Air India vs IndiGo? The airlines business now is a two-horse race
Though the Covid-19 freeze on air travel is beginning to thaw, high fuel prices and the slow recovery of passenger traffic continues to spoil the party.
There’s a hefty shift and rumble on the airline landscape after the Tatas bought over the ailing Air India with its humungous assets. As the two big players — Air India and Indigo — will now slug it out, the smaller strugglers, with mounting losses and inability to raise desperately needed funds, are sinking fast.
After several still-born attempts, GoFirst Air was to launch its initial public offer (IPO) on 8 December. It did not happen. On the same day, the Madras High Court allowed a winding up petition against SpiceJet Airlines filed by Credit Suisse. The trigger seems to be the failure of the airline to pay up $24.01 million due to engine maintenance services firm, SRT Technics. SpiceJet has got a breather of 3 weeks to sort this out.
Though the Covid-19 freeze on air travel is beginning to thaw, high fuel prices and the slow recovery of passenger traffic continues to spoil the party. For some of the weaker airlines, survival itself is a question mark.
Ajay Singh, one of the original founders of SpiceJet, has been often seen as a smart businessman with the right political connections and an ability to pull things back from the brink. Though he was a co-founder of SpiceJet in 2005, Ajay Singh exited in 2010 leaving the airline in control of the Sun Group-Kalanathi Maran family. When the airline was near closure in 2015, he bought it back.
SpiceJet for a few years was on the growth path and even made modest profits, but its inability to cope with the Covid-19 crisis, has brought it to near closure once again. The airline posted its 7th consecutive loss recently — Rs 561.7 crore for the quarter ended September 2021, and Rs 729 crore for the previous June 2022 quarter. In 2020-21, the company lost Rs 1,029.89 crore, up from a loss of Rs 936.57 crore in the previous year. Last financial year, revenues fell 54% to Rs 6,119.39 crore.
The airline’s problems are more than just high fuel prices. It does not have the ability to raise cash to handle its debts and daily operations of a modestly large fleet of 109 aircraft. For instance, it is fighting aircraft maker De Havilland for defaults and damages of over $40 million in respect of delivery of Q-400 turboprops. There’s also the battle with aircraft lessors Goshawk and BOC Aviation for defaults on lease payments. The airline has a good presence in regional routes, and has reconfigured its fleet to cater more to cargo operations. Yet it needs to recapitalize and raise Rs 2,500 crore immediately to continue operations. A difficult task, indeed!
GoFirst’s IPO struggle
GoFirst, earlier GoAir, shelved its IPO on 8 December perhaps on weak investor signals after the Paytm fiasco, and Star Health Insurance’s IPO listing at a 6% discount. The runaway has been bumpy. After GoAir notified its red herring prospectus on 13 May, several attempts at listing by the company have failed. It seems the company does not have the market’s confidence.
A simple examination of how the proceeds of the IPO have been apportioned does not generate investor confidence. The IPO is not a growth agenda but a lifeline for survival. Of the Rs 3,600 crore to be raised, about 55% has been set aside to retire old debts. Another Rs 240 crore will go to pay Indian Oil’s aviation fuel bills.GoAir registered a loss of Rs 923 crore in the first April-September half this year, and slow deployment of flights led to the airline’s share shrinking to 6.5% in May from 9.6% in the previous month.
Since inception in 2005, the company has adopted a cautious approach, which some may say is a euphemism for stagnation. Over 16 years, while others like Indigo soared, it has less than 50 operational aircraft and annual revenues are less than Rs 7,000 crore. It is perhaps to try and kickstart faster growth that Jeh Wadia, who ran the airline since inception, was made to step down as Managing Director, in March this year.
In comparison, Indigo which launched in 2006, one year after both SpiceJet and GoAir, today operates 276 aircraft and flies to 71 domestic and 24 international destinations. Covid has taken a toll on the airline too and it reported its 7th straight quarterly loss this October of Rs 1,436 crore. However, it has cut its losses from Rs 3,174 crore in the previous quarter, and internally its warring founders, Rahul Bhatia and Rakesh Gangwal , are moving to a settlement.
The other big player, Air India, with the Tata acquisition will now evolve into a different beast. It has a fleet of 127 aircraft, including 26 wide-bodied aircraft. More important, it has 100 domestic and 70 international destinations; and a massive network of maintenance and hangar facilities.
The Tatas, the second largest private sector behemoth, will infuse the required capital and management skills, add their existing airlines — Air Asia India and Vistara — in which they own a majority stake, and what you will get is a formidable airline that will take on Indigo.Competition is going to turn sharper; and it is difficult to see how the small boys who have been flapping around so far, will survive the onslaught.
Struggle for smaller players
As the two big players — Air India and Indigo — will now slug it out, the smaller strugglers, with mounting losses and inability to raise desperately needed funds, are sinking fast