Mumbai: Kingfisher Airlines Ltd may have been the undoing of Vijay Mallya, but the bitter experience of the former liquor baron has not deterred others who believe in the opportunity in the world’s fastest growing aviation market.
The latest are the promoters of listed transportation company VRL Logistics Ltd—Vijay Sankeshwar and his son Anand Sankeshwar.
In an interview, Anand Sankeshwar said lower crude oil prices, growing passenger traffic, and the emergence of regional airports supporting travel to tier-II and III cities make India attractive for regional airlines.
“Today, there are a lot of growth opportunities. People laughed at IndiGo (run by InterGlobe Aviation Ltd) when it was getting launched 10 years ago. Now, IndiGo is the most profitable airline in India,” he said.
IndiGo, which has been consistently profitable since 2009, is the country’s largest airline by passengers carried.
Sankeshwar said he has plans to start an airline with pan-India operations and launching a regional airline is just a start. He is yet to apply for an air operating permit.
Sankeshwar said the airlines that ran into huge losses or shut down did not plan their routes properly and were overstaffed.
“VRL has a business model of low cost. We could make better Ebitda (earnings before interest tax depreciation and amortization) margins compared to our rivals despite the fact that the company is following an asset-heavy model. This is purely because of our cost-control mechanism,” he said.
Sankeshwar said his regional airline will be based in Bengaluru, run by a separate professional management. The company will start discussions with plane makers, he said, but declined to give a firm timeline on when this will happen.
He said it is too early to decide on whether it will be a budget airline or a full-service carrier.
Investors in VRL Logistics have been spooked by the promoters’ plans.
VRL shares fell 19.99% to close at Rs.315.10 on Tuesday, a day after its promoters announced their plans to launch an airline and their decision to sell a 2% stake in the company to raise money for the venture. The shares fell another 13% on Wednesday, but recovered marginally on Thursday.
In an effort to calm investors, the promoters clarified that they intend to use personal funds for the aviation venture.
Vijay Sankeshwar said the airline business may need Rs.1,400 crore over the next three-four years. Of this, Rs.400 crore will be equity and the rest debt.
Kapil Kaul, CEO (South Asia) at aviation consultancy firm Capa India, agrees that there are significant opportunities in regional aviation, but cautions that promoters tend to underestimate the long-term needs of the aviation business.
“Most of the promoters underestimate the capitalization requirements and strategic challenges. I see most of the regional airline start-ups are under-prepared,” Kaul cautioned.
Craig Jenks, president at New York-based aviation consultancy firm Airline/Aircraft Projects Inc., noted that India still has limited surface connectivity, including for short-medium distances, which leaves room for regional airlines.
“When asked about start-ups anywhere, I say, sure, most will fail. But if you say all will fail, you are flying in the face of history. Business people then start exploring cities that previously were too much hassle for them to get to. This is how new airline markets develop,” Jenks said.
“In the old India, the idea was, transport was low-priority, people should just accept what is there and not fuss. The new India will be putting an ever-increasing value on time, not wanting to waste it. It will be rightly impatient. And it will want high mobility,” he added.
The ministry of civil aviation introduced so-called scheduled operator permits for regional airlines in August 2007, to increase air services to smaller cities. Regional airlines are required to operate in small towns within one of the designated regions—north, south, west, east and the north-east.
But they are not allowed to connect to more than one major city, except those licensed to fly in the southern region.
Yet, not many regional airlines have succeeded.
Religare Voyages Ltd, which ran Air Mantra, stopped operations within eight months of operations in March 2013, owing to poor bookings.
MDLR Airlines Pvt. Ltd, the only regional carrier that started operations in 2007, stopped flying on 1 November 2009.
Others such as Star Aviation Pvt. Ltd, ZAV Airways Pvt. Ltd, Jagson Airlines Ltd and King Air Pvt. Ltd, were licensed to fly as regional carriers, but none of them could launch because of high jet fuel prices and the economic slowdown of 2008.
And at least six private airlines—Damania Airways, Skyline NEPC, Modiluft, East West, Gujarat Airways and Span Air—that started operations after 1992 when the airline business was opened up to private companies, closed shop within five years.
Will this time be different? Sankeshwar thinks so, but acknowledges the risks.
“Spike in oil prices and shortage of pilots can play spoilsport,” Sankeshwar said.
Oil prices used to account for 40-50% of the operating cost of airlines a few years ago.
Would a cargo airline make sense to complete the family’s interest in logistics? No, says Sankeshwar, adding the Indian market is not mature enough for a dedicated cargo airline.
What is the preferred airline model for Sankeshwar?
“Definitely not Kingfisher Airlines,” he says, adding he will create his own business model. “But it’s too early to comment.”