Event Round Up

A 'resource'ful conference

The recently concluded South Asia Aviation Finance Conference (SAAFiC) 2008 in Mumbai provided a platform for lessors, banks and airlines to come together and present views on the booming aviation in the region and also the hindrances in operations which further add to the cost. By Chetan Kapoor

In the last few years there has been a transformation in the way people travel in India, and aviation has been the sole driver for this movement. Airport after airport is being connected and more aircraft have been added across all airlines. However, with increased operations and lower ticket prices to outdo competition, airlines have found themselves in a tight spot as losses have been high and there is a point to which investors will continue to burn their pockets.

Kick starting the conference, Scott Gibson, managing director, Seabury Group stated, "Leading airlines are focussed on improving profitability through cost reductions and network enhancement. With LCCs being an integral part of life and driving price structure around the world, airlines operating in tier two cities are rarely able to compete, while those in tier one are challenged domestically." According to statistics, the APAC region with a 3.9 billion population has 43 LCCs driving this transformation. However, with increasing and unpredictable costs, an LCC may not necessarily continue to be one and according to Gibson, companies must understand the drivers of this business and maintain benchmarks pertaining to the costs and revenues with over capacity in terms of demand and undercutting prices. "It is a free for all at the moment and airlines aren't working on the revenue side. All Indian carriers appear to follow the LCC-model in spite of being full-service carriers, which in the long run will result in a shake out, as everyone is grabbing from the same market," he added.

And it is not only the Indian aviation that is booming. Neighbour countries like Bangladesh and Maldives, too are witnessing growth because of the improving relationships and trade between SAARC countries and South Asia. Airlines such as Bangladesh-based private international carrier GMG Airlines and Maldives national carrier, Island Aviation are flying to destinations and feeding traffic to and from major international SAARC airports thereby giving rise to the use of all small, medium and large-sized aircraft. Shahab Sattar, managing director, GMG Airlines mentioned, "The domestic passenger traffic (in Bangladesh) is growing at 10-12 per cent, however slow deregulation is eroding the market share by allowing foreign airlines to fly more freely than private operators."

L to R: Riyaz Peermohamed, CFO, IndiGo; G P Gupta, CFO, GoAir; S Venkat, executive director (finance) & company secretary/PR, Air India; Anand Ramachandran, vice president - finance, Deccan; and Jaspal Jandu vice president (strategic marketing), Lease Corporation India, at SAAFic 2008 in Mumbai

Asset utilisation and financing

With a view to promote current growth trends in the industry, it is integral to use the right tools and spares so as to have maximum utilisation of the asset. However, in order to reduce costs, more airlines are looking at leasing engines by Parts Manufacturer Approval (PMA). With reference to that, Steve Horner, director, Marketing for India, Engine Lease Finance Corporation, argued, "Twenty five per cent of the residual impact on the engine is caused by PMA usage, and affects mobility. With high proliferation of PMA parts and manufacturers, there is a conflict in the industry owing to the fact that they are attracting LCCs. There is a need to have generic engines and PMA is not an option as even the aircraft lease rate is lower than engine leasing." According to him, the market for engine leasing, which could be around US$ 1 billion per annum, is being driven by MROs in part and is expected to grow almost six times in ten years. Even when aircraft are leased, given the Indian regulations, they are under utilised. Referring to the potential of regional airlines in the country, Koustav Dhar, president (Commercial and Special Projects), MDLR Airlines, said, "With 411 operating aircraft in the country, we have 68 aircraft capable of regional operations but only 32 are actually in use. Regional airlines is a booming market with 18 new SEZs being built and 108 more airports estimated to be in place by 2010, flying 1.3 million passengers from tier I and II cities. Yet the suppliers do not want to come forward. Even the passengers travelling for shorter distances end up paying more; policies therefore should not be lop-sided and this market must have constructed channels." According to Bombardier's Jerome Chung, manager airline analysis, Asia Pacific, Asia will hold 23 per cent of the world's fleet in the region by 2026 with over 70 per cent accounting for domestic traffic. "The regional market is poised to grow with latent demand rising, improving infrastructure and the regional policy established. About 129 new routes connected to 22 cities between 2000-’07 has increased airline penetration and the regional aircraft have advantage over narrow-bodied aircraft with 33 per cent faster turnarounds and 70 per cent lower trip costs."

