All is not Well!

While the Re­gional Con­nec­tiv­ity Scheme un­folds grad­u­ally, one has to wait and watch how this is go­ing to im­pact the main­line play­ers and the re­gional play­ers, in­clud­ing gen­eral avi­a­tion op­er­a­tors

SP's Aviation - - TABLE OF CONTENTS - BY R. CHANDRAKANTH

EEVERYONE IS TALK­ING ABOUT how In­dian avi­a­tion will soar in the years to come, with avi­a­tion growth reg­is­ter­ing over 20 per cent year on year, re­flected mostly by mas­sive surge in pas­sen­ger move­ment. They all seem eu­phoric that India will be the third top avi­a­tion mar­ket in the next five years, from its cur­rent rank­ing of ninth. That is a phe­nom­e­nal jump. Ev­ery­one is bank­ing on the Na­tional Civil Avi­a­tion Pol­icy and the Re­gional Con­nec­tiv­ity Scheme to do won­ders. While the top ech­e­lons in the Civil Avi­a­tion Min­istry are do­ing ev­ery­thing to cre­ate an ecosys­tem for growth, there are still many is­sues that are erod­ing air­line per­for­mance, more so of the re­gional air­lines.

RE­GIONAL AIR­LINES GET­TING GROUNDED

All is not well on the re­gional air­line front. The first re­gional air­line from Vi­jayawada — Air Costa — is again in the news for all the wrong rea­sons. It has sus­pended flight op­er­a­tions due to fi­nan­cial mud­dle, the sec­ond such set back in nearly four years of its op­er­a­tions. While it be­gan on a good note, peaked it with or­der­ing 50 E-Jets E2 at the 2014 Sin­ga­pore Air­show, Air Costa is now fac­ing an­other bout of fi­nan­cial night­mare. The com­pany, which had four Em­braer air­craft at its peak, is left with none as the lender GE Cap­i­tal Avi­a­tion Ser­vices (GECAS) has re­pos­sessed them. Ne­go­ti­a­tions are on between the lessor and Air Costa and the lat­ter has stopped tak­ing book­ings for a tem­po­rary pe­riod. The Vice Pres­i­dent (Mar­ket­ing and Brand Com­mu­ni­ca­tion) Kavi Chaura­sia had told the me­dia that a clear pic­ture would emerge soon and the air­line would an­nounce when op­er­a­tions would be re­sumed.

With fund crunch, the air­line has re­port­edly only paid the base slab salaries for Jan­uary and the pro­mot­ers, LEPL Group, are try­ing to clear the dues. The Vi­jayawada-based group has di­ver­si­fied in­ter­ests in real es­tate and in­fra­struc­ture devel­op­ment.

While Air Costa is floun­der­ing, an­other re­gional air­line which hit the dust is Air Pe­ga­sus. It had to shut down opera-

tions within al­most a year of start­ing as it could not re­pay the lease amount to Dublin-based lessor Elix Avi­a­tion. Ben­galu­rubased Air Pe­ga­sus is part of Dé­cor Avi­a­tion which is into ground han­dling. The Direc­torate Gen­eral of Civil Avi­a­tion (DGCA) had sus­pended the fly­ing li­cence of Air Pe­ga­sus in Novem­ber 2016 af­ter the car­rier failed to give as­sur­ance for re­sump­tion of its op­er­a­tions then. Air Pe­ga­sus has not been op­er­at­ing its ser­vices since July 27, 2016, fol­low­ing huge losses and its fail­ure to pay lease rentals to the air­craft lessors.

AIR PE­GA­SUS-FLYEASY TIE-UP

Mean­while, an­other op­er­a­tor from Ben­galuru — FlyEasy — who was sup­posed to take off some time back has not started op­er­a­tions, but has taken a dif­fer­ent route. Now, FlyEasy has taken a stake of 74 per cent of Air Pe­ga­sus for an undis­closed sum, hop­ing to start com­mer­cial op­er­a­tions. It is re­ported that FlyEasy will in­vest ` 26 crore in the part­ner­ship with ` 13 crore as cap­i­tal and the rest would be debt re­struc­tur­ing. Sub­se­quently, it plans to in­vest ` 60 crore.

