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Human resources having bigger impact than fuel in India

(Mumbai:

6 September 2006) Centre for Asia Pacific Aviation today warned

that increasing pressure on airline bottom lines, led by higher human resources

costs pose a major threat to market development, just a week after Boeing

upgraded its long-term aircraft sales forecast for India by 75%.

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According to Kapil Kaul, the Centre’s CEO, Indian Subcontinent and Middle East, the pressures from massive wages and overtime increases, fuel and constrained airport/ATM infrastructure will provoke significant structural changes in the sector in the next 12 months. These cost pressures will be discussed in depth by airline CEOs from India and the Middle East at the upcoming LCC Symposium in Mumbai on 29-30 September 2006 – at which a new report by the Centre into India’s LCCs will be released.

India has flirted with the concept of consolidation – unsuccessfully to date – but that does not mean the issue will go away. On the contrary, some new partnerships between airlines must emerge in the months ahead, to address overcapacity, skills and airport capacity shortages - and to stop the bleeding. It is quite possible that a full service carrier may acquire an LCC within the next 12 months”.

“The losses being racked up by the sector are unsustainable and will drive some new and potential entrants out. Despite this challenging environment, up to 12 start-ups are awaiting permission to launch. India cannot afford to have a repeat of the early 1990s when new entrants came and went and the sector reentered its slumber”, said Mr Kaul.

“But on this occasion, the market is vibrant and fast expanding. Like any relatively free market, there will be casualties. This does not mean that the system is wrong; it needs time to find a dynamic equilibrium. But airline life in India will never be the same again, that is certain”, said Mr Kaul.

The comments come as Boeing upgraded its long-term sales forecast to 856 new aircraft, and boosted the projected value of these orders by 125% compared to last year’s forecast to USD72 billion – or USD84 million per aircraft (up from USD65 million per aircraft in last year’s forecast). Traffic growth is buoyant with a 48% increase reported in domestic passenger numbers for the three months ended 30-Jun-06.

Meanwhile, market leader, Jet Airways, recently reported a net loss of USD9.8 million in the three months ended 30-Jun-06, compared to a USD21.9 million profit in the previous corresponding period, despite a 24.8% increase in revenue. The carrier experienced a USD48.5 million negative swing at the pre-tax level, from a USD35 million profit in the Jun-05 quarter to a USD12.9 million loss in the latest period.

The key concerns for Jet are pressure on domestic yields from intense competition and a massive shift in the passenger mix. In the Jun-06 quarter, the carrier had a full fare-to-discounted fare ratio of 65:35, but this switched to 35:65 in the latest quarter, much worse than the budgeted 47:53 ratio. Clearly Jet is having to discount to compete as savvy travelers hunt out bargains.

“The key problem for Jet Airways in the domestic market is personnel costs, which more than doubled (despite only a 12.5% increase in staff numbers) to account for 13.2% of total costs in the Jun-06 quarter, compared to 9.3% in the previous corresponding period”, said Mr Kaul.

According to Jet, higher-salaried staff (pilots, cabin crew and engineers) received annual wage increase of 12-15%, while pilots racked up USD5 million more overtime payments than the same period last year.

Jet Airways operating costs: Jun-05 quarter vs Jun-06 quarter

Source: Centre for Asia Pacific Aviation & airline reports

“All carriers are under pressure to retain staff, so that salaries for skilled staff are rising quickly. Overall, the short-term term outlook for airline profitability remains very challenging. This is of particular concern to the established carriers, while the new entrants engage in deep discounting to capture a position in the market”.

“Another key issue issue faced by carriers is establishing strong management depth at senior and middle levels. It is not sufficient to employ a couple of expatriates and expect that the airline will run itself”, concluded Mr Kaul.

The warning comes as the Centre prepares to hold its third annual India and Middle East LCC Symposium in Mumbai on 29/30 September 2006.


Confirmed speakers include:

  • AirAsia: Tony Fernandes, CEO;
  • Air Deccan: Captain GR Gopinath, Managing Director
  • Jet Airways: Wolfgang Prock-Schauer, CEO
  • GoAir: Jeh Wadia, CEO
  • Jazeera Airways: Marwan Boodai, CEO
  • Sama: Andrew Cowen, CEO
  • SpiceJet: Ajay Singh, Director
  • Viva Macau: Andrew Pyne, CEO
  • Ryanair: Patrick Murphy, Former Chairman
  • Ohio State University: Prof Nawal Taneja, Aviation Department Chairman
  • IATA: Julian Carr, Manager New Product Development
  • Landor Associates: Bill Larsen, Director
  • PhocusWright: Ram Badrinathan, Asia Pacific Analyst
  • Ginger Hotels: Prabhat Pani, CEO
  • Centre for Asia Pacific Aviation: Andrew Miller, CEO Consulting
  • Centre for Asia Pacific Aviation: Peter Harbison, Executive Chairman

Key details about India & Middle East LCC Symposium 2006:

  • Date: 29/30 September 2006
  • Venue: Grand Hyatt Mumbai
  • Attendance:
    • 250+ Delegates
    • 25+ High-level Speakers
    • 50+ Global Media Representatives
  • Media Exposure: Global newswire press coverage
  • Broadsheet newspaper coverage on three continents
  • Global television coverage: Over 50 website listings and advertising

The event will also feature an extensive supplier exhibition and enhanced sponsor offering, with over 10+ hours of networking time.

For more information, please visit: https://centreforaviation.com

For sponsorship details, please contact Misty Cambray, Marketing Manager mc@centreforaviation.com Ph: +612 9241 3200.