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Thursday, June 22, 2017

Airlines call for delay in GST roll-out citing technical issues

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London Heathrow, United Kingdom - May 25, 2013: An Air India Boeing 787 Dreamliner with the registration VT-ANK on approach to London Heathrow Airport (LHR) in the United Kingdom. The Boeing 787 Dreamliner is the world's first major airliner to use composite materials in the construction of its airframe. Air India is the flag carrier airline of India with 99 planes in operation.

New Delhi: Airlines in India have sought a delay in the roll out of the goods and services tax (GST) on technical grounds.

Most airlines are dependent on global computer reservation systems for ticket bookings that are hosted abroad and need to be changed to allow for new entries, a person with knowledge of the matter said, declining to be named.

Full-service airlines such as Air India, Jet Airways and Vistara use a ticketing system for bookings that serves over 800 airlines internationally, and will take slightly longer to be tweaked compared with those used by budget airlines.

Low-cost airlines like IndiGo, SpiceJet and AirAsia use Navitaire. GoAir uses the Radixx passenger booking system.

The aviation ministry has also written to revenue secretary Hasmukh Adhia.

“Considering the compliance requirements under GST, significant amendments would be required in the GDS (global distribution system) for generating tickets as per the GST invoice rules. It is therefore requested that time up to 1 September may be considered for implementation,” the letter said, according to the person cited earlier.

The current compliance date is 1 July. The ministry has not heard back from Adhia yet, he added.

The airlines have also asked for three more clarifications on some of the GST rules, said another person who did not wish to be named. These include taxation on international flights and input credit for economy class tickets.

“The key issue is GDS, which they are asking to be resolved,” this person said.

Airlines did not offer any comment on the subject.

GST subsumes excise and service tax and other local levies and unifies India into a common market. Economy class air travel is expected to become marginally cheaper, with the GST rate fixed at 5%, against the existing 6%. However, for business class, the tax rate will rise from 9% to 12%.

Air India’s long and difficult journey towards privatization

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London Heathrow, United Kingdom - May 25, 2013: An Air India Boeing 787 Dreamliner with the registration VT-ANK on approach to London Heathrow Airport (LHR) in the United Kingdom. The Boeing 787 Dreamliner is the world's first major airliner to use composite materials in the construction of its airframe. Air India is the flag carrier airline of India with 99 planes in operation.

New Delhi: When Colin Marsh Marshall arrived at British Airways Plc (BA) in 1983, he saw a bloated airline with a demoralized crew, flown for its bosses and sinking in its losses.

Those were the heydays of privatization in Margaret Thatcher’s Britain. The sale of British Petroleum was under way, and British Telecom would be privatized in 1984. John King, chairman of BA, had hired Marshall as chief executive, and the brief was clear.

King fired around 22,000 BA workers, setting the path for Marshall. Over the next four years, Marshall overhauled the airline, changing its focus from staff to customers, raising productivity, cutting costs and checking losses. In 1987, the year it was privatized, BA made $284 million in profit. It remains one of the crown jewels of the success of privatization.

Thirty years hence and halfway across the globe flies Air India, another state-run airline deep in debt, backed by bailouts and beholden to bureaucrats, awaiting its Marshall Plan. After shovelling thousands of crores of rupees into the Air India black hole, the government seems to have finally made up its mind. It doesn’t want to run the airline any more.

For India’s flag carrier, this is the BA moment.

Second-time lucky?

This won’t be the first time, though. An attempt to privatize Air India was made in 2001. That was when Atal Behari Vajpayee was prime minister. But a wave of privatizations in the early 2000s failed to touch the airline. Since then, Air India has been through a messy merger with Indian Airlines, racked up debt and seen aggressive challengers emerge. Even though there is political backing for the sale of Air India now, there is scepticism over whether it would make economic sense for a buyer.

