Businessworld has a detailed cover story on the state of the low-cost airline industry in India, including a comparison of the strenghts and weakness of the current leaders - Air Deccan and SpiceJet - and an interview with former CEO of easyJet, Ray Webster.
Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.
Ray Webster, the former CEO of easyJet, who established the efficacy of the low-cost model in Europe, is bullish: "In Europe, the number (of passengers) is far lower, journeys are short, and travelling by train is a nice experience. Yet, the low-cost airline model has worked very well. I can't begin to imagine the size of the market in India."
The two airlines have done well so far. Loads have been high and increasing (Air Deccan claims 75 per cent average load in April-September 2005; SpiceJet claims around 84 per cent). Both airlines have been cash positive for several months. Deccan had projected revenues of Rs 275 crore in its third year but made Rs 318 crore in 2004-05 (the second year) itself. In 2005-06, the first six months have brought in Rs 359 crore, and Gopinath expects to close the year at around Rs 1,000 crore. SpiceJet's revenue moved to Rs 82 crore in Q2 (2.98 lakh passengers) from Rs 57 crore in Q1 (2.21 lakh passengers).
Says Kapil Kaul, CEO (Indian Subcontinent & Middle East), Centre for Asia Pacific Aviation (CAPA): "There is a mad rush of money chasing India's aviation sector." Sample this: Both Air Deccan and SpiceJet, two of the three budget carriers already in the air (Go Air is the third) have raised substantial sums. In March 2005, Deccan raised $40 million through a convertible debenture from ICICI Venture and US-based Capital International, and is planning to go public in March 2006. In December 2005, SpiceJet raised $80 million by issuing foreign currency convertible bonds (FCCBs) in the international market to part-finance its order for 20 Boeing 737-800 aircraft (it has five now). SpiceJet is valued at close to $350 million, and Deccan is likely to be valued at a little over double that. Says Ajay Singh, director, SpiceJet: "Many airlines with perhaps not the best plans can also get funded." That's quite a change from when Air Deccan launched (September 2003) when people were ready to give them a hearing, but no money.
Operating conditions, however, present severe challenges. Airport charges are 62 per cent higher than international levels and fuel prices are also higher. Distribution costs are high, as Internet penetration, the main ticketing medium for budget carriers, is poor. Aircraft utilisation and turnaround times are lower due to poor infrastructure (few runways and hangars, among other things) at Indian airports. Also, many carriers are buying or leasing new-generation aircraft at high prices. Then, there are regulations like all airlines have to fly to some unprofitable routes (the North-east, for example). All these add up to throw their budgets out of gear.
Still, many believe that low-cost is the future. Says CAPA's Kaul: "By 2010, the (low-cost) market share will be 50 per cent, up from 16 per cent today." He contends that on parameters like fuel prices and airport charges, India will be at par with international levels then. Coupled with labour cost advantage and high quality IT infrastructure (at low prices), India will be one of the lowest-cost aviation markets by 2010. "We see unbelievable valuations for Indian aviation companies then," he says.
Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.