Shyson Thomas, who started Pe­ga­sus, said the com­pany was in talks with Oman Air and FlyDubai for sell­ing its stake, but these did not ma­te­ri­alise. “Af­ter the King­fisher de­ba­cle most for­eign in­vestors are wor­ried and sus­pi­cious about the In­dian mar­ket,” Thomas said. Air Pe­ga­sus has en­tered into a strate­gic part­ner­ship with ABC Avi­a­tion and Train­ing Ser­vices Pvt Ltd-led FlyEasy India to re­vive its op­er­a­tions from March 1, the air­line said in a state­ment re­cently. "Air Pe­ga­sus will con­tinue as a re­gional air­line op­er­at­ing in Tier-II and Tier-III cities," said Thomas. The firm did not dis­close in­vest­ments or any other de­tails but said FlyEasy's Zul­fikar Ahmed Khan will be the new group Chair­man while Thomas will con­tinue in the board as Vice Chair­man.

AIR CAR­NI­VAL’S LOW LOAD FAC­TORS

The south­ern part of India has an­other re­gional out­fit in Air Car­ni­val, pro­moted by a Coim­bat­ore-based con­glom­er­ate. It com­menced op­er­a­tions from July 18, 2016, with Coim­bat­ore In­ter­na­tional Air­port as the hub and con­nect­ing to ma­jor re­gional air­ports. The air­line has started ser­vices with ATR 72-500 air­craft ini­tially and plans to add two more by the end of June 2017. An­other re­gional player TruJet from Hyderabad is also op­er­at­ing ATR 72-500 and has plans to in­duct ATR 72-600 soon. Air Car­ni­val had the low­est load fac­tor in Jan­uary 2017 at 56.6 per cent, and TruJet was at 74.8 per cent, while the lat­ter had the high­est can­cel­la­tions in Jan­uary. Re­gional air­lines (Air Car­ni­val, Air Costa, TruJet and also Air Pe­ga­sus till it was fly­ing) al­ways were on the top of the list in can­cel­la­tions, caus­ing se­vere in­con­ve­nience to pas­sen­gers.

GRIM PIC­TURE

In­deed, a very grim pic­ture for the re­gional air­line seg­ment. The prob­lems are ga­lore — huge debts; lessor’s re­pos­sess­ing air­craft; low pas­sen­ger load fac­tors; high rate of can­cel­la­tions; un­paid salaries; safety is­sues etc — and above all the seg­ment is grad­u­ally los­ing its sheen among the fly­ing pas­sen­gers.

Why is it that re­gional air­lines have found them­selves in such a quag­mire? Well, it is not just re­gional air­lines, but even low-cost car­ri­ers and full ser­vice air­lines (take Air India for in­stance, it is al­ways in a mess and now and then bailed out by the gov­ern­ment). That was one of the grouses of Vi­jay Mallya stat­ing that there was no bail out for King­fisher Air­lines while gov­ern­ment-run Air India is al­ways on a ven­ti­la­tor. Com­ing back to re­gional air­lines which are floun­der­ing, the rea­sons for their not es­tab­lish­ing them­selves as a seg­ment lie within.

HIGH COST OF OP­ER­A­TIONS

One of the main rea­sons for re­gional air­lines to hit air tur­bu­lence very fast is the high cost of op­er­a­tions and the not-so-deep pock­ets to sus­tain op­er­a­tions. Even com­pa­nies which have req­ui­site funds are now wary to en­ter the re­gional air­line seg­ment as ev­i­denced by VRL Lo­gisitics back­ing out of the re­gional air­line project. The pro­mot­ers — Vi­jay Sankesh­war and Anand Sankesh­war — had said in May 2016 that they would start a re­gional air­line, but now have in­formed the Stock Ex­changes that they would not go ahead with that plan in the light of new avi­a­tion pol­icy. In­stead the VRL group is plan­ning to make for­ays into launch­ing a re­gional tele­vi­sion channel, a safer bet?