“I can see a political deal being done, but the economic case has limited merit without significant restructuring and leeway for an investor to radically transform the company,” said Vikram Krishnan, associate partner at Oliver Wyman, a San Francisco-based consulting firm, “It will be interesting to see if they can find an investor.”

Since 2001 when the privatization plan was first mooted, Air India has been through a messy merger with Indian Airlines, racked up debt and seen aggressive challengers emerge

In a interview aired on 27 May by state-run broadcaster Doordarshan, finance minister Arun Jaitley said Air India, with a mere 14% market share, had debt of Rs50,000 crore. “Now, there are private airlines that are flying—IndiGo, GoAir, SpiceJet, Jet Airways—there you don’t invest money. But to run Air India, you have invested Rs50,000 crore. That money is government’s money, that’s your money. It could have been used for school education. And if 86% of flying can be handled by private sector, so it can also handle 100%,” said Jaitley— the clearest signal that the government wants Air India off its back.

Air India may have some suitors, said an international investor who invests in airlines. asking not to be named.

“The reason investors might look at it is because it is there,” said this investor, noting that the airline has revenue-earning operations, aircraft, passengers and an established network.

“I can see a political deal being done, but the economic case has limited merit without significant restructuring and leeway for an investor to radically transform the company”- Vikram Krishnan, associate partner at Oliver Wyman, a San Francisco-based consulting firm

“Your theory would be a) I am a brave investor; b) I would acquire an existing revenue stream and I can see a path to profitability through the following defined 10 things to do (whatever those are); c) I like India and this is a major player in the market, hard to replicate its size and network unless considerable capital is deployed over time,” said this person.

To be sure, Air India’s massive infrastructure of engineering and ground-handling subsidiaries would make any airline envious.

Rich in assets

The airline has 140 planes including 43 owned Airbus A320s and 15 owned Boeing 777s that can fly non-stop to the US and Europe. It also has nearly two dozen brand new Boeing 787 Dreamliner planes on what one Air India official, who did not want to be named, described as “great sale and lease-back terms”.

Air India has nearly 2,000 pilots, and many more trained engineers and cabin crew. Its $150 million aircraft maintenance and repair unit in Nagpur is the only such in the country. It’s the only airline in India that performs major aircraft checks including for rivals like Jet Airways Ltd. It has 33 hangars, compared with rival Jet Airways’ two.

Air India has its own training centre in Hyderabad and a multimillion-dollar aircraft simulator for Boeing 777 and 787 Dreamliners.

The airline also has vast land holdings, including nearly 32 acres in central Mumbai, besides the iconic headquarters on Marine Drive valued at more than Rs1,600 crore. It also has a 30-acre housing colony in the posh Vasant Vihar locality in south Delhi surrounded by embassies and villas where a single flat could cost about Rs8 crore. It also has properties in London, Hong Kong, Nairobi, Japan and Mauritius. The Centaur hotels in Delhi and Srinagar belong to it. And that’s just a partial listing.

Air India also holds 8% in Air Mauritius, and has shares of telecom firm Orange SA (formerly France Télécom), IT company SITA, Cochin International Airport Ltd and air traffic control firm Aeronautical Radio of Thailand Ltd, according to the airline’s 2014-15 annual report.

Last year, a London Heathrow slot was sold for about $75 million. Air India has four slots at Heathrow alone

It is a part of Star Alliance, the biggest airline grouping, which counts Singapore Airlines, Lufthansa, United Airlines and Thai Airways among its members. Passengers of most of these airlines can fly on a single Air India ticket and earn traveller miles. The entry into Star Alliance itself was an exhaustive exercise that cost €10 million in entry fee and $100 million in investments in IT and other related infrastructure.

The airline flies to 72 Indian and 41 international destinations with prime slots. Last year, a London Heathrow slot was sold for about $75 million. Air India has four slots at Heathrow alone. A slot allows an airline to land and take off from an airport at a particular time.

Air India also has one of the largest collections of modern Indian art. After princely states faded out following independence, Air India became a patron of art. Works by artists such as Anjolie Ela Menon, M.F. Husain and V.S. Gaitonde are a part of its extensive collection. It also has expensive antique furniture, some made of ivory.

