Ajay Singh: It's not out there

Air Deccan's chief Operating Officer Warwick Brady is a colourful man. He does not mince worlds and wears a bright yellow tee shirt to work-every day. The recurring tee shirt is not a passing whim or a statement of Brady's taste in clothing. Everybody who works for Air Deccan, from the senior management to the booking agents, will sport these fluorescent yellow tee shirts, which are part of the company's latest branding campaign. A glance at the low-cost pioneer's bottom line, though, makes you wonder whether red tee shirts would have been more appropriate. After all, Deccan Aviation (that's what the listed company is called) has blood dripping all over its balance sheet, and piled up losses at last count had hit Rs 341 crore in the 15-month period to June 2006.

To be fair, Air Deccan is not alone-red seems to be dominant motif of the Indian aviation industry. Spice Jet, a competitor in the low-cost space, has also run up losses, of Rs 41.4 crore since inception. GoAir, another low-cost airline, is also losing money (although Managing Director Jeh Wadia told BT recently that break-even is round the corner). The pain, to be sure, isn't restricted to just the low-cost fleet. Full-service airlines like Jet Airways, Kingfisher Airlines and Air Sahara are also reeling, with Jet notching up a Rs 45-crore loss in the first quarter. "Even though it's tough to project the exact amount of losses incurred by the Indian aviation industry as most players are privately held, we estimate that the industry will lose $350-400 million (Rs 1,610-1,840 crore) this year. And that's an estimate on the conservative side," says Kapil Kaul, CEO, Centre for Asia Pacific Aviation (CAPA), Indian subcontinent and Middle East.

Less than 18 months ago, the scenario was different. The buzzwords in the Indian aviation industry were capacity expansion, aggressive pricing and, of course, market penetration. To the credit of most airlines, they did most of that. Ticket pricing was cut-throat and the market was penetrated like never before (traffic growth rates of 50 per cent are unheard of in aviation industry history).

So, what explains today's funeral mood-and the morbid language of honchos? "It's airline suicide," grimaces Deccan's Brady. "If a passenger can pick up an airline ticket for Rs 6,000 a month before the journey and a thousand bucks a day before the journey, then you know that there is a need for sanity." Brady was speaking at the third Annual India and Middle East Low Cost Carrier (LCC) Symposium, organised by CAPA. Brady did not stop there. "Right now, it's just a downward spiral of low fares. Over the next two years, there will be a couple of deaths along the way. We expect a bloodbath in February, March when new players will come into the industry. Back here (India), airlines have an appetite for losses and pain," he added even as delegates squirmed in their seats.

Brady was not alone. SpiceJet Director Ajay Singh feels that the next couple of months could be very tough for the industry. "All airlines are feeling the pain. However, we think the threshold for pain has been reached or will be reached soon," says Singh. "There is bound to be high volume growth in the industry. But the challenge is to convert that into growth of profit." Since April 2005, the Indian aviation industry has added 95 aircraft and 40 more are expected to be delivered in the next six months. Basically, in the last 18 months, capacity has doubled. By 2007, India will have more than 300 aircraft (see A Bulging Order Book). In addition, there are 10 operators competing for passengers on almost the same routes. Says capa's Kaul: "Most low-cost carriers are focussed on the Delhi and Mumbai routes which are dominated by Jet, Indian and Sahara. Most of the operators are concentrating on similar routes. There has not been too much innovation by operators in route choices." This has forced operators to slash prices to attract customers, leading to predatory pricing practices. Full-cost carriers are cutting prices to low-cost levels, and some airlines are selling tickets far below the costs they incur.

Last fortnight, a group of airline heads met Civil Aviation minister Praful Patel, and appealed for regulation of prices and restricting entry of new players. The minister, for the time being, has said even though the entry of new players will not be restricted, their applications will be "more closely scrutinised". The minister has also been reported saying that the losses of airlines could well be exaggerated.

Industry watchers also believe that this is not the time for regulatory fine-tuning. "I have one word of advice when it comes to preventing new airline entry-don't. Government intervention, unless there is a very clear and transparent framework, would very quickly undermine investor confidence," says CAPA's Executive Chairman Peter Harbison.

If such troubled times are prodding players to unite, or to cartelise, perish the thought. As Air Deccan's Brady quips, "Airlines are like street dogs right now. There is no clique."

Very Heavy Fuel
Fuel and salary costs eat into airlines profits.