ATF TAXES NEED TO BE LOW­ERED

The high cost of avi­a­tion tur­bine fuel (ATF) is an­other rea­son for air­lines not to be­come vi­able soon enough as ATF ac­counts for nearly 40 per cent of op­er­a­tional costs and with such volatil­ity, air­lines have to have real good rev­enue man­age­ment team to off­set this cost as much as pos­si­ble. The Cen­tre which is ag­gres­sively mak­ing a case for ex­pand­ing re­gional avi­a­tion has asked states to re­duce taxes on ATF for re­gional flights. Heed­ing to the re­quest by the Min­is­ter of Civil Avi­a­tion, P. Ashok Ga­jap­athi Raju, the Delhi gov­ern­ment re­cently an­nounced that it had re­duced value added tax (VAT) from 25 per cent to 1 per cent on ATF for re­gional flights. If this hap­pens across India, the re­gional air­lines can breathe a lit­tle eas­ier, while there con­tinue to be other chal­lenges.

Fi­nan­cial crunch con­tin­ues to plague re­gional air­lines and there is not much of lessor con­fi­dence in the re­gional play­ers. For that mat­ter, the air­line sec­tor has prob­lems of ac­cess to funds. Says Shyson Thomas of the failed air­line Air Pe­ga­sus that ‘the de­ba­cle of King­fisher Air­lines was the turn­ing point’ in lessors re­think­ing on India as an in­vest­ment des­ti­na­tion. The lessors have had gar­gan­tuan dif­fi­cul­ties in re­pos­sess­ing air­craft and tak­ing it out of India. The gov­ern­ment re­al­is­ing that there was low lessor con­fi­dence has made it eas­ier and also tried to bring down leas­ing costs.

COL­LAB­O­RA­TION, NOT CON­FRONTA­TION IS THE AN­SWER

The re­gional play­ers also have a grouse against the main­line play­ers, in­clud­ing low-cost car­ri­ers, who they feel are slash­ing ticket fares to such an ex­tent that it be­comes un­vi­able for a re­gional player to com­pete in such mar­kets. The ques­tion there­fore be­fore both the seg­ments is — to live and let live. Re­gional play­ers state that the main­line play­ers should not get into ‘preda­tory pric­ing’ on thin routes which are suit­able for re­gional air­line. Un­less there is col­lab­o­ra­tion, the prob­lem is not go­ing to go away. The best route would be for main­line air­line and re­gional air­line to join hands to work out the best route net­work­ing for the trav­el­ling public.

While the Re­gional Con­nec­tiv­ity Scheme un­folds grad­u­ally, one has to wait and watch how this is go­ing to im­pact the main­line play­ers and the re­gional play­ers, in­clud­ing gen­eral avi­a­tion op­er­a­tors. But the route that seems most rea­son­able is col­lab­o­ra­tion which the air­lines need to start ex­plor­ing, be­fore it is too late.

AF­TER THE KING­FISHER DE­BA­CLE MOST FOR­EIGN IN­VESTORS ARE WOR­RIED AND SUS­PI­CIOUS ABOUT THE IN­DIAN MAR­KET

NEED OF THE HOUR: UN­LESS FLOOR PRIC­ING IS IM­PLE­MENTED, OP­ER­A­TORS SUCH AS AIR COSTA ARE LIKELY TO FACE IM­MENSE LEVEL OF PRES­SURE THEREBY DIF­FI­CULTY TO SUS­TAIN THEIR OP­ER­A­TIONS. THE MIN­ISTRY WILL HAVE TO IN­TER­VENE TO CRE­ATE A CON­DUCIVE EN­VI­RON­MENT.

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