Air Deccan on troubled sky, Kingfisher on rescue

Captain Gopinath can be counted among the most risk-taking (first to bring the concept of low-cost airline in India), and most unlucky entrepreneur. The period during which IPO was available for subscription, the market witnessed its severest crash, and the issue barely managed to scape through with the lowering of offer price. Its first flight was grounded due to a minor fire, and there have been severe allegations against the company splashing across major news channel accusing the airline of overbooking tickets.

Its recent quarter result was the final nail in the coffin as the company posted loss of 213 crores, making it vulnerable to the growing competition in the aviation industry. Business Today writes that the company needs to raise over Rs. 400 crores to survive and for this it needs to dilute around 20% stake. During previous quarters, the company managed to earn profits on back of income from aircraft purchase contract and selling seat in advance.

Aviation has always been a sector which is highly competitive, capital intensive and sensitive to macro environment. Many airline companies over the world have been bankrupt, especially after WTC attack in 2001. The Low Cost Carrier model has been a new concept in India, but it has been quite successful in other countries and key players working are Ryan Air, Easy Jet and Virgin Blue. Their revenue generation stems from sale of food and drinks, advertisement, high cancellation charges, high luggage overweight charges, quick runaround time and servicing non-metro cities and airports. But in India, due to lack of adequate infrastructure, LCCs have to function from main airports only which charge higher airport taxes.

In the times ahead, players with a pan-India presence, adequate fleet size, complement low cost with consumer service, connecting cities where growth potential exist, would be ones to survive. The Financial Express reports that the government may allow domestic operators to import ATF, which could lead to reduced costs and reduced airfares. The adjoining image is the best judge for the growing competition in the sector.

The aviation sector has witnessed quite a few changes lately, Jet Airways acquisition of Air Sahara and renaming it JetLite, impending merger of ‘Indian’ and ‘Air India’ and rapid development of metro and non-metro airports. In wake of consolidation, it makes sense for Kingfisher to takeover Air Deccan as it would give immediate access to 65 destinations, 350 flights per day and 43 aircrafts. Kingfisher could then operate a LCC in its fleet to take on Jetlite, GoAir, SpiceJet and IndiGo.

Another positive for Vijay Mallya is that, Air Deccan has been in operation since 2003 and law state that to operate international flight, airline should first operate in domestic circuit for 5 years. Given Kingfisher’s high ambition and deep pockets, it makes business sense otherwise it would have to wait for 3 years to operate internationally. One is in need of funds while one is in need for scale, so this might turn out to be a happy marriage.