Stock Pick- Airline

Stay grounded

Sandeep Singh

Posted online: Tuesday , April 24, 2007 at 1156 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

Last week, after much give and take, Jet Airways finally bought Air Sahara. Elsewhere, decks continue to be cleared for the impending — some would say, never-ending — merger of the two state-owned airlines, Air India and Indian. And unconfirmed news reports say the Anil Ambani Group is looking to buy a 26 per cent stake in the country’s leading low-cost airline, Deccan Aviation.

By the deal-making going on and being talked about, and the growing number of Indians taking to the skies, it would appear the airline sector is poised to fly into a higher trajectory. It might well unravel that way. Still, to an investor today, investing in an airline stock is entering an unknown. There’s so much flux and there are so many issues that it’s even difficult to tell which company will be around three years on. And even if it is around, whether it will be making profits; and, if so, how much.
Battle of attritionToday, the battle is for market share, and it is being fought at the expense of profits. All airlines are bleeding, and bleeding badly. Leading the price wars are low-cost carriers, which are weaning away market share from full-service airlines by the month — led by Deccan, their share of the domestic pie has increased from 21 per cent in January 2006 to 37 per cent in March 2007. This will increase to 70 per cent by 2010, predicts the Centre for Asia Pacific Aviation, an aviation industry consultancy.
That’s an ominous sign for full-service airlines. If passengers grow at the projected rate of 25 per cent a year, all airlines will grow. But how many will turn — and stay — profitable is the question. Airlines is a volumes and cost-management business, and it doesn’t have room for many. That explains the rush for market share and the fare wars. The fear is that not only will the fare wars lead to some airlines going belly up, it will also leave the survivors in bad shape. Says Sachin Neema, research head, India Infoline: “The situation will improve only if airlines decide not to undercut competition.”
Policy pushReforms — rather, the absence of it — is the other factor preventing airlines from travelling at the pace they would like to. Fuel is the biggest cost head for Indian airlines. More than high prices of crude, it’s high taxes that are killing. Says Warwick Brady, chief operating officer, Deccan: “Fuel taxes are 70 per cent higher in India than in other countries.” As a result, while 42 per cent of Deccan’s expenses go towards fuel, and Jet spends 37 per cent, the corresponding figure for European airlines is in the mid-20s.
Airlines want state taxes on aviation turbine fuel (ATF) to be reduced from the current 20-40 per cent to a standard 4 per cent. This move calls for tricky negotiations between the Centre and states, most of which look at ATF as a luxury item. If duties are reduced, it will provide a fillip to profitability. Airline chiefs believe it’s not a question of ‘if’ it will happen, but ‘when’ it will happen. But as a shareholder, are you prepared to stake your investment on government intent?
The same argument also holds true for other policy measures that the industry has been crying for. Airport infrastructure is a mess. The smaller airports are not in ideal shape to service additional capacity, which holds back low-cost carriers from expanding as they would like to. Then, the older airlines are losing market share, but they still have a monopoly over parking bays and corner key time slots. For all this, airlines are paying extra or are not utilising their asset as efficiently as they could be. Says Neema: “They are inefficient users of capital, as is indicated by the low return on capital employed.”
Even as they wait for the new civil aviation policy, which might address some of these issues, airlines are increasing fleet size and adding destinations. Says Warwick: “We are working towards becoming the most-efficient low-cost carrier, and expect to be in profits within a year.” Getting there is one thing, staying there is another, which is what you should be interested in. At this point, it’s difficult to predict who will rule the skies and when. Stay grounded till the sky is clear to fly.

http://www.expressmoney.in/news/Stay-grounded-/85365.html