Clouds Lift on Indian Carriers After Ticket Price Bloodbath
By Anand Krishnamoorthy, Santanu Choudhury, Bloomberg News | Jul. 12, 2007
Mergers and buyouts are ending India's cutthroat airline competition, and with it the 2-cent ticket wars that lost the industry US$500 million last year.
The carriers say rising fares will boost profits in an aviation market set to be the world's fastest-growing through 2025, after Jet Airways (India), the biggest domestic airline, bought a rival, and a competitor acquired a stake in Deccan Aviation, the second-largest airline.
"Consolidation is a very positive sign," said Robert Kalin at DWS Investment in Frankfurt. "In an oligopoly, there is pretty good pricing power."
Shares of Mumbai-based Jet Airways have gained more than 30 percent since it agreed to buy Sahara Airlines in April.
Shares of Bangalore, India-based Deccan have risen more than 50 percent since early April, including an 8 percent gain since United Breweries Holdings, India's biggest brewer and the parent of Kingfisher Airlines, agreed to buy a 26 percent stake in the carrier in May.
Shares of SpiceJet, the country's second-largest budget carrier, rose 3.2 percent to 56.75 rupees on the Bombay Stock Exchange on July 11. Shares of Deccan Aviation rose 1.5 percent to 143.65 rupees and Jet Airways fell 1 percent to 794.4 rupees.
"In the next two years, most of the companies should be making a net profit, especially Jet Airways, mainly because of their pricing power," said Rati Pandit, an analyst at Mumbai-based Networth Stock Broking.
In the United States, major carriers have used bankruptcy to slash costs and are cutting capacity after losing money in five of the past six years. In Europe, expansion by low-cost carriers is causing excess capacity, lowering fares and profitability.
Air travel in India will grow by an average of 7.7 percent annually through 2025, compared with 7.2 percent growth for China and 4.8 percent globally, according to a December projection by Airbus, the world's biggest commercial-plane maker.
The number of passengers rose 24 percent to 73.4 million in the fiscal year ended March 31, 2006, according to India's Civil Aviation Ministry. It probably grew to 86.8 million, including 60.9 million domestic passengers, in the year ended March 31, the ministry said.
The growth also attracted four new budget carriers in the past four years, started by a former army captain and silkworm farmer, a billionaire brewer, a cookie maker and a textile mill owner. Airlines sold tickets for as little as 1 rupee and even gave them away to seize market share.
"It was obvious ... consolidation would have to take place sooner rather than later," Kingfisher's chairman, Vijay Mallya said in June.
While some carriers are now merging, the market is still set to expand. A 1 percent rise in India's gross domestic product should translate into a 2 percent increase in air traffic, according to a June report by Ernst & Young.
India's economy expanded 9.4 percent in the year ended March 31, the most since 1989, and may grow 8.5 percent in 2007, a pace surpassed only by China among the world's largest economies, according to the Organization for Economic Cooperation and Development.
The Centre for Asia Pacific Aviation expects the Indian airline industry to continue losing money this year.
Still, SpiceJet has said it expects to post a profit in the year ending March 2008 and Kingfisher has predicted Deccan will be profitable in the same period. Jet posted a profit in each of the past two quarters, following losses in the previous two.
Consolidation will continue with state carriers Indian Airlines and Air India combining this month. Jet Airways and Kingfisher have also been in talks to buy stakes in SpiceJet, according to press reports.
Kingfisher and Deccan will save as much as 3 billion rupees in costs in the first year through sharing planes and workers.