, and a very capable airline executive and 48% owner of IndiGo through his Caelum Investments while InterGlobal Aviation which owns Indigo, and 51% owned by CEO of Indigo Mr. Rahul Bhatia, the company they own is big in aviation, hotels and travel related technologies. IndiGo ordered 250 Airbus A320neo’s worth $US 26 billion on October 15, 2014, it basically says it all, the future of Indian aviation is huge for IndiGo, and while everyone has been loosing money, IndiGo makes money in India !

The size of the IndiGo IPO is estimated to be at around $US 400 million and should be sometime in the 2nd half of 2015 the size is what was expected back in 2010 but the IPO did not materialize. Indigo has 98 A320’s now and the new order for 250 A320neo’s is on top of an existing 180 order for A320/321 neo’s which will start to be delivered in 2015 with the 250 to be delivered by 2026, so by then it ‘should’ have 528 Airbus A320/321 aircraft ! wow ! and it is looking to lease 12 A320’s as I write this from Tiger Airways (owned by SIA), which is a LCC hurting badly.

indigo

IndiGo is making money in India with about 32% of the Indian market share, so there is a business model that works in India that has sustainability, hence the order for 250 Airbus A320neo’s worth $US 26 billion at list price, its traffic is 93% domestic and it is THE Indian airline business model (for now), the standard for making money, soon it will do an IPO (initial public offering on the stock market) and be very successful going forward, and dominate the skies above India. Presently serves 31 domestic destinations and 5 international destinations with 98 Airbus A320’s and has 430 Airbus A320/321neo’s on order, the only Indian airline to order the neo for now. This if anything shows the huge potential the Indian aviation market has.

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So far, no potential investor name has been given by SpiceJet, but I so not believe it will survive, waited too long to restructure, you deal with problems right away, not wait, “HOPE IS NOT A STRATEGY” I KEEP saying that in my articles, but my years of work in this industry have seen so many cases of companies waiting and waiting to make change as things fall apart all around them, and then it is too late.

When restructuring, first stabilize the core problems then fix the problems with strategy, organization and operations then you need to fund the turnaround, you need to create value, so either 1. Fix the business and generate higher operating cash flows or 2. Fix the financing debt/equity or 3 Both.

Never like to see an airline go bust, best wishes to Mr. Sanjiv Kapoor and SpiceJet.

Till next time, thanks for ready my short blog today.

 

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About Aviation Doctor - Helping aviation companies to transform the present into a more profitable tomorrow

I am a Canadian and EU national with an MBA and 33+ years experience in aviation business development with 20 years overseas and work in 25+ countries. A former investment/merchant banker (mergers and acquisitions to corporate turnarounds). airline and OEM senior executive and past owner of 6 successful aviation companies in 3 countries (executive jet charter/management companies, aircraft sales, aircraft broker, airline/aerospace consulting to aircraft insurance). I have a very diverse aviation background with 75+ aviation companies (45+ airlines of all sizes, OEM's, airports, lessors, MRO to service providers) as consultant, executive management, business analyst and business development adviser. Excellent success track record in International Business Development. Most work with airlines is with new start-ups and restructuring of troubled carriers. I sold new business jets, turboprops and helicopters for Cessna, Raytheon, Gulfstream to Eurocopter as an ASR as well as undertaking sales and marketing of commercial aircraft for Boeing, de Havilland, Dornier, Saab and Beechcraft. Brokered everything from LET-410's to B747's and from piston PA31 to G550 business jets. I look beyond the headlines of the aviation news and analyze what the meaning and consequences of the new information really means. There is a story behind each headline that few go beyond. Picked the name Aviation Doctor, as much of my work has been with troubled companies or those that want and need to grow profitably. I fix problems be in the business, and help with restructuring for a better tomorrow. You can reach me with comments or suggestions at: Tomas.Aviation@gmail.com and I comment a lot on Google+, my Facebook and LinkedIN.

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