Though some of these austerity acts have back fired (remember Jet fiasco), but most of them have gradually pushed airlines towards the profitable zone. Well, the recent and long awaited profitable quarterly results of both Jet Airways and SpiceJet (Rs.530 million Q4 ‘08-09 and 260 million Q1 ‘09-10 respectively) stand testimony to the fact. Further, the continuous fall in the price of the air turbine fuel (ATF) over the last one month (Jet fuel form 40 to 50% of the total input cost) has contributed to the cause. “A shift in passenger traffic from FSCs to LCCs coupled with added capacity have helped SpiceJet gain market share. While the total passenger demand is expected to remain unchanged, our goal is to continue to gain market share in 2009,” explains Sanjay Aggarwal, CEO, SpiceJet.
The fact that further encourages investors to invest in the domestic airlines is the favourable attitude of the government towards the sector. Apart from restructuring the ailing Air India, it’s also taking initiatives to fuel the revival of the sector. Reportedly the government is planning to include jet fuel under the purview of goods and services tax, starting next fiscal. This would help airlines in further reducing the overall cost.
Moreover, the contentious proposal by Praful Patel, which allows foreign airlines to pick equity in their Indian counterpart, would definitely give some breathing space to the cash strapped domestic aviators. Apart from easing the norms for Indian carriers to fly abroad, the ministry has also been lobbying for tax sops. “There has been a perceptible change in India’s airport infrastructure, especially with the modernisation of the Delhi and Mumbai airports. We believe this improvement would translate into better airlines’ productivity and profitability,” agrees Mahantesh Sabarad, Aviation analyst, Centrum Broking.
Further, Indian investors can also take a positive clue from the fact that encouraged by the favourable standings and better future prospects the domestic airlines are now raising funds from overseas. While Goyal plans to raise $400 million through a QIP, Mallya has unleashed plans of raising $175 million from overseas investors by March 2010. Not to forget, SpiceJet is already being supported by Wilbur Ross.
No doubt, these are reasons enough to encourage an investor. But then, the one thing that they need to keep in mind before digging too deep into their pockets is that the airlines are still not out of the woods completely. Industry experts continue to stand firm on their prediction of losses for the sector for the current fiscal. Further, debt burdens for these airlines are still mounting. For starters Kingfisher Airlines is burdened by a total debt of Rs.60 billion. “Yields continue to remain weak, and with the industry moving strongly to the low cost model, downward pressure on fares will continue. So it is likely that the outlook, although better, will continue to remain challenging for some months to come,” predicts Somaia of CAPA.
Thus, looking at the prevailing uncertainties, new investors should keep their eyes and ears open before taking the final plunge into the sector. In fact, the best option available for the existing investors is to quickly book profit and exit. Or may be, it’s already too late for some!
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Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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