Tag: Aviation

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Editorial Editorial of the Day

Why is IndiGo Buying More Engines in Between A Pandemic?

The Story

As per the reports, IndiGo is planning to buy engines when the Covid-19 has paralysed the aviation sector globally. India’s biggest airline, IndiGo, is betting on a robust future of the industry. They are in talks with Pratt & Whitney and CFM International Inc. to buy its next batch of engines.

Pratt & Whitney and CFM International Inc. are two rival manufacturers. Reportedly, the new set of order for jet engines power around 150 new Airbus SE A320neo jets. This new deal could be worth around $10.7 billion. There is no given timeline up to which this deal can conclude.

Rumours of this big investment by an airline are surprising in these times. Last year, IndiGo placed a $20 billion (Rs 1.4 lakh crore) order for LEAP-1A engines. This was the largest ever single-engine order in history which covered 280 planes. Airline and tourism industry are the two most severely hit industries during the pandemic. Several airlines around the globe have either deferred or cancelled hundreds of plane orders due to the Coronavirus slump. To understand how badly the aviation sector has been hit by Covid-19, click here. Yet, IndiGo is rumoured to make another big investment. Is that feasible for the company?

Why now?

Any airlines investing such heavily during the pandemic does raise the question “why now?” The fears of coronavirus are still present, if not more than earlier. Governments are easing restrictions but with rising cases, another shutdown like that in Europe cannot be ruled out. IndiGo, like every other airline, has been impacted massively. Yet, India’s biggest airline wants to take this opportunity and solidify its dominance in the Indian market.

All of Indigo’s competitors are equally hurt, if not more badly. Overall market conditions also give them an opportunity to buy materials at a lower cost. Thus, IndiGo has no reason to shy away from any lucrative deal. India has one of the world’s fastest-growing aviation market. A low-cost carrier like IndiGo competes on a pricing model to attract more customers. A higher passenger load factor helps them to improve their top and bottom line. As compared to other Indian airlines, IndiGo has robust cash support. In their Q2 FY21 results, the airline reported a $2.4 billion (~Rs 18,000 crores) of cash and cash equivalents. This number was higher than $1.9 billion they reported in the same quarter previous year.

Are People Confident with Flying Again?

Indian government suspended domestic and international flight operations in the last week of March. From the last week of May, a limited number of domestic airlines were given a nod to operate. But again, with several restrictions from both the central and state governments. According to DGCA (Directorate General of Civil Aviation), air traffic plummeted by 85% year-on-year in June 2020.

Like other airlines, IndiGo has to announce a pay cut to restrict their expenses. In June, the airline asked some of its staff to take mandatory leave without pay (LWP) for 1.5 to 5 days. Next month, pilots were told to take an additional 5.5 days of LWP. They also laid off 10% of staff and cut the salaries of its senior employees. With the recent uptick in demand for air travel, Indigo has reduced the 10 days of LWP in July to 3 days in November.

The data of DGCA for September showed 39.4 lakh people taking the air route for domestic travel. It was a significant increase from 28.3 lakh people reported in August. Keeping the change in the mind, the government has also airlines to operate at 65% of their capacity. Earlier, they were restricted to operate at a mere 45% of their capacity.

Even in the pre-Covid times, IndiGo had a substantial market share in the domestic segment. The September data showed that their grip became stronger in the domestic market. They had a market share of 48.1% by the end of March 2020. Currently, they have a market share of 58.8%. At the same time, Air India, Air Asia, Vistara and SpiceJet all have faced a reduction in market share.

In these tricky times, do you think IndiGo should invest in their growth or should they be more cautious and focus on just survival?

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Editorial

Jet Airways: Jet, Set, Gone? Or Can it Succeed?

Jet Airways is back in the news, this time with some positivity. A group of investors, Murari Lal Jalan (stay tuned for his bio), and UK-based financial services company Kalrock Capital have won the bid to buy Jet Airways in a vote by the CoC or Consortium of Creditors. The CoC consists of all the creditors to whom Jet Airways owes money. The duo would have to invest close to Rs 1,000 crores to get the operations up and running in its initial stage. However, the company won’t be operational before next year. Let’s take a peek into what caused Jet to shut down in the first place.

