Turbulent Patch

WHEN THEY TOOK OFF nearly four years ago, private airlines were expected to wrest the skies from the national carrier, Indian Airlines (IA). But even though these airlines account for 42 per cent of the existing domestic capacity, they are not doing well and many have been defaulting on their payment obligations with an alarming regularity.While some of the new hopefuls like Damania Airways ran up liabilities of Rs 85 crore within two years (before being bought by NEPC Airlines in May 1995), others like East West Airlines have been slapped with suits for nonpayment of lease rentals (see graphic). East West, in fact, has a chequered history and was first hauled up for nonpayment of Rs 14 crore of Inland Air Travel Tax in July 1993 and six of its flights were cancelled. In June 1995, its flights were grounded for non-payment of Rs 16.7 crore to the Indian Oil Corporation. And on March 27, 1996, the Delhi High Court ordered grounding of three of the airlines' Boeings for nonpayment of Rs 10.5 crore to the US-based PLM Equipment-since the airline has still not paid up in full, PLM has asked that the aircraft be deregis-tered. East West disputed the claim, but has been ordered to pay the first instalment of US $750,000 (Rs 2.6 crore) pending settlement of the dispute.Skyline-NEPC has also been served a show-cause notice by the Director-General of Civil Aviation (DGCA) for deregistering two of its Boeing 737-282s for non-payment of $1.4 million to PLM. Skyline-NEPC however, claims it has paid all its dues.The latest in the dock is ModiLuft. Last fortnight, its collaborator Lufthansa snapped ties with it, among other reasons, for incomplete payment of lease rentals and other payments. While Modiluft Chairman S.K. Modi denies owing Lufthansa any money, the German carrier has demanded that ModiLuft return its three aircraft as well..preferred-source-banner{ margin-top: 10px; margin-bottom:10px;}The reason for the sharp decline in profit margins of private airlines is not far to seek: a severe mismatch of demand and capacity. While their entry has seen industry capacity almost double over the last three years, demand has grown at a much slower pace. The sitution is likely to get worse with the DGCA issuing licences to 19 other non-scheduled operators and no-objection-certificates to 29 prospective operators of air-taxi services.In fact, private airlines face a double bind: increasing competition means they will have to induct new aircraft to extend their area of operations. Sky-line-NEPC plans to induct two Boeings, East West Airlines four more, and Mod-iluft four new Boeings. Says R.K. Khemka, chairman Skyline-NEPC:"We aim to become the largest private air carrier in India. This is possible only with a large size as fixed costs are absorbed over a large fleet, and reduce overall costs." This will, however, only add to the strain on the bottomlines of those who can't muster enough passengers, especially with lease rentals typically accounting for 15-20 per cent of total operational expenses.And with the DGCA guidelines making it mandatory for private airlines to offer 50 seats on non-trunk routes for every 100 on trunk routes, these companies often have to fly with passenger load factors as low as 35 per cent on uneconomical routes. The only private airline that is making money on these routes is Skyline-NEPC, which has small and fuel-efficient aircraft. Says East West Airlines Managing Director Faisal Wahid: "The Government's insistence that we service sectors in the North-east causes many problems because we are flying with a passenger load capacity of 35 per cent, whereas the break-even for a large-bodied craft is 75 per cent."Not surprisingly the bottomlines of these airlines are being hit. While East West Airlines' income in 1994-95 increased by 14 per cent, its operational expenses rose by 15 per cent. High operating costs, which drain over 62 per cent of Modiluft's total income, saw profits after tax fall from Rs 7.4 crore in 1993-94 to Rs 5.6 crore in 1994-95-during this period, Modiluft's operating costs rose by as much as 74 per cent. Says Nitin Anandskar, aviation analyst at Jardine Fleming: "With high operational costs taking their toll, we expect two or three more shake-outs in the next three years. And if IA or its new subsidiary Alliance Air can get their act together, they can pose a big threat to private airlines."IA, in fact, has shown a remarkable turnaround in terms of efficiency-75 per cent of its flights in March this year were on time, as against 49 per cent earlier. It also plans to add 6,000 seats and take its capacity to 40,000 seats a day in the next one year. Says IA's RegionalDirector (western region) S.L. Arora: "We have the largest network, an infrastructure and safety standards that none of the private operators can match. We are confident of winning back our market share."Private players hit another pocket of turbulence recently with the entry of IA's wholly owned subsidiary Alliance Air. Not only does it enjoy the benefit of IA's vast infrastructure and training facilities, but it has also started with two aircraft from IA. Over the next one year it will get two more of the latter's Boeing 737s on lease-the rates for these will also be significantly lower than those paid by the private airlines. Alliance is also planning to buy six 50-seater turboprop craft. All this will give it a decided edge over existing private players.Whether the IA-Alliance combination is able to edge private airlines out is uncertain. But what is certain is that too many players are jockeying for a place in the sky. As Dinesh Keskar, president of Boeing India puts it: "Passenger traffic is growing but so is competition. We have entered the shake-out phase in which only professionally managed airlines will survive."-with NAVNEET SHARMAPublished By: AtMigration Published On: Jun 30, 1996--- ENDS ---

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Turbulent Patch

Most operators are overstretched as excess capacity and high costs hit the industry. And a shake-out is imminent as Indian Airlines becomes more efficient.

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