Airlines survival kit: Slim down, merge or drop out

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New Delhi: The demand slowdown has cast a shadow on the $6-billion Indian aviation industry, which is struggling with overcapacity. This is in spite of a reduction of around 11 per cent in total number of domestic seats in the past 10 months.
According to the latest report on the Indian airlines by Centre for Asia Pacific Aviation (CAPA), the airlines need to ground 20 aircraft to slash 7-10 per cent excess seat capacity, given the weak demand. Reduced capacity would result in lower costs and network rationalisation, which would help airlines turn around in 2009-10.
“The demand is expected to remain weak for at least next two-three quarters (till December 2009). So, the capacity needs to be cut further immediately, especially by full-service carriers (FSCs),” said Kapil Kaul, CEO, CAPA (South Asia). While the actual growth in demand required addition of three aircraft per month, airlines added 6-6.5 aircraft per month. Passenger load factor (PLF) remained below 65 per cent during 2009, making flying unsustainable, given India’s high cost-low fare environment.
In January 2009, when airlines cut fares by up to 50 per cent, there was marginal increase in traffic, but a dramatic decline in yields. The traffic level in March is expected to remain weak due to increase in fares.
In such a scenario, most effective way to cut capacity is to either go for consolidation through acquisition or market exit. The next round of consolidation, which as per the report may be strategic in nature, is most likely to occur in the LCC sector as the FSCs do not have the funds for acquisitions.
Citing reasons for failure of phase one of consolidation, report said that airlines continued to pursue aggressive but unachievable growth strategies despite early signs of distress.
Second, airlines indulged in massive fleet induction programmes, stretching their balance sheets. Third, rapid increase in capacity led to congestion at yet-to-be modernised airports, escalating operational costs for airlines. Fourth, from a management and capital perspective, airlines failed to handle the growth rate of 25 per cent in the last few years

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~ by anand213 on March 17, 2009.

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