Security checks for aviation industry

Fare discounting has historically been a less productive strategy for the airline industry.

India is the ninth-largest aviation market in the world, according to research company RNCOS’s report titled ‘Indian Aerospace Industry Analysis’. The civil aviation market is expected to register more than 16 per cent compound annual growth during 2010-13.

Today, 87 foreign airlines and five Indian carriers provide connectivity to 40 countries. Domestic airlines served 43.8 million passengers during January-September 2012, according to data from the Directorate General of Civil Aviation.
The Vision 2020 statement announced by the Ministry of Civil Aviation envisages infrastructure to handle 280 million passengers by 2020.

While the outlook is upbeat, there are obvious challenges. The industry is facing multiple headwinds — high oil prices, high debt burden and liquidity constraints — and most airlines need significant equity infusion to improve their balance sheet. Therefore, it is critical for an airline to identify its business risks and mitigate them through effective strategies.

The inherent complexities in the aviation business, together with the highly regulated environment, expose an airline to several risks in the areas of branding, strategy, finance and operations. An airline Board is entrusted not only with identifying risks and mitigating them but also capitalising on opportunities that arise.

Strategy Risk
The Government’s ‘open sky’ policy has attracted many foreign players, and the industry is growing in the number of players and aircraft. An airline faces direct competition from other airlines on its routes, as well as from indirect flights, charter services, and other modes of transport.
Also, mergers and acquisitions amongst competitors can adversely affect the market position and revenue of an operator.

Some airlines may want to concentrate more on international operations. While it is important for an operator to constantly increase its network, it is crucial to ensure that it continuously calibrates its network and optimises its spread.
Fare discounting has historically been a less productive strategy. An airline should implement adequate measures to safeguard against the temptation of discounting to acquire new customers.
Failure to adopt an integrated strategy can directly impact revenues. The Board has to ensure that strong risk management procedures are integral to strategy formulation, as well as their execution.

Finance Risk
Given the nature of the industry, an airline operator may carry substantial debt. Ability to finance ongoing operations, committed aircraft orders, and future fleet growth plans may be affected by various factors, including market conditions. Future capital requirements/ funding may be asset-related, but there can be no assurance that the aircraft will continue to provide attractive security for lenders.

Fuel constitutes about 40 per cent of an airline’s expenditure. Volatility in fuel price can impact operating results. The price risk may partially be hedged through the purchase of oil and petroleum derivatives in forward markets, but an airline is still exposed to currency risk on revenue, purchases and borrowings in foreign currencies.

A majority of the airlines in India have seen a dip in revenue despite an increase in traffic. A sound financial management system, coupled with greater operating efficiencies has helped some airlines maintain sustainable margins.

Operations Risk
Metro sectors have seen sizeable traffic in India, and these have been growing steadily.
However, the high cost of landing bays and other infrastructure, delays in ground clearances, and higher turnaround times have made these operations less profitable.

There has been a constant struggle between the unionised workforce and airlines, and a breakdown in the bargaining process has disrupted operations and adversely affected business performance. The airlines’ effort to reduce employment costs, through increased productivity and competitive wage awards, may not provide the impetus expected.

The airline industry, in general, is also becoming increasingly regulated, in areas ranging from infrastructure (slot capacity and route flying rights) to new environmental and security requirements. An airline’s ability to comply with the regulations is key to maintaining operational and financial performance.

Brand Risk
Erosion of an airline’s brand could adversely impact its market position, and affect future revenue and profitability.
Some key factors that impact an airline brand are customer service, safety standards, crisis management, communication strategy, corporate governance, regulatory compliance and personnel management (employees and contractors).

Road Ahead
The Indian aviation industry is exploring opportunities to improve connectivity and enhance the number of Indian carriers. The fast-growing tourism industry has boosted the market, as well as the airport industry’s outlook. It is, therefore, critical for an organisation to be risk intelligent to sustain operations in this highly competitive and regulated market.
http://www.thehindubusinessline.com/industry-and-economy/taxation-and-accounts/security-checks-for-aviation-industry/article4400422.ece

Flying into air pockets and multiple headwinds

Industry players will have to find their equilibrium while focusing on yield rather than load factor.They have to come up with a more tactical response to the ‘low-cost vs. full-fare carrier’ debate.


Government-owned airlines dominated Indian aviation industry until the mid-1990s, when the country adopted an open-sky policy allowing air-taxi operators to fly on charter and non-charter basis for cargo and passenger traffic. This paved the way for ending the monopoly of Indian Airlines and Air India. By 1995, several private airlines entered the fray and accounted for more than 10 per cent of domestic air traffic.

