India's private airlines land back in profit

The 'worst is over' for India's aviation industry but there are still challenges that will have to be faced if it is to rebound completely.

Indian airlines carried about 4.4 million passengers in December, an increase of 35 per cent on the same period in 2008.

MUMBAI // Some of India's money-losing private airlines declared soaring profits in the December quarter, beating analysts' estimates and indicating strongly that the country's ailing aviation industry is on the cusp of economic recovery after a turbulent year. Jet Airways, the country's largest private carrier, posted a profit of 1.05 billion rupees (Dh83 million) in the December quarter, its first profit in three quarters, while Spice Jet, the second-largest low-fare airline, posted a profit of 1.08bn rupees.

This was just the news the industry was waiting for after India's private airlines collectively lost US$2bn (Dh7.34bn) last year. Both airlines, which reported a loss of 10.32bn rupees and 3.52bn rupees respectively in the 2008-2009 fiscal year, were buoyed by improving passenger numbers and the low cost of aviation fuel. Kingfisher Airlines, the second-largest private carrier, posted an operating profit of 110m rupees, although its net losses touched 4.2bn rupees.

The global airline industry has been hit by a severe downturn, although Asia-Pacific carriers are expected to post the most dramatic financial improvements this year, the International Air Transport Association said. India's aviation market, the ninth-largest in the world and fourth-largest in terms of domestic passenger volume, expanded by 7.5 per cent last year compared with the previous year, the airline regulator said.

"Indian aviation is set to take off, with the domestic segment reporting peak passenger traffic," said Nikhil Vora and Shweta Dewan, senior analysts at the domestic brokerage IDFC-SSKI Securities, in a report last month. "The worst in Indian aviation is clearly over." Passenger volume surged by 3.07 million last year, taking the total number of passengers to 43.8 million. The number had contracted to 42.8 million in 2008. Some 4.4 million people travelled by plane last month alone, a 35 per cent increase on December 2008.

The Centre for Asia Pacific Aviation (CAPA), a consulting firm, also estimates a 15 per cent increase in passenger volume this year. India's private domestic airlines are expected to make a combined profit of $250m to $300m as early as the fiscal year ending in March next year, although it might take longer to erase previous accumulated losses, says a recent report by CAPA. "The airline sector is exhibiting strong recovery, not just due to an increase in passenger traffic but also bottoming of yields," said S Arun, a senior director at DSP Merril Lynch, a global brokerage.

But the industry still faces several challenges that could dampen the new-found exuberance, analysts say. Despite the impressive numbers, airlines are cautiously optimistic. "While there have been positive signs of a revival in aviation, both globally and in India, on the back of a revival in the global economic environment, it would be a bit premature to suggest a return to profitability just yet," said Nikos Kardassis, the chief executive of Jet Airways.

The sustainability of the recovery depended largely on the global economic scenario, he said. Mr Kardassis expressed concerns over volatile jet fuel prices, which could hit airlines hard. Crude prices are up nearly 75 per cent compared with a year ago and aviation fuel typically accounts for 40 per cent of an airline's operating cost. "Jet fuel prices in India are unfeasibly high as compared to global aviation hubs such as Dubai and Singapore, and this needs to be corrected at the earliest to make Indian carriers more competitive," said Mr Kardassis.

Spice Jet has similar concerns. "An increase of up to 15 per cent in jet fuel prices can be sustained as this can be translated into ticket prices without hurting passengers, but anything beyond that will kill the industry," said Sanjay Aggarwal, the chief executive of the airline. The prospects for Air India, the country's national carrier operated by the National Aviation Company of India Limited (NACIL), remain grim although the airline's operating loss fell by 25 per cent to 14.7bn rupees in the December quarter.

To rescue the beleaguered company, Pranab Mukherjee, the country's finance minister, decided in November to infuse capital into the airline in tranches of 4bn rupees, based on monthly reviews of cost-cutting measures by the airline. Arvind Jadhav, the chairman and managing director of NACIL, wants an equity infusion of 50bn rupees to carry out plans to use a combination of cost cuts, outsourcing, restructuring and spinning off under-utilised divisions into separate businesses to rewrite its books.

The airline also needs money to pay off loans it acquired to buy new aircraft. It introduced 29 new aeroplanes last year worth $11bn and plans to add at least six more this year. The Indian government has helped cash-strapped private carriers by easing restrictions on foreign direct investment. Despite improved earnings, some analysts are sceptical that the improved results are indicative of better times ahead.

"This is not real growth," said Harsh Vardhan, the chairman of Starair Consulting, an aviation consultancy firm based in New Delhi. "The bullish numbers are achieved on account of capacity reduction and route rationalisation measures the airlines undertook last year." @Email:[e-mail]