Plug-and-play

“It’s a plug-and-play offer. To create this kind of infrastructure, you will take years,” said the Air India official cited above. “The Air India brand is still more respected internationally than any other brand from India.”

It was Tata Sons Ltd, the holding company of the Tata group, which founded Air India as Tata Airlines in 1932 and operated it till it was nationalized in 1953. Tata Sons has since re-entered aviation with Vistara and AirAsia India. It plans to take Vistara, its joint venture with Singapore Airlines Ltd, international next year and is looking for long-haul planes similar to those in Air India’s fleet.

If Air India goes on the block, could Tata Sons be interested?

A Tata Sons spokesman said it doesn’t comment on such matters, but an official aware of the Tata group’s thinking said one cannot rule out its participation.

It was Tata Sons Ltd, the holding company of the Tata group, which founded Air India as Tata Airlines in 1932 and operated it till it was nationalized in 1953

“The thing with RNT is that he really likes aviation,” said this person, referring to chairman emeritus Ratan N. Tata. “So, if the government takes a haircut (on its debt) one could see some interest.”

Valuing intangibles will be a challenge for the government, said a former Air India chairman who did not want to be named.

When privatizing, the key questions for the government will be the following: How will it protect Air India’s employees from job losses? Will the bilateral rights of the airline be valued in a potential deal? Will the brand equity of Air India be valued?

And finally, if Air India is privatized, who will evacuate stranded Indians from war-torn countries, transport people in crisis zones and operate the Boeing 747 jumbos that fly the Prime Minister?

The descent

Air India clocked a small profit of Rs16.29 crore in 2005-06, while Indian Airlines posted a Rs49.50 crore profit. Both had a paltry equity base of about Rs105 crore and Rs153 crore, respectively. They had combined debt of about Rs5,000 crore and there was no financial support from the government.

Then, in 2007, the Congress-led United Progressive Alliance (UPA) government decided to merge the two airlines and ordered planes worth more than Rs50,000 crore. The airline took on heavy debt to purchase these planes while employees agitated over wage disparities. Air India never recovered from the chaos. Federal investigating agency Central Bureau of Investigation on 31 May said it had started inquiring into the plane order and the merger.

Till 2010, the airline kept paying for these planes, many of which it did not even need as the national auditor pointed out in 2011, from its internal resources and loans.

Finance minister Arun Jaitley has sought NITI Aayog’s help to chalk out an Air India revival plan. Photo: Pradeep Gaur/Mint
Finance minister Arun Jaitley has sought NITI Aayog’s help to chalk out an Air India revival plan. Photo: Pradeep Gaur/Mint

New wage agreements were signed to improve employee salaries, but all this meant more distractions and more loans to fly in a new environment where private airlines including Jet Airways, Kingfisher Airlines and IndiGo were expanding rapidly. The ministry also gave hundreds of flying rights to foreign airlines that pushed Air India further down the hole—this was again flagged by the auditor.

In 2009, the aviation ministry let lapse a rule which allowed Air India to get annual royalties from foreign airlines, as with its limited fleet it could not match the flights they were bringing into India. This cost the airline Rs400 crore annually, according to the Air India official quoted above.

With the financial burden of 111 aircraft and working capital loans, the airline’s debt ballooned from Rs5,000 crore to Rs50,000 crore in 10 years. In 2011, when the airline reached a point that it could not pay salaries on time, the UPA government agreed to provide Air India about Rs30,000 crore in equity funding, spread over a decade.

A government official aware of the matter explained the sequence of events leading to Jaitley’s statement. He did not want to be identified.

Exploring options

Every month, Air India’s expenses are Rs300-400 crore more than its revenue. To bridge this gap, it borrows routinely. For better terms for loans and equity infusion, it has to go to the finance ministry.