Indian aviation industry has undergone a transformation over the past 15 years. Between 2000 and 2010, the sector grew nearly 160 per cent in traffic terms, and India now ranks among the top-10 civil aviation markets. Government-owned Air India Ltd is still the big daddy and under its wings are the erstwhile operations of Air India, Air India Express, Indian Airlines and its subsidiary Alliance Air.
Over 50 per cent of the market is now shared between Jet Airways — the carrier which made a complete difference to the Indian traveller, and Indigo — the recent challenger to Jet’s numero uno position. During calendar year 2012, however, traffic dipped with domestic airlines carrying 588 lakh passengers, compared with 607 lakh in 2011.

Regulatory framework
The Ministry of Civil Aviation, responsible for formulating national policies and the development and regulation of the civil aviation sector, exercises administrative control over organisations such as the Directorate General of Civil Aviation (DGCA), Bureau of Civil Aviation Security (BCAS) and Airports Authority of India (AAI) apart from the public sector units operating in this domain.

Besides regulations for aircraft and air safety, DGCA impacts the civil aviation business through administration of route dispersal guidelines, preference in traffic rights and slot allocations.

Business and Accounting
Writing on accounting for Indian aviation industry during these tough times, one is reminded of a remark by Virgin Airlines founder Richard Branson. In his blog ‘Learning from mistakes’, he commented that if you want to be a millionaire, start with a billion dollars and launch a new airline.

While profitability of aviation industry has been a challenge worldwide, in India the main constraints include high price of aviation turbine fuel (ATF), airport infrastructure, lack of international-standard maintenance and repair organisation (MRO), and trained crew.

The ‘competitive rivalry’ that the management consultant Michael Porter famously spoke about is much evident in civil aviation industry.
Fare reduction in a bid to maintain the seat factor (percentage of seats sold on a sector) often disrupts margins. Just this month, Spice Jet offered one million tickets at Rs 2,013 anywhere in India and the DGCA had to intervene to ensure that competitors did not succumb to the pressure.
The risk in such a proposition is that regular flyers would take advantage of the scheme rather than poaching flyers from competition. This, inevitably, perpetrates the unhealthy syndrome of high seat-factor with low yield. This has been the bane of aviation players over the last few years, raising concerns over the viability of certain players.

The fundamental assumption of ‘going concern’ is that the balance sheet is drawn on the basis that there is no requirement to dispose of the assets or liquidate liabilities except as envisaged in the entity’s normal business plan.
This call is taken over a period of twelve months from the balance sheet date. This, in the current situation, dovetails into impairment considerations.
The comforting factor is that over 90 per cent of the non-current assets of an airline typically has a dollar-denominated market value, and with a depreciating rupee the rupee-denominated ‘value in exchange’ provides a high threshold to cover the carrying value. However, to decide if the news is good enough, one has to understand the dollar-rupee exchange implications on the income statement.

‘Code sharing’ is one practice that evolved from the collaborative approach that airlines adopted towards passenger traffic. Parties to the arrangement can book passengers on a counterparty’s sectors, so that they can offer travellers a through-and-through ticket. Although still relevant, it was crucial when Web booking through travel portals was not in vogue.

Collections from tickets booked remain in ‘forward sales’ until pulled in as revenue to the income statement when actually flown, and provide a source of working capital.
Another peculiarity of airline revenue recognition is ‘stale tickets’ revenue, which is based on past trend and the ticketing terms. Revenue may be impacted positively if it is dollar denominated — that is, for an airline that flies international sectors. However, considering the dollar denominated costs of operating ‘wide body aircraft’ on these sectors, this can often be a zero sum game for an Indian airline.

Leasing of aircraft has been an inextricable part of the business model, and there are players whose fleet comprises almost entirely of aircraft on operating leases rather than finance leases. Finance leases imply that the fleet and finance liability is recognised on the balance sheet as non-current assets and borrowings, respectively.
Rupee depreciation has meant that currency loss has been added to the carrying value of the fleet of Indian players pursuant to the relaxation in Indian GAAP arising from para 46/46A of Accounting Standard 11, as distinguished from International Financial Reporting Standards. The padded up value has to be depreciated over the balance life.

