Indian Summer

As the summer season hits a peak, the majority of Indian airlines struggling to cope with high fuel costs have long since started to scale back their domestic and international ambitions in a drive to become more efficient and lower their operating costs.

Consolidation of the Indian market is still largely an ongoing episode, with the most recent overtures by Kingfisher Airlines towards its smaller domestic rival, SpiceJet being rebuffed after the $80m injected by Wilbur Ross to thwart Dr. Vijay Mallya’s plans.

SpiceJet itself is struggling to cope with the rise of fuel and is in talks to defer delivery of some if its Boeing 737’s. Kingfisher too is widely rumoured to be in negotiations to defer deliveries of up to 29 Airbus A320’s as demand wanes on India’s domestic network, gripped by higher fuel surcharges and the scrapping of a plethora of flights by most airlines in the country.

Image courtesy of Boeing

“I like to do good deals and I won’t do expensive deals,” says Mallya, yet almost laughably the carrier is struggling to find buyers for two new Airbus A340-500’s that are now seemingly “surplus to requirement”.

With the evolution of point-to-point travel, the emergence of twin engine airplanes now being the benchmark for long haul travel, Kingfishers selection of the A340 is certainly one that it is hard pressed to admit it got wrong, not least because the said A340-500, like the 777-200LR are niche market players and have limited demand. The inferior and higher fuel burn of the A340-500 further complicates the reasoning for the purchase, although some insiders say that Kingfisher picked up the A340’s for around $90m apiece.

Cheap to acquire, expensive to operate it seems given the business climate in India today.

Air India and Jet Airways may be poised to better weather the storm given the delays to the 787 that both have ordered, while benefiting from operating the popular and in-demand 777-300ER between various hubs in their already established networks in Europe and beyond.

Image courtesy of Tim Dauber

Interestingly, as the economic slowdown grips India, the shift towards using other modes of cheaper transport has a dramatic effect on air travel.

Boeing Commercial Airplanes Vice President, Sales, South & Southeast Asia, Dr. Dinesh A. Keskar sums up the situation quite succinctly:

“Airlines have increased fuel surcharges and when you do that, sure, you’ll get a little bit more revenue but you also see numbers of passengers going down as there are a few people at the end of the pyramid now who say “yeah, I can travel but I better go on the train again“, “.

While the summer season reaches a peak, the uncertainty over fuel, confidence in the marketplace being able to bounce back remains. Just last week Boeing upped its 20 year forecast for India and Airbus’ 2007 Global Market Forecast is equally upbeat about the region:

“India and China are evolving into vibrant marketplaces with a dynamic consumer base, which is expected to become three times larger than that of North America and Europe combined, by 2026. In time, the influx of these new consumers from emerging countries will prove crucial to the world economy, as private consumption in developed countries reduces. With levels of consumerism set to ease in developed regions, the world economy will increasingly rely on China and India as an alternative source of demand.” 

On the face of it, this Indian summer may just be a blot of discontent while fuel cost uncertainty pushes the populace away from air travel.

The battle for domestic and international dominance will be decided largely by those airlines who stand out in the summer heat and make some drastic fleet and network changes to benefit themselves if they aim to pluck passengers off trains and into the skies. It’s no easy feat, but so much untapped market potential exists in India that the reward for prudence is one that is too good to miss.

4 comments July 28th, 2008