In the past few months, there have been discussions to convert Air India’s debt into equity. But the banks led by State Bank of India, already loaded with bad loans including those given to Kingfisher Airlines, are not convinced.

It was during these discussions with finance minister Jaitley that it was decided to look beyond the current options and the opinion of NITI Aayog, a government think tank, was sought.

In the past few months, there have been discussions to convert Air India’s debt into equity. But the banks led by SBI, already loaded with bad loans including those given to Kingfisher Airlines, are not convinced

“NITI Aayog has given its suggestion to the aviation ministry; now the aviation ministry will have to explore all the possibilities on how to privatize Air India,” said Jaitley on 1 June.

In the aviation ministry, there are three different views. Aviation minister Ashok Gajapathi Raju says it cannot be business as usual and some way has to be found to allow the airline to survive.

“Air India is a good airline. Its finances are awful,” Raju told Mint in an interview on 1 June, “Finances are more because of legacy issues. Now from day one I have been saying that Air India’s problem has been its finances and it’s a debt trap situation despite the fact that the previous government has given a turnaround plan and a financial reconstruction plan. So taxpayers’ money is also going to Air India and somehow things are not working out. So business as usual is definitely not an option.”

“NITI Aayog has given its suggestion to the aviation ministry; now the aviation ministry will have to explore all the possibilities on how to privatize Air India”- FM Arun Jailtey on 1 June 2017

Another ministry official with a finance background suggested that instead of handing over the airline to one strategic investor, it could be given to several investors, and run like a board-managed company.

Another senior official said a partner could come in as a strategic investor, and that, over time, the government could gradually sell the rest of its stake.

At an event to mark the three years of Prime Minister Narendra Modi’s National Democratic Alliance (NDA) government last week, civil aviation secretary Rajiv Nayan Choubey said employees’ interests will be protected in any move the government makes on Air India.

“That would certainly be taken care of,” he said, adding things would become clearer in three months.

The Air India official cited earlier said a proper valuation exercise should be conducted by a reputed international valuer who has helped in a similar airline privatization and understands this space to make sure assets don’t go cheap.

Pain before gain

Former Jet Airways CEO Steve Forte said the government should allow professionals to take over and run the airline.

“It will be very painful at first, with manpower, fleet and route reductions, but then, as the airline will slowly emerge from the darkness, it will have a chance to grow again in a profitable way,” he said.

Jitender Bhargava, former Air India executive director, said, “The UPA government took the airline into this debt trap; now the NDA government should make sure it is not remembered for selling the flag carrier cheap. A special committee of retired and serving Air Indians should negotiate best terms and keep the process transparent.”

Air India’s privatization did come up several times in the UPA tenure too at the highest level, said another top bureaucrat who was directly involved in the process, but did not want to be named.

“The UPA took the airline into this debt trap; now NDA should make sure it is not remembered for selling the flag carrier cheap. A special committee of retired and serving Air Indians should negotiate best terms and keep the process transparent.”- Jitender Bhargava, former executive director of Air India

However, political will was lacking. The argument given was this: Air India was being given on an average some Rs2,000 crore equity by the government every year since 2011. Nearly 40% of its outgo of some Rs25,000 crore is spent on oil bills and airports, which anyway comes back to government-owned oil and airport companies, besides the taxes paid. This includes Rs6,500 crore in fuel, Rs1,500 crore to airports and Rs500 crore in service tax.

“So, it was seen as just transferring money from one arm of the government to the other,” said this bureaucrat, recalling a conversation at the Prime Minister’s Office. “Air India also has immense prestige attached to it. The last thing the (UPA) government, already marred by scam allegations, wanted to signal to the world was the end of its own airline. It’s not just another company.”

However, Air India can no longer bank on perpetual government support as private airlines steadily eat into its share. Governments the world over have stepped back from owning airlines and hotel chains. This is Air India’s BA moment. Or is it?

Airlines slash fares ahead of lean season starting June-end

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New Delhi: Airlines have slashed fares across most routes to fill planes ahead of the lean season that starts at the end of this month.

