End of the Indian summer

There’s no puzzle. Kingfisher Airlines, the baby of liquor baron Vijay Mallya, did the local industry a favour by getting itself grounded in October and, by January, losing its licence to fly altogether.

That removed over-capacity from India’s airways and opened the door for rivals to have a go at making some decent profits for a change. Fewer seats means reduced numbers of overall passenger numbers but better yields and income for the survivors.

While the entrepreneur continues to promise he’ll get back in the air – Kingfisher has two years to convince regulators it is in a fit financial state to resume operations – the last thing India needs right now is a big batch of seats re-entering a market that has suffered badly from over-capacity and bouts of vicious ticket discounting over recent years.

This competition, coupled with the local regulatory regime and exorbitant fuel costs, a result of state taxes on fuel, made it almost impossible for local airlines to make decent profits. The demise of Kingfisher has introduced a measure of much-needed rationalisation into the landscape.

It is already beginning to show. For example, budget carrier SpiceJet swung into profit in the last quarter of 2012, helped by higher fares in a market with reduced capacity. Its income of A$17. 2 million in the October-December stretch compared with a $7 million loss in the same period a year ago. Its average passenger yields rose 29 per cent in the latest quarter, coinciding nicely with the disappearance of Kingfisher.

Whether this period of rationality will persist remains to be seen. India is quite rightly considered, along with China and Indonesia, to be one of the region’s future boom markets. Until now traffic growth has at times been spectacular but unfortunately rapidly rising passenger numbers have seldom translated into healthy bottom lines.

Last year IndiGo was the only airline that made money while, at the other extreme, Kingfisher’s debts reached a staggering $2. 5 billion.

It is difficult to comprehend why the Indian government has not seen what is blatantly obvious: heavy-handed regulation and an extremely high taxation regime constitute the biggest hurdle for carriers as they strive for long-term profitable growth – measures which would help get bogged down in the bureaucracy. For instance, airlines have applied for permission to import jet fuel to avoid state taxes. They are still waiting for a decision, with authorities saying there is inadequate infrastructure at the country’s airports.

This state of affairs is also the reason why, in the four months since New Delhi, after years of procrastination, opened the door to foreign direct investment by offshore airlines into local operators, there has been hardly a nibble from interested parties. Who would cough up the $400 million Kingfisher needs to get it back on track and take a bite of its huge debt? Clearly, the answer is: no-one.

Often-mentioned contenders such as Emirates Airline and Qatar Airways have strongly denied interest “at this time”. So has Malaysia Airlines, also a reported potential investor. There are strong links between India and the Gulf, as well as to South-East Asia and there are clear prospects sometime in the future.

But none of these carriers are prepared to risk their investment money in this often chaotic market.

The one serious player to emerge is Abu Dhabi-based Etihad Airways. Its Australian-born chief executive James Hogan and his commercial team are in serious talks with Jet Airways founder Naresh Goyal and his executives. It is not known just how long due diligence on Jet will take.

SpiceJet has also said publicly it is actively looking for a strategic investor but its chief executive Neil Mills says he is “really not in a particular hurry to do so… we are not desperate to do a deal but we will do the right deal when it comes in the interest of shareholders and the company”. As one of India’s better performing airlines, Spicejet probably has more chance than most of attracting interest.

Ironically, an early foreign arrival may have nothing to do with existing airlines. Tony Fernandes, chief of Malaysia’s budget major AirAsia has been talking to local investors, particularly Indian communications conglomerate Videocon, about starting up a new AirAsia arm in India. But discussions are still being described as “preliminary”.

For now the message to anyone considering dabbling in India’s airline market remains clear: proceed with extreme caution.

Whether this period of rationality will persist remains to be seen.