Operating leases (dry leases) emerged as a significant alternative, perhaps by compulsion rather than choice. The compulsion is triggered by the balance sheet leverage often cornering the players into “sale and leaseback” deals, where aircraft are sometimes sold at a profit and leased back.
Informed analysts are wary of such profit, as it might not in substance meet the test stipulated in the lease accounting standard —which requires such ‘profit’ to be spread over the operating rentals and recognised over the lease period as reduced rentals. Given the significance of rentals to the income statement in this industry, it is normal to talk of EBITDAR rather than EBITDA.

‘Frequent flyer’ points are a common feature intended to reward loyalty. The accumulated points can be redeemed for tickets.
While the accounting under IFRS will depend on the exact terms of redemption allowed, in India the practice has been to allow redemption without cannibalising revenue — that is, when the flight is not fully booked. The extra cost of carrying the passenger free of charge is accrued as a provision under AS-29, after factoring the lapsed ‘miles’ based on past trend.

Government response
Sometime around May 2011, the Ministry of Corporate Affairs referred a possible ‘cartelisation’ plea against private carriers to the Competition Commission of India. This came about after fares were hiked in the wake of the Air India strike.
The Commission rightly concluded that the hike in fares was a market-driven response of the ‘dynamic pricing’ followed in the industry, rather than anti-competitive practices. The picture of bleeding airlines against the backdrop of increasing traffic clearly confirms this is a case of an opportunity turned into a crisis — albeit, to the benefit of consumers.
This crisis, in turn, later compelled DGCA to focus on the financial surveillance of industry players from the perspective of air safety compliance. This process dealt a blow to Kingfisher Airlines, with the ‘King of good times’ biting dust.
It is interesting to note that regulatory concern on pricing made the DGCA set up a fare monitoring cell a couple of years ago. A complex intervention of business and regulatory issues indeed! Industry players will have to find their equilibrium while focusing on yield rather than load factor and with a more tactical response to the ‘low cost carrier (LCC) versus full fare carriers’ debate.

A study was commissioned at the behest of regulators to address key issues such as
ensuring competitive neutrality between private carriers and the national carrier; incentive-based route programme; and market-based tools for slot distribution.
Responses to these are being evolved, and could significantly impact the competitive landscape.

Recently, foreign direct investment, or FDI, rules were modified to allow foreign airlines up to 49 per cent stake in Indian carriers. The conditions are
the domestic carrier is registered in, and has its principal place of business within India;

the chairman and at least two-thirds of the directors are citizens of India;
the substantial ownership and effective control are vested in Indian nationals; and
all foreign nationals associated with the Indian company as a result of the investment will have to undergo security clearance.
It is expected that the FDI relaxation will enable inherently viable players to recapitalise and up their game with the superior management strengths that strategic alliances can bring to the table.
http://www.thehindubusinessline.com/industry-and-economy/taxation-and-accounts/flying-into-air-pockets-and-multiple-headwinds/article4400423.ece

Boeing bullish on airlines’ prospects in India

Aerospace giant Boeing has in recent weeks been in the news because of the grounding in mid-January of its latest civil aircraft, the 787 Dreamliner. Air India has ordered 27 Dreamliners of which six have already arrived. In an interview with Business Line, Boeing India President Pratyush Kumar outlines the strategy for the country.
The grounding of Kingfisher Airlines’ - who flew your rival Airbus’ aircraft – means less Airbus aircraft flying in the Indian domestic sector. But Boeing still lags behind Airbus in aircraft sales in India. What are the fresh strategies Boeing is putting in place to take on Airbus?

We lead with our products, offering a value proposition that make sense to our customers and makes them competitive. If our customers are competitive they will gravitate towards. So fundamentally there is no shift in strategy. We make our customers competitive on their operation costs basis, be it fuel efficiency, maintainability of the aircraft, etc and all the things that come with it.

Not tweaking your strategy?
No. We plan to stay the course.
With Kingfisher Airlines flying into turbulence, funding and leasing agencies including the ILFC appear wary about funding domestic airlines in India…

You should ask people who are putting money into Jet Airways. They must see some health in the industry that’s why they are doing it.
Yes, but Jet Airways is an established airline that is up and running... What about new airlines, as an aircraft manufacturer don’t you see lack of funding as a key issue as you seek to sell aircraft?

See we are pretty bullish about the long term prospects of the airline industry in India. Look at the fundamentals. With 1.2 billion people, with vast geographic distances which cannot be covered efficiently because of very poor ground infrastructure both rail and road we think an eight to 10 per cent growth rate for the civil aviation market is very achievable. We remain optimistic and bullish about India. As for the financial security of new airlines, I cannot comment. Only thing I can say is that some very smart people have made investment decisions into Jet Airways which is a huge vote of confidence.
Compensation is being sought by India because of the delays in deliveries. Penalties...