On the other hand, the introduction of the Airbus' A380 and Boeing's 787 Dreamliner has been an evolutionary step in changing the way people fly. However, Dr Dinesh A Keskar, senior vice president - Sales, Commerical Airplanes, Boeing argued, "With more routes opening, the average seats per flight is falling, making the A380 successful only in certain niche markets. As the concept of hubs grows, there will be more fragmentation of the market." According to Boeing's estimates, with air travel, frequencies and non-stop markets on the rise, the average plane size is reducing. "By having fewer seats, one doesn't need bigger flights because of the feeding done at many airports," he added. Further estimates reveal that city pairs and frequency of servicing in India will double or may even triple in the next 20 years.

Given the potential, the asset assessment (of an aircraft) is no different from other financing. Says Victoria Hartley, executive director, Transportation - Aviation of WestLB AG, "Banks are cautious and always look at exit strategies if things go wrong such as ability to trade slots before delivery, financing delivery and subsequent sale, and trading out via lease. It is important to know the credit rating of the Indian aviation market as airlines are posting more losses year after year."

Agreed Navin Wadhwani, director and head infrastructure, Rothschild India, "Investors are not seeing results in the Indian aviation industry, a fact which is therefore deterring them from investing. There are lower yields with higher prices and low load factor which will lead to a second round of consolidation. The path to profitability is expected to take another two-three years."

Money matters

With the current backlog of about 453 aircraft in India, aviation analyst, Praveen Vetrivel of the IBA Group estimates them to be worth US$ 28 billion and assuming 50 per cent is on operating lease at the rate of 0.8 percent, lease rentals leaving India would amount to US$ 1.12 billion per month.

In a panel discussion involving finance heads of various airlines, G P Gupta, CFO, GoAir appealed, "People travelling by trains are our target market and we need to stimulate them. The rate of taxation on fuel must be lowered from the present 33 per cent to four per cent and hopefully the industry will turn around in the next 18 months." However, the merged airlines are waiting to exploit synergies. Mentioned S Venkat, executive director, National Aviation Company of India (NACIL), "It will be another two-three years before the merger kicks in as civil aviation in India is no longer civil; one-third of our costs being for ATF and other 53 per cent being uncontrollable due to human resources, apart from other factors." Added Anand Ramachandran, vice president - Finance, Deccan, "Consolidation is attractive for lessors and investors. Mergers are good signs for players to start break-even if not earn profits and with the Deccan-Kingfisher combine, we would offer different products for various clientele."

Despite the positives of M&As, Saroj Datta, executive director, Jet Airways still feels that continuing under different names does not account for a merger in the true sense. "M&As help in having additional assets, routes and ability to expand inorganically. None of the mergers and consolidations has really gotten benefits so far, except for the principal benefits of rationalisation of capacity by avoiding competition. India also doesn't yet provide subsidiary for low-fare carriers as everything is identical to the full-service carriers."

Lack of quality human resources too resulted in poaching which added up to the cost. However, national carrier NACIL which requires 100 pilots every year for the next seven years has identified three-four international flight training schools with DGCA certification, issuing Indian licences post-training. Even the Federation of Indian Airlines (FIA) is looking at a pool of resources to train pilots other than expats.

However with the booming industry and new entrants coming in, the question to be asked is whether the lessors will consider investing in start-up airlines being knowledgeable of the barriers that obstruct airlines from being profitable. "When dealing with a start-up airline, the first impression is very important in addition to their business plan evaluation to determine the cash flow. Also, risks such as the power behind the project, innovations and competition to stand out from the crowd need to be evaluated. Ultimately, it is the airline with the best business plan which will survive and drive the way," Nirvan Veerasamy, managing director, Veling answers.