“We are delighted to announce another 3-day Monsoon Special Offer. We are anticipating an increase in demand beyond summer vacations and are pleased to introduce special fares,” Sanjay Kumar, chief commercial officer, IndiGo, said in a statement on Monday.

IndiGo said the sale would start from 12 June and continue till 14 June offering passengers all-inclusive prices starting at Rs899 on select routes, including Mumbai-Goa, Jammu-Amritsar, Delhi-Udaipur, Ahmedabad-Mumbai, Chennai-Port Blair, Hyderabad-Mumbai, Kolkata-Agartala, Delhi-Coimbatore and Goa-Chennai.

Fares on long routes such as Delhi-Mumbai, which are going for up to Rs7,000 in the current week, are available for Rs2,100 in July.

Airfares are higher if they are booked for travel in the same week or the week after, but much lower when booked in advance. The July to August quarter is usually a lean season for airlines after a packed April-June quarter which sees high traffic led by summer vacations in schools.

GoAir too is offering tickets for similar prices, according to data available online on travel portals. Last week, Jet Airways announced a sale offering tickets at Rs1,111 for travel between 27 June and 20 September.

“This special monsoon offer will allow Jet Airways guests to discover and experience select destinations across India. Guests can additionally enjoy the airline’s award-winning hospitality and service while availing significant savings on their travel with us,” Jayaraj Shanmugam, chief commercial officer, Jet Airways, said in a statement last week.

SpiceJet: Flying a bit lower in March quarter

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Higher year-on-year crude oil prices weighed on the performance of listed airlines in the March quarter. SpiceJet Ltd, which announced its fourth quarter results last Saturday, is no exception.

The airline’s fuel costs expressed as a percentage of revenue increased a massive 1,170 basis points in the March quarter to 33.9%, compared to the same period last year. In fact, counterparts Jet Airways (India) Ltd and InterGlobe Aviation Ltd (that runs IndiGo) too saw at least a thousand basis points increase in the measure. A basis point is one-hundredth of a percentage point.

For SpiceJet, some other cost components were higher too. Airport charges, other operating costs and employee expenses rose at a faster pace. The upshot: the airline’s Ebitdar declined 7% year-on-year to Rs315 crore. That’s at a time when revenue increased 10% compared to the previous year’s quarter.

Ebitdar is an important measure of profitability for airlines. It is short for earnings before interest, tax, depreciation, amortization and lease rentals.

Average fares for the March quarter declined 1% year-on-year. This compares favourably with the December quarter when fares had declined 7%. Analysts maintain SpiceJet’s revenue mix is superior to competitors.

Despite the correction in yields, SpiceJet’s RASK continues to be much superior to its peer and market leader IndiGo (by Re0.22/ASKM in the March quarter), though this gap has decreased from ~Re0.35 in the first nine months of fiscal year 2017, Santosh Hiredesai of SBICAP Securities Ltd said in a report dated 5 June. ASKM is short for available seat kilometres and RASK is short for revenue per ASKM.

Investors won’t complain, what with SpiceJet’s shares sharply outperforming the S&P BSE 500 index so far this calendar year. In 2017, the stock has gone up a stellar 97% till now.

Analysts say one reason that helped the SpiceJet stock perform better is that it was trading at a meaningful discount compared to bigger rival IndiGo and valuations had to bridge the gap. Also, SpiceJet has done well on the profitability front and investors are rewarding that.

The current year is expected to be better on the yields front, as further decline in pricing is not expected. “While a weak performance was in line with expectations for Q4, that IndiGo could actually report flat fares for Feb/March and Jet could report 2.2% Y-Y increase in domestic fares in Q4 point to an available pricing power in the Indian aviation space, especially after three successive years of fare decline,” pointed out an ICICI Securities Ltd report.

Investors should keep an eye on the capacity addition in the industry. Still, a relatively softer outlook on crude oil prices should support aviation stocks in this seasonally stronger quarter.