Nobody from Air India has spoken to me about it. And I can’t comment on this.
On the military sales Boeing has recently won contracts to supply 10 C-17 Globemaster III strategic airlift aircraft, and the P8I maritime reconnaissance aircraft. Boeing has also been declared the lowest bidder in the 15 Heavy Lift (Chinooks) and 22 attack helicopters (the Apache). When do you see these being sewed up?

Negotiations are going on. It depends to a large extent on the Ministry of Defence

Boeing has been working with a number of Indian companies in the public sector most notably HAL. But increased offset obligations has necessitated collaborations with the private sector.

That frankly gets me really excited. We have a twin pronged strategy. First we want to bring the best of Boeing’s state-of-the-art products to India. At the same time, we want to bring the best of India to Boeing to make sure that the integration of products remains competitive. We are enthused by the private player’s willingness and interest to get involved in aerospace. We are very supportive of their efforts and want to work with them and develop them as long term reliable suppliers in a supply chain. We are keenly working with, maybe a dozen suppliers and some of their products have already been integrated on our equipment. Partnerships with private industry to build an ecosystem for aerospace in India is a priority for us. This will also allow us to discharge our offset obligations effectively.
Finally how do you see the prospect for the civil airline market in India?
Very bullish. We have projected that India's commercial aviation fleet will grow more than 4.5 times over the next 20 years. The Boeing 2012 Current Market Outlook India has forecast that the airline market in India will need 1,450 new airplanes worth $175 billion in next year 20 years.
 http://www.thehindubusinessline.com/industry-and-economy/taxation-and-accounts/security-checks-for-aviation-industry/article4400422.ece
 

Air India signs Rs 535 crore outsourcing deal with Sutherland Global

BANGALORE/MUMBAI: Government-owned airline Air India has, after much hemming and hawing, found a business process outsourcing partner in Sutherland Global Services even as many other potential bidders avoided the five-year contract because the terms were exacting.
Air India postponed its tender by six months to December-end and introduced three amendments to the first draft around November before sealing the about $100 million (Rs 535 crore) deal with US-based Sutherland early this month, according to sources with direct knowledge of the development.
Major BPOs, such as Servion, Serco Global Services, Aegis and WiproBSE 0.92 % BPO that Air-India invited to bid for the contract, had hesitated to take part in the bidding after going through the terms and conditions, said the sources.
Among other things, the BPOs were put off by the thin margins on offer, the financial condition of the loss-making airline and risks associated with taking up government-related contracts, especially after the recent Commonwealth Games in New Delhi, where all contracts are coming under the microscope to check for potential fraud.
"In this space any business that brings less than average margin could pull down the company's performance," said Sanjay Dhawan, executive director of PwC India. "So, in a typical $100 million deal, where the vendor is making half the average margin, they would need to grow the business four times to reach the level."
The five-year contract with Sutherland, which recently bought the healthcare BPO of Chennai-based Apollo HospitalsBSE 0.32 % for 1,000 crore, will replace a three-year deal with InterGlobe Technologies-part of the group that runs Indigo Airlines-that ran its course. AI was said to be looking for a partner that did not have a close link to a rival.
"A lot of times, companies get concerned about the security of passenger data and efficiency in the system," said Dhawan. "Also, a new contract with a new vendor gives an opportunity to the client to evaluate the existing contract by bringing cost-savings and efficiency."
According to the sources, the new deal is on a full-time equivalent basis of up to 600 seats.

Chennai airport upgradation: Govt may privatise cargo operationChennai, Feb. 10:  
The Government could give the entire air cargo operation to a private company in the proposed second phase of the Chennai airport modernisation plan, said a senior official of Airport Authority of India (AAI).

“We are open to the idea of outsourcing the entire air cargo operations in the second phase when a new cargo facility is to be built in the old terminal,” said G.K. Chaukiyal, Member (Operations), Airport Authority of India.
Last week, the first phase of the modernised terminal was inaugurated by Vice-President Hamid Ansari.

“We will give the land while the build, own and transfer operator will take care of the construction and operation of the cargo terminal,” he said.

The outsourcing plan has been recommended by the Centre for Asia Pacific Aviation. “We will look at the report in a couple of weeks. If approved, we will go ahead with the outsourcing plan,” he said. AAI will also review the master plan of the Chennai airport, he said.