What's been the biggest factor contributing to Deccan Aviation's humungous loss of Rs 341 crore, on net sales of Rs 1,236.4 crore for the 15 months ended June 2006? An aggressive, arguably indiscriminate, expansion programme? Perhaps. After all, Deccan added 20 new aircraft on 56 new routes in the past 15 months-last fortnight for instance the airline announced another flight into the North-East, to Lilabari in upper Assam from Kolkata. But the biggest drag on Air Deccan's bottom line has been clearly escalating fuel costs, which accounted for a little over half (51 per cent) of sales for the period ended June. That's Rs 625.5 crore spent on aviation turbine fuel alone! Fuel and wages together accounted for 64 per cent of Deccan's top line, as against 41 per cent in the previous year ended March 2006. For the April-June quarter, wages and fuel swallowed away 69 per cent of sales (for the quarter the net loss stands at Rs 110.26 crore on sales of Rs 398 crore). On a year-on-year basis, the company's fuel and salary costs have jumped 333 per cent and 278 per cent, respectively. Since 2001, the burden of wages and fuel charges to sales has been steadily burgeoning, from 13 per cent in 2001 to 64 per cent in 2006.

Jet Airways too has been feeling the pain on the wages and fuel fronts. For the year ended March 2006, these costs shot up to just under 40 per cent from 33 per cent in the previous year. It got worse in this year's first quarter-when Jet notched up a Rs 45 crore loss-with fuel and wages eating into almost half of sales (49 per cent).

-Mahesh Nayak

Yours, Mine(s) and Ours
Are steel makers crying wolf over iron ore exports?

It is a spat that is turning rather nasty. In one corner of the ring is the Indian Steel Alliance (ISA), an association of five major Indian steel producers-Steel Authority of India (sail), Essar Steel, the Jindals, the Mittals of Ispat Industries and Rashtriya Ispat (Vizag Steel). They are clamouring for an outright ban on iron-ore exports and allotment of captive mines to steel producers. In the other corner is the Federation of Indian Mineral Industries (FIMI), a body of non-captive mine owners that has benefited greatly from India's policy changes since 1997, which allows private sector players to export ore.

ISA's charges are straightforward (see ISA vs FIMI). Iron-ore is a scarce commodity, which should be limited for the consumption of domestic steel producers. Steel production means a 10-15 times value addition, greater taxes and higher forex earnings. So, mines should be given only to steel mills for their captive consumption.

A spokesperson for FIMI points out while Indian steel production currently stands at around 41.3 million tonnes (mt), the iron ore available is sufficient for more than 100 years, even if production more than doubled to 110 mt. "In the next 100 years who knows what will come along to replace steel? It is like arguing that mid-eastern countries should conserve oil and gas and not export them. Countries trade in what they have a surplus of," says the spokesperson. Pointing out that the quantity of iron ore available has increased by around 15 per cent from 22,108 million tonnes in 2000 to 25,249 million tonnes at present, FIMI says that this has been possible because of fresh prospection and better extraction methods.

FIMI also says that existing captive mine owners regularly sell their additional ore production in the domestic market or even export it. "This demand for captive mines is a colonial hangover. There is no shortage of iron ore for domestic steel industry," claims FIMI.

Even as ISA and FIMI fight it out, the government is said to be studying the situation and is yet to make its policy clear. The demand from the Chinese, which some analysts say might cool off, may determine the future shape of the industry and not just the policy decisions.

-Venkatesha Babu

Down, But Not Out
Prices of commodities have eased, but the bull run's intact.

It is not just crude that has shaved off nearly a quarter of its price over the last couple of weeks. The easing of prices spans commodities ranging from energy, metals and agri-commodities.

Not too long ago, the runaway prices were being explained as multi-year bull runs in commodities. So has that rally petered out? Well, the current softening of prices is a combination of many things. One of those is liquidity, a glut of which triggered a frenzied rise in commodity prices. But when money supply tightened sharply in the middle of the year, the bull phase in commodities was the first to suffer. Heightened concerns about whether the expected slowdown in us will deepen into a full-blown recession also contributed to the bearish mood. And as the cost of carry-the cost incurred from an investment position-increased speculators unwound their positions. This is especially so in case of the energy market, even as us hedge fund Amaranth defaulted big time last fortnight. Easing geo-political concerns coupled with a muted hurricane season in the US drove down prices further. So, unsurprisingly, crude fell from a high of nearly $80 a barrel to sub-$60 in roughly 5-6 weeks. According to estimates, there was a $10-15 overlay of speculative and geo-political concerns on fundamentally-driven crude prices.

Sentiment apart, other commodities such as gold have also been witnessing what many commodity experts are calling "the crude impact". In recent times, strong cross-linkages of crude oil prices with other commodities have emerged as crude prices are often taken as a proxy for inflation. Hence, as crude dipped other commodities followed suit. This is not to say that the bull run in commodities is over. Only the hot money has gone away from it for the moment. "The long-term trend line for a secular bull run is intact," says Unupom Kausik, Head of Commodities, Anagram Comtrade.

-Shalini S. Dagar