Jet Airways halted its international as well as domestic operations on April 17, 2019. It was once a symbol of luxury, customer loyalty, and service par excellence. Moreover, Air India was its only competitor for a long time in the ‘90s. Later, Jet was faced with debts, competition by low-cost carriers, tax evasion notices, poor top management, and money mismanagement allegations. Jet Airways was on the verge of closure in the past but got back on its feet when Etihad bought a 24% stake in 2013 for more than Rs 2,100 crores. Despite this, the airline fell into deeper losses.Let’s dig into what caused Jet Airways to shut shop.

Why Jet Airways failed

Irrational Spending

Experts believe that Jet Airways’ account of irrational spending dates back to 2006 when it purchased Air Sahara, the low-cost carrier for $500 Million in cash. This acquisition was considered over-valued by most market watchers considering Air Sahara’s budget business model and fleet size as compared to Jet Airways’ full-service model.

Jet Airways dominated the industry after the acquisition of Air Sahara, but the acquisition came with its own set of problems. These were mostly about due diligence, legalities, regulatory matters, compensation, human resource issues, leadership, and integration strategies.

Competition

Jet Airways needed a MASSIVE restructuring in its company. It was a full-service airline venturing into low-cost flying. However, by the time it could restructure, market players like Spicejet, Indigo, and Go-Air had started a fiercely competitive price war. Their aircrafts and engines were brand-new and fuel-efficient. They adopted a budget-friendly strategy.

Fun Fact: Indigo and GoAir employ only female cabin crew since on average they are 15-20 kg lighter than their male counterparts. This helps them save close to Rs 30 crores every year in terms of fuel cost. Every extra-kilogram on the flight costs airlines Rs 5 per flight hour.

It was getting difficult for Jet Airways in this fiercely competitive market where flying wasn’t just a luxury anymore, it was a necessity.

Poor Management

Both Jet Airways and Jet Lite (later Jet Konnect)  had a single team headed by Naresh Goyal, the founder and chairman. It was this one team; that was handling both the full-service carrier as well as the budget carrier, Jet Konnect. The operation of a budget carrier and a full-service airline is different. Jet Airways used the same tool or mechanism to run both. When Jet Konnect merged with Jet Airways after a financial crisis, Jet Airways continued to hold two operating licenses while technically operating a single airline. This added to cost and caused some operational problems.

The Tatas had offered to buy a stake(undisclosed) in Jet Airways in 2018, chairman Naresh Goyal refused to dilute his share of stake for Tata. Shortly after this, two of Jet’s independent directors, two independent directors – Vikram Mehta Singh and Ranjan Mathai – resigned in November 2018, the same month the Tatas were in talks with the board. The promoters and chairman put their interests before the minority stakeholders’ interest. The cash flow and debt management of Jet Airways were pretty mediocre in popular opinion.

The fluctuation of Oil Prices

Oil prices have been all over the place in the past few years. Crude oil prices affect the ATF(Aviation Turbine Fuel) prices. Moreover, ATF is much more expensive in India than around the world. India continues to be a major importer of oil. The rising crude oil prices coupled with the depreciating rupee is a burden for many airlines.

The Scavenging Effect

After Jet ceased operations, the entire aviation industry benefited from it. Other airlines captured Jet Airways’ market share by leasing their aircraft, obtaining their airport slots, hiring the laid off staff of Jet Airways and capturing the lost customer base . 

Airfares increased shortly after Jet Airways ceased operations. Spicejet and Vistara leased Jet’s aircraft. IndiGo acquired more slots from Mumbai’s Terminal 2 and Delhi’s Terminal 3. Many airlines acquired Jet Airways’ aircraft, terminal slots, and routes. Spicejet absorbed much of Jet’s staff and its older aircraft variant, the B737 NG. It even added a premium ‘Business Class’ to its fleet. 