The Chennai airport’s capacity is to handle 11 lakh tonnes of cargo per year. However, only one third of it is being utilised, he said.

When his attention was drawn to the availability of only two parking bays for freighters, Chaukiyal said with the introduction of the Automatic Storage and Retrieval System, the Authority plans to have more bays.

G. Raghu Sankar, Chairman, SICCI Shipping and Logistics Committee, said that the AAI recently dedicated both modernised airport terminals at Chennai and Kolkata. This is a great opportunity to showcase their capabilities in terms of attracting passengers and cargo.
As of now, the trade, the industry and users feel that the scope for improvement in the service level is high and that these airports are way off from reaching their potential.

In 2006, an exercise was undertaken by AAI Chennai involving the Chennai Customs House Agents Association, Air Cargo Agents Association of India (southern region) and Board of Airlines Representatives (southern region).
The exercise was to benchmark and fix responsibility with a time frame for each activity commencing from landing of a flight to delivery of cargo. The study distinguished a time frame for passenger and freight operations. This study could be revisited to align with the present day changes and requirement and can be made as a public document, he said.
http://www.thehindubusinessline.com/industry-and-economy/chennai-airport-upgradation-govt-may-privatise-cargo-operation/article4400611.ece

SBI Chief: Kingfisher needs to pay up soon

State Bank of India Chairman Pratip Chaudhuri wants the beleaguered Kingfisher Airlines (KFA) to act quickly on repaying its bank loans. When asked if he is willing to give the airline more time, Chaudhuri said, “No….time is of essence. So, we think the company should act faster. It is a big company and with a whole group of banks, action is happening.”

A consortium meeting of 17 lenders led by State Bank of India is likely to take a call on February 12 on initiating recovery proceedings, including a change of management, against the debt-laden airline, said a senior banker close to the development. Though banks and KFA management have held talks over the last one year for recovering their dues and reviving the airline, no headway has been made yet. The airline owes about Rs 7,000 crore to banks.
Last month, Chaudhuri said that KFA, in its presentation, did not come up with anything concrete for the banks. “They (promoters) had a lot of plans for their creditors and oil companies,” the SBI Chief said on the sidelines of the launch of the IL&FS Financial Services Infrastructure Debt Fund.

“It (KFA) is a problem asset….A consensus can only emerge when the company comes out with a credible plan,” he added.
 http://www.thehindubusinessline.com/industry-and-economy/banking/sbi-chief-kingfisher-needs-to-pay-up-soon/article4397389.ece?ref=wl_industry-and-economy

No-frill airports for smaller cities on anvil

The Government plans to build no-frill airports for smaller cities. A draft report has already been submitted to the Civil Aviation Ministry, and this is under ‘serious consideration,’ said an official.
Low cost and no-frill airports could be the answer to fly to smaller cities. That’s the long-term plan the Civil Aviation ministry has chalked out, said S. Machendranathan, Additional Secretary, Ministry of Civil Aviation.
Regional and remote area connectivity is important for the growth of the civil aviation industry. This can be done by smaller aircraft reaching out to small towns in no-frill small airports that will offer facilities for take-off and landing of aircraft.  Construction of no-frill airports across the country is one of the four major growth plans of the future. The involvement of the private sector will also be considered in this, he said at an interactive session on Aviation Cargo Industry — A Vital Link in Logistics. The event was organised by the Southern India Chamber of Commerce and industry and Chennai Custom House Agents Association in association with Air Cargo Agents Association of India.
Upgrading of skills , strengthening regulatory authorities and modernisation of existing airports are other major initiatives that the government plans, he said.
With the pace of the growth in civil aviation, there is going to be a huge demand for pilots and engineers. The Government is planning to set up a National Aviation University. A consultant is already working on this project, he said.
On strengthening regulatory authority, Machandranathan said that setting up a body superior to the Directorate General of Civil Aviation is being considered.
According to Yeshwant Bhave, Chairman, Airports Economic Regulatory Authority of India, the market is the best regulator. “Mimic the market to set the pricing,” he said.
Bharat Thakkar, President, Air Cargo Agents Association of India, said that all efforts should be done to bring down the transaction cost, which is one of the highest in the world. “The Government has done enough. We need to work together,” he said. http://www.thehindubusinessline.com/industry-and-economy/logistics/nofrill-airports-for-smaller-cities-on-anvil/article4397386.ece?ref=wl_industry-and-economy