Page last updated at 23:34 GMT, Tuesday, 14 October 2008 00:34 UK

Indian airline dreams hit turbulence

By Neil Heathcote
Editor, India Business Report, BBC World, Hyderabad

Begumpet airport, Hyderabad
Hyberabad's ambitious takeoff comes at a time when airlines struggle

As India's first civil airshow gets underway at the Begumpet airport in Hyderabad, the government hopes that in time it will join the ranks of the airshows in Paris and Farnborough, UK.

But its debut comes at a bleak time for the industry in India, where few airlines are actually making any money.

Consequently, India's airlines are having to change their strategy, as exemplified by this week's alliance between the country's biggest carriers, Jet and Kingfisher.

"This is a quantum leap forward in the evolution of Indian aviation which will benefit customers through a comprehensive integration," says Vijay Mallya, chairman of Kingfisher Airlines.

Sour dream

The past few years were heady times for India's airlines.

GoAir's chief executive, Edgardo Badiali
If someone [says he] isn't worried about the current downturn, he's either a liar or not aware what the situation is
GoAir's chief executive, Edgardo Badiali

Thousands of passengers started flying for the first time, drawn by new airlines offering bargain flights around the country.

Thousands of young men and women also flocked to find work in the industry, attracted by the prospect of money, travel and glamour.

Now the dream is beginning to sour.

"India has witnessed tremendous growth in the past which has slowed down considerably," says Jet chairman Naresh Goyal.

And so the airlines have flown into heavy weather.

Soaring fuel prices - which remain high even though oil has come back from this summer's record levels - have pushed up ticket prices.

For the airlines, much of the damage has been done already. Many passengers have turned their back on the airlines and returned to the railways.

At the start of 2007, passenger numbers were rising by 40% a year. That surge in growth has now gone into reverse.

"The airlines grossly miscalculated the size of the domestic Indian market," says aviation writer Hormuz Mama.

"There were very high increases initially, but that was because the fares charged were unremuneratively low."

Costly operations

For the airlines, there is simply too much competition. Too many planes are offering too many seats.

Airlines analyst Hormuz Mama
These airlines should be allowed to sink
Airlines analyst Hormuz Mama

Many of the carriers are now cutting back on unprofitable routes, or scaling back their workforce.

In their home market, none of the major airlines are making money.

So what went wrong with India's budget airline dream?

Many of the cheap flights were never actually profitable. The airlines simply cut prices to grab market share, in a bid to stay ahead of the pack.

In Europe, entrepreneurs cut costs by flying to cheap regional airports outside of the big cities. Indian airlines, by contrast, have to jockey for space in the country's few established airports.

With airport fees and fuel costs so high, its been hard for the budget airlines to beat more traditional carriers. Cutting out in-flight meals is simply not enough to do the trick.

International routes

As a result, the airlines are having to rethink their strategy.

Chief executive of India's Kingfisher, Vijay Mallya, and chairman of Jet, Naresh Goyal
Kingfisher and Jet alliance: a marriage made in heaven?

"If someone [says he] isn't worried about the current downturn, he's either a liar or not aware what the situation is," says GoAir's chief executive, Edgardo Badiali.

"This is no time to sit back and wait for things to get better."

GoAir plans to offer its customers more choice. In addition to itsbudget offering, it will also offer premium seating with more legroom, at a slightly higher price.

"We'll still make sure we have the most competitive fares," insists Mr Badiali.

"But we'll add additional services which the customer can decide upon, and buy or not buy. Each one will be priced according to what kind of service or product it is."

Other airlines, like Jet and Kingfisher, are hoping to make money opening up international routes.

"In this environment the alliance is a new industrial model for aviation in India," says Mr Goyal.

Liquidity crunch

But the main problem is that there are simply too many planes for the number of people who can afford to fly, and there are many more on order.

Planes in Mumbai
Indian airports are crowded and dear

No one has actually cancelled those orders, simply because the penalty fees would be so high.

With losses of $2bn forecast for this year, the industry is running short of cash.

The Federation of Indian Airlines is reported to be seeking a $1bn loan from the government to tide carriers over the current credit squeeze.

One way or the other, the industry will have to lose capacity - even though its prospects in the long-term look strong.

Otherwise, more airlines will merge - or go down.

"The liquidity crunch is so severe for some airlines, there's no way they can survive for very long," says airlines analyst Hormuz Mama.

"The best thing that could happen is that these airlines should be allowed to sink. I know it sounds harsh, but there seems to be no other way out."

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