Monday, September 23, 2013

What arrival of Tata-SIA full-service airline means for Jet, Air India

New Delhi: Will the arrival of a full-service airline whose promoters have deep pockets spell doom for India's two surviving full service airlines, Jet Airways and Air India? The Ministry of Civil Aviation appears all set to accord fast track clearances to the newly announced Tata-Singapore Airlines combine, and this sudden game changing arrival of a new player is obviously making incumbents jittery. It has been just three days since the new proposed airline was announced and we are yet to see its plans in terms of fleet size and width of domestic operations, its service levels and whether it will play out in the 'hybrid' market on fares or be a premium priced airline. But already, the knives are out. In a note to clients, Citi analysts Jamshed Dadabhoy, Arvind Sharma and Michael Beer said on Friday itself – a day after the surprise announcement of a new airline by the Tatas and SIA was made – "that directionally, we view the development as a long-term negative for both the industry and for Jet Airways. The industry has been in consolidation mode for the past 12 months after oversupply for the five+ preceding years. For the next 12 months, we don't expect this situation to reverse. But into second half of FY15/FY16, we don't think the industry can absorb two more airlines – especially not another full-service carrier in what's essentially a low-fare (but not low-cost) short haul market." Will the arrival of Tata-SIA also hurt Air India's turnaround? AFP The analysts make a pertinent point about over capacities – which means more airline seats than there are passengers – and how all airlines are now shying away from adding domestic capacities to be able to fill up more of their planes. In the first quarter of this fiscal, the industry added negligible 0.1% new capacity whereas the analysts say in their report that Jet Airways actually scaled down capacity by 12% on domestic routes. During these three months, Jet suffered perhaps the worst traffic growth on domestic routes among all airlines as traffic on its flights declined by 18% or close to a fifth compared to the first quarter of previous fiscal. During this time, domestic industry traffic grew by a minuscule 1%. So what are these analysts really pointing to? Despite a mega deal with Etihad Airways where Jet has not only ensured flow of funds to cut debt but also a massive realignment of operations, it remains in a weak position in the domestic market if a strong player like Tata-SIA brings in fresh capacities. Will the arrival of Tata-SIA also hurt Air India's turnaround? In the last one year, AI has managed to fill more seats on its planes and match low cost competitors on fares on most sectors – in short, its performance has improved. It has remained neck and neck with LCC SpiceJet in market share, opened new international routes as glitches with the Boeing 787 Dreamliners slowly get ironed out and expanded also on the domestic front by hooking up more cities. While AI officials remain tightlipped about Tata-SIA and its impact on their operations, it is obvious that fresh capacities may hurt AI growth in the short term. Another factor worth considering is whether Singapore will now press for enhanced bilateral flying rights, on the line of Etihad Airways of Abu habi, to further increase the feeding of Indian passengers into SIA's global operations. A story in the Hindu Business Line newspaper this morning says one needs to step back a little to understand Singapore Airline's need to find a partner in India. In April, India and Singapore concluded a successful air services bilateral exchange which increased the number of seats that designated airlines could operate between the two countries by 2,160 a week. The exchange with Singapore was a drop in the ocean as compared with what was exchanged with Abu Dhabi – almost 50,000 seats in a phased manner over the next three years from the current level of 13,600. If Abu Dhabi can, so can Singapore. And if Singapore does, it could means a complete realignment of the Indian aviation market from what we see today. Obviously then, incumbent airlines are worried. But an industry veteran pooh-poohed any significant threat from Tata-SIA, saying a well funded player in the Indian aviation market should be welcome news. "SpiceJet and GoAir keep changing hands, they are not serious players, merely investors who are looking for financial returns. It helps everyone when a stable operating environment is achieved, else foolish decisions on capacity and fares are the norm. The arrival of an airline where both partners are well regarded and long term will help the industry". We shall have to wait and watch the rapid developments on the Tata-SIA front to figure out if industry concerns are really misplaced. At present, the market share is fragmented across five carriers: Indigo (~30%), Jet+JetLite (~23%), SpiceJet (~20%), Indian Airlines / Air India (~17%), Go Air (~9%) and if both, Tata-SIA and AirAsia India (where Tata Sons have 30% stake), airlines commence operations, market share fragmentation could continue, impacting pricing and yields

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