Does Aviation problems limit to Kingfisher,Air India only?

November 16, 2011   ·   0 Comments

If you think only Kingfisher & Air India is having problems in hand with losses building in thousands of crore, then you need to think again! Most of the companies are facing the heat with losses mounting up each quarter. Domestic Air traffic has increased by 19% & topline (sales) of each airline has increased then, Why Whole aviation sector is in doom & day of glory seems distant?

www.stockssavvy.comThe gloom at Kingfisher Airlines has spread all over to the entire aviation sector.  Apart from the current crisis, its Q2 numbers were bad to say the least. Its net profit doubled on higher fuel prices and operating costs. The carrier, till date has never reported a profit. In Q2, 50% of its cost on fuel ate away the top line.

And though the focus is currently on Kingfisher, the plight of the other listed carriers is not exactly ‘smooth running’. Jet Airways, for Q2FY12 posted a net loss of Rs.714 crore. This was on account of the forex loss of Rs.276 crore, 50% YoY rise in fuel cost at Rs.1,491crore and not to mention the huge interest outgo of Rs.428 crore for H1FY12.

And it is not just Kingfisher planning to cut flights. Jet Airways too has cancelled or clubbed flights across some routes where demand has been slow. Exactly like Kingfisher. Jet too has sought lenders’ help to ease its debt burden. It plans to sell and lease back aircraft as well as cut interest costs by converting rupee loans into dollar debt. How different is its story from that of Kingfisher?

The other listed company – Spicejet too reported a net loss for Q2FY12 at Rs.240 crore. Fuel cost ate away 63% of the topline and lease rental 18%. Interest outgo is not as gargantuan as the other two but it has gone up from Rs.5 crore in FY11 to Rs.15 crore in H1FY12.

And that’s not all. The Centre for Asia Pacific Aviation (CAPA) has forecast a record US$2.5-US$3 billion loss for Indian airlines for FY12 of which 50% loss will be of Air India alone.

All this in the background of news that domestic air traffic during the first eight months of 2011 was actually up 19%. So on one hand, air traffic is going up; more and more people are travelling by plane; air fares are noticeably higher than last year. And yet, despite the macro factors being so optimistic, airline companies are in deep red.

What is wrong with the sector? Topline of all airline companies is up but it is the operating costs which are eating away the companies. And high fuel cost, high interest costs are the prime reasons. That’s not all. Competition is up and airlines are cutting prices to ensure that they stay in the race thus making the business unviable.

The rupee has depreciated 11% in this year and this has raised the cost of airplanes bought from overseas. These aircraft companies lease aircrafts from foreign companies at a debt taken in dollars and thus the rupee depreciation is eating away the earnings. Jet plans to raise anywhere between US$ 300 – 350 million from sale and lease back of 20 planes. It is planning to cut costs by 5 to 10% by renegotiating contracts across various operations like leasing of aircraft, in-flight food and beverages and fuel supplies.

But on a macro level, are these just bad times or are we at cross roads, about to witness another bout of consolidation? Yes, to some extent consolidation will happen. Price rise is something we consumers will have to live with and with airport taxes hiked; fares will only go up further. The best solution would be to lower fuel taxes, lower interest rates, and have a stronger rupee and lower airport charges. But this is wishful thinking or rather day dreaming as none of the above could happen. And against this backdrop, with airlines cash strapped, those in the sector thus advocate allowing FDI in the aviation sector. If foreign carriers are allowed to buy stake in domestic airlines, their cash crunch to some extent could come under control. But that is another story for another day.

Source: Premium Investments

Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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