Vistara managed to expand its focus from Mumbai and Delhi. It obtained slots of Mumbai – Bangalore, Mumbai – Chennai, Mumbai – Hyderabad, and other such routes establishing Pan-India operations. All the airlines at a major scale absorbed much of Jet’s assets, routes, and employees.

How Much More?

  • There is a lot of work to be done before the first flight takes off like charting out a plan for the new fleet that the airline will have, deciding on key positions of the company, figuring out the routes, and other paperwork involved.
  • Jet Airways owes a lot of money to investors and banks, roughly close to Rs 14,000 croresCrores. However, Jet doesn’t have much liquidity to offer to the creditors. The sale of assets won’t fetch the creditors much money. Some of the debt will be converted to equity which might bring relief to some creditors. As far as debt is concerned Jet is indeed in a puddle. Bank stocks went up as well, after the revival of Jet Airways was announced.
  • There is a lot of work to be done before the first flight takes off like charting out a plan for the new fleet that the airline will have, deciding on key positions of the company, figuring out the routes, and other paperwork involved.
  • Jet Airways before it opens up will have to be firm on the following aspects:
    1. What routes is Jet Airways going to fly?. International operations might be tricky given the COVID-19 situation
    2. How many airport slots will it be able to get back? It will have to use
    3. What will be its fleet like? Currently, it owns only 6 old fleets.
    4. How does it intend to cover the debt that it owes?
    5. Who is going to be the CEO? Murari Lal Jalan hasn’t operated an airline before and Kalrock is a financial services firm.
    6. A plan on how and when Jet Airways will hit break-even and turn a profitable airline where even established players are struggling.
    7. A strategy to recapture its brand value. A rebranding could be a possibility.
  • Finally, on a positive note for Jet Airways, it might be easier than it seems to revive it. COVID-19 has pushed many airlines to vacate airport slots. The aircraft lessors have reduced their prices, therefore Jet Airways can get the fleet for cheap. The fuel costs for aircraft too have gone down considering reduced demand. Jet Airways has been operational for close to 3 decades, which gives it a name and repute in the market. Considering that there are not many full service carriers in India and not many airlines that offer wider international connectivity, Jet Airways seemingly can fill the void.
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Market News

SpiceJet to operate flights to the US

Spicejet

Budget carrier SpiceJet on Thursday said it has been designated as the “Indian scheduled carrier,” to operate flights to the US. SpiceJet would be the first Indian budget carrier to operate services to the United States.

All international commercial air passenger services are suspended since March 22, in the wake of travel restrictions due to the coronavirus pandemic.

“This is to inform you that in terms of the Air Services Agreement between the Government of India and the Government of the United States of America, SpiceJet has been designated as Indian scheduled carrier to operate on agreed services between India and the USA. This is for dissemination to all stakeholders,” SpiceJet said in its statement to the exchanges on July 23.

SpiceJet Chairman & Managing Director Ajay Singh said the designation as an Indian scheduled carrier to operate between India and the US would help the airline in planning its international expansion in a much better and calibrated manner.

“I have always maintained that there is an opportunity in every adversity and the present crisis situation has seen SpiceJet rise to the occasion and play a pivotal role,” he said.

Shares of SpiceJet were trading at Rs 49.65, up 4.6 per cent over its previous close on the Bombay Stock Exchange.

Currently, Air India is the only Indian airline that operates on the India-US route, which has seen substantial traffic since the onset of the Vande Bharat flights.

In the case of outbound passengers on Vande Bharat flights, the sector of India-US and Canada gained the maximum passengers or nearly 60 per cent of the outbound traffic as 46,170 passengers boarded flights for the US on these 159 flights.

In conclusion, to be able to fly to the US, Spicejet will need wide-body aircraft. As SpiceJet does not have any wide-body aircraft, it will have to get such a plane on lease. This will surely deter the slowdown in the aviation sector and likely propel the growth in forwarding direction