The Indian Economy Blog

May 5, 2007

Which Airline Will Go First?

Filed under: Business — Reuben Abraham @ 5:17 pm

I have a little game going on with some of my friends to place bets on which Indian airline will go out of business first. Given the cutbacks on routes and redeployment of airplanes, most of us came to the conclusion that Jeh Wadia’s Go Air would be the first to exit the ruthlessly competitive Indian airline space, where survival has become synonymous with the airline’s ability to withstand mounting losses. Turns out we may have been wrong, if this Mint story on Air Deccan can be believed. Apparently, Air Deccan is dangerously close to running out of all its equity.

On 31 March, the day the company closed its books for the last quarter, Deccan Aviation, which runs Air Deccan and a small helicopter charter operation, had not more than Rs42 crore in equity, and, perhaps, even less than that in available cash for its day to day operations, according to Mint’s analysis.If the airline is losing money at the same rate today as it did in the January-March quarter—about Rs2.36 crore a day—that equity has likely been already depleted.

“Excluding the IOU that Deccan has from Investec, we estimate that Deccan has close to zero residual equity,”?JP Morgan Chase analyst Peter Negline wrote in a note to investors on Friday, referring to instalments from a UK bank still due to the company from a deal completed last year. “If they cannot find private equity to inject funds immediately, we believe that their departure from the market is imminent.”

I am flying Deccan in a couple of days, and from all outward appearances, there seems to be no sign of pending trouble. In fact, as Mint says, they’ve even floated a new round of 100,000 free tickets. Is this just bravado or is there something wrong with the doomsday analysis? If there’s anyone with knowledge of the Indian aviation sector, please do comment.


  1. Reliance mutual fund holds almost 4-5% in Deccan Aviation. Also the other day there was talks about Deccan Aviation talking to Anil Ambani’s ADAG group for funding.

    We might finally see ADAG group taking over Deccan Aviation and let Gopinath run the day to day business. Remember Adlabs, where Manmohan shetty still calls the shots though its ADAG’s money that’s powering the company.

    Comment by Full2njoy — May 6, 2007 @ 6:36 am

  2. There is the rumour floating around about Kingfisher’s interest in Deccan, which according to the Mint story is probably untrue. Interesting point about ADAG though. It’s a pity if Capt Gopi will simply end up being an employee of his company.

    Comment by Reuben — May 6, 2007 @ 5:12 pm

  3. The 100000 tickets could well be an idea to get more money upfront – nothing like being paid a few months in advance, but having said that there are rumours that the Tatas too could be interested in the airline. I too hope that it is not true…

    Comment by neelakantan — May 6, 2007 @ 5:25 pm

  4. Neelakantan, the 100,000 tickets are free tickets, not paid tickets.

    Comment by Reuben — May 6, 2007 @ 6:21 pm

  5. All tickets are not free. Every free ticket also means that surcharges have to paid – in advance.

    Comment by neelakantan.b — May 6, 2007 @ 7:11 pm

  6. Why did so many Indians set up airlines? It\’s the worst industry known to mankind… That\’s always baffled me, especially when the data is out there

    If one adds up all the profits and losses made by airlines in toto worldwide since the Wright brothers\’ original flight at Kittyhawk (in 1903), the airline industry\\\’s LOST MONEY! Which other industry can claim this?

    For instance, this is what Warren Buffett has said : \”If there had been a capitalist down there (at Kittyhawk), the guy should have shot down Wilbur! I mean, you know, one small step for mankind, and one huge step backwards for capitalism!\”

    Another Buffett joke: \”When Richard Branson, the wealthy owner of Virgin Atlantic airways, was asked how to become a millionaire, he had a quick answer: there\’s really nothing to it. Start as a billionaire and then buy an airline.\”

    One counter I\’ve heard: some Indian conglomerates set up a) airlines b) hotels c) newspapers, because the return from giving freebies (kickbacks in kind rather than cash) are significant. This may be part of the answer. What do you think?

    Comment by Prashant — May 6, 2007 @ 8:57 pm

  7. “…and from all outward appearances, there seems to be no sign of pending trouble.”

    @ Reuben:
    Lucky you, you know so many days in advance about your travel! Most frequent travellers sometimes book a few hours ahead and try to fly..

    However when airlines go bust – as many European examples will show, and I do not mention US examples because their Chapter 11 protection is unique amongst still-ongoing trade barriers cloaking themselves as domestic industrial policy – you may only find out when you get to the airport and try to check in.

    “Why did so many Indians set up airlines?”

    @ Prashant:
    Travel time by train from Bangalore to Delhi = 36 to 42 hours if train runs on time
    Travel time by air = 2 hours

    Travel time by train from Calcutta to Delhi = 14 hours or so if the train does not get stuck in Bihar or starts from Calcutta in time..
    Travel time by air = 1.5-2 hours

    These are two illustrative reasons why so many airlines can exist in India.

    As for the last part of your note, the realpolitik of the airline industry globally is intertwined inextricably with several issues of international trade including but not exclusively limited to sugar. All one has to do is track how the Boeing-Airbus global duopoly features in how the US and the EU respectively negotiate with their largest and fastest growing markets. In other words, it is all about leverage.

    The airlines in India still do not meet demand and mass-pricing means that the pie (the market) itself has grown. So many more people may open shop. However as things go, the market can only sustain so many, so there will be inevitable bankruptcies and corporate ownership changes, and hence market restructuring.