Air India’s failure points to inadequacies of bureaucrats as PSU leaders

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Sixteen years after he first mooted the idea of disinvesting the government’s stake in Air India, minister for finance and defence Arun Jaitley has finally cleared the suspense on whether the present government would bring to an end the long-running tragedy.

Jaitley, who was disinvestment minister in 1999, said last week that the government should get out of the perennially loss-making airline and look to privatize it.

But while his prescription is right, we are still not ready to nail those who are responsible for the giant hole the public sector airline finds itself in. Somewhere, the several bureaucrats co-opted over the years to head Air India need to be held accountable.

Or maybe it is successive governments that thought it fit to appoint Indian Administrative Service (IAS) officers with little relevant experience or expertise, to head such a complex business. It isn’t just Air India but a whole host of public sector undertakings in businesses as diverse and complex as steel, oil and shipping, that have been steered by leaders who are hardly equipped to handle the challenges these industries present.

Sure, Air India should be shut down or sold off to the highest bidder the government can get because it has been a chronic underperformer which has swallowed bucketloads of scarce capital and produced nothing that can be deemed public good.

But while most critics have panned the airline for its quality of service, its operational inefficiencies as well as its woeful productivity levels, what’s not been emphasized enough is how little understanding the men charged with leading it over the years, have had of the business itself. Before Ashwani Lohani, an officer of the Indian Railways Service, took over as chairman and managing director in September 2015, the airline was led by men from the IAS.

The airline business today, at its core, is about acquiring the planes at the right price in the right configuration. The best airlines in India—IndiGo and SpiceJet—figured out that the operational drivers of profitability are on-time performance, which is as important for the passengers as it is for the airlines for whom the priority is turning around every aircraft rapidly even if it means leaving a few passengers behind and running with a few empty seats. Equally, given that the business works on leverage, it is about smart use of capital. To that end, it is actually a derivatives business.

Sadly, given the access to free cash from the government’s coffers, none of the people who have led the airline over the years had either the inclination or the nous to figure this out. It is little surprise then that men like Rakesh Gangwal, a sector veteran who has in the past been part of turnarounds at Air France and US Air, along with Rahul Bhatia at IndiGo and Ajay Singh at SpiceJet have virtually run rings around Air India, leading to a steep fall in its market share. This, despite the captive customer base of government officials forced to use its services.

Nor did successive leaders of the stricken airline display the ability to seize the opportunities available in the market. In the last five years, IndiGo’s success and the failure of Kingfisher Airlines indicated what the market was looking for—a cheap, reliable, no-frills flying option. Across the world too, the most profitable airlines in 2016 based on operating margins included Allegiant Air, the US ultra low-cost carrier, and Ryanair, another discount carrier.

It was a slot Air India was perfectly geared to fill. With its fleet of 140 planes and 72 domestic destinations, it had the economies of scale. But Air India Express, its low-cost international subsidiary launched in 2005, has been a chronic underperformer as well.

Furthermore, most private domestic airlines can’t wait to go overseas since that’s where the real moolah is. Air India flies to 41 international destinations including all those which are on the travel maps of most Indians. Yet, it hasn’t been able to capitalize on this advantage either.

Falling oil prices have been a bonanza for airlines in India and across the globe since fuel accounts for nearly 18% of the industry’s cost structure in 2017. Its bloated structure though, has meant that Air India was among those which took least advantage of this drop.

The International Air Transport Association (IATA) expects the global airline industry to post a third consecutive year in which airlines will make a return on invested capital (7.9%) which is above the weighted average cost of capital (6.9%). Finding a buyer for the national carrier of one of the world’s fastest growing aviation markets should not be too difficult a task even if the government will have to soften the deal with adequate sops.

What’s more important is to use the Air India example to accept that installing men and women with little understanding or experience of a business to head a large public sector undertaking in a competitive market scenario is a recipe for disaster.

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