    Comment by Shefaly — May 7, 2007 @ 3:04 pm

  8. And as if by magic:

    Comment by Shefaly — May 7, 2007 @ 3:10 pm

  9. @Shefaly

    Travel time by train from Bangalore to Delhi = 36 to 42 hours if train runs on time
    Travel time by air = 2 hours

    Travel time by train from Calcutta to Delhi = 14 hours or so if the train does not get stuck in Bihar or starts from Calcutta in time..
    Travel time by air = 1.5-2 hours

    These are two illustrative reasons why so many airlines can exist in India.

    Not sure what your point is? The comparisons you’ve listed are meaningless w/o any context

    Here’s some more comparisons for you:

    The travel time from NYC to LA is 40 hrs by car or train, assuming minimal # of stops. In spite of this, the domestic American airlines have lost gazillions… consistently.

    And here’s one more: the travel time from NYC to Brussels via ship is a week. And yet, Sabena (the Belgian airline that went bust in 2002) made money for just two yrs out of its’ 50 yr history.

    My point: The economics of the airline industry are terrible, worldwide.

    Comment by Prashant — May 7, 2007 @ 7:54 pm

  10. @Prashant:

    My point – which was clearly as lost as your own in your first comment and which you subsequently clarified – was that greatly reduced travel times would appear to be a viable enough proposition for most travellers. This, in a large and growing domestic market in India, would attract enough customers to flying (over other options). Those customer numbers in a growth market in boom times look attractive to many potential service providers to consider entering the sector in huge numbers. Coupled with deregulation, this may be why so many players are entering an obviously-not-spectacularly-profitable industry (where some do make money however small).

    However as more and more players enter, there is – despite enough apparent demand – a downward pressure on prices due to competition. Case in point: Easyjet was making money before discounted prices from competitors started appearing about 4-5 years ago.

    Because airports are not expanding at similar rates, the competition for landing slots may constrain costs upward at the same time. Further, while some sectors are over-served and unprofitable, capacity constraints may remain on yet other sectors making cross-subsidisation inevitable. An airline where profits from profitable routes can make some net gain after subsidising poorer performing ones will remain afloat longer than one which collapses under competitive pressures or which does not have enough diversification in its routes portfolio. Which is why there will be inevitable consolidation and bankruptcy related activity in every sector where too many players are offering services not very distinguishable from one another. An example would be: Go’s acquisition by Easyjet allowed BA to exit the cheap flights business and gave Easyjet easy access to many routes while reducing duplication on some routes and thus cutting costs and gaining revenues in one go.

    I think the Indian context is very different from that of the EU and the US for a few reasons.

    European airlines have serially not made money because each country was trying to sustain a flagship carrier, despite the domestic market being very small and despite the international regulations limiting the stops they could offer in other countries and hence severely constraining their services. The situation is similar in the US with most airlines with their own hubs in specific states (like hubs in specific countries in Europe). A similar situation could brew in India but I do not see any hub-constraints such as those in the US or Europe, making the Indian context very different from both that of the EU and of the US.

    European airlines also do not have Chapter-11 handouts which US airlines have been availing of aplenty in the last several years. When someone does manage to negotiate incentives, there is a lot of noise. Ryanair receiving a Brussels handout for promoting an airport in Belgium has received a lot of flak and has been asked to return the money tantamount to state aid. In that respect Indian airline firms may be more like European airlines than like those in the US.

    In the short to medium term, I think ok-but-not-great performing airlines in India may end up being bought by other better operators than going bust as over-capacity is simply not yet a problem India has to face in the airline sector. A no-frills offer could be a USP but Deccan, which to my knowledge, is the only no-frills airline in India, does a really terrible job of it, compared to experiences of no-frills flying in the US/ EU/ India, in respect of costs, punctuality, reliability, service quality etc on which Easyjet. Ryanair, South West, Jetblue all deliver very well. Deccan’s going out of business may not be a bad thing for consumers (or the airline should simply and more accurately rename itself ‘Dhakkan’ Airlines!)

    (Yes I know too many points and may need re-read to get them all. But sorry, don’t have more patience or time.)

    Comment by Shefaly — May 7, 2007 @ 8:36 pm

  11. I think investing in airline industry will be a good idea.Look at the market cap of air deccan(about 1200 crore) and spicejet(about 750 crores).I am of the view that this companies may never make great profits,but atleast looking at the overall growth of the industry ,there is a potential of about 5 times appreciation in the market cap of this companies in next 5 years.

    Same thing happened with Bharti Tele.I think its ipo in 2002 was for about 40-45 rupees per share and it even touched 20 rupees as year low in that particular year.But as the industry grew tremendously today its share price is more than 800 (20 times appreciation in 5 years) and its market cap is more than even infy,wipro,tcs.Guys strongly believe that money is to be made in growing industries such as aviation,retail (pantaloon etc) in next 5-10 years.

    Comment by Brijesh — May 10, 2007 @ 7:18 pm

  12. Looks like Deccan finally managed its skin by forging a partnership with the king of good times….

    Comment by Siladitya — June 5, 2007 @ 3:14 pm

RSS feed for comments on this post. TrackBack URL

Leave a comment

Powered by WP Hashcash

Powered by WordPress