Subcontinent flag carriers struggle


The Indian Subcontinent's flag carriers are in serious trouble. Shackled with low productivity levels and ageing fleets from years of neglect by their government shareholders, high fuel prices have magnified the problems at Air India, Pakistan International Airlines (PIA), Biman Bangladesh Airlines and SriLankan Airlines.

The four airlines reported combined losses of approximately USD715 million in the 12 months ended 31-Mar-08 and losses this year could double, if fuel prices remain at current levels. Losses of this magnitude will be difficult to bear and could trigger a regulatory response by the region's governments.

Air travel in the Subcontinent has flourished this decade, as governments have opened up access to private and foreign carriers. But their flag carriers have been poorly equipped to cope with the influx of competition, much less the run-up in fuel prices. Each has significant aircraft orders outstanding, but funding the new aircraft is becoming an increasing challenge.

Air India expects to have generated a USD458 million loss for the financial year ended 31-Mar-08 and is finalising a request for a government equity injection and soft loans totalling roughly this amount, to help fund its working capital requirements. Air India is struggling in the domestic market, where rising fares have slashed growth rates and load factors. Meanwhile, an IPO has been indefinitely postponed.

SriLankan Airlines reported a USD45 million net profit in the 12 months ended 31-Mar-08, a result which was softened by the sale and leaseback of three A340s. Excluding these gains, the airline reported a USD5.5 million loss, due to higher fuel prices. Fuel currently accounts for a crippling 52% of SriLankan's costs, compared with 27% last year. The outlook for 2008/09 - no longer with the guidance of Emirates' experienced management and network support - is not promising.

Biman Bangladesh Airlines is expected to have generated losses of USD12 million in 2007/08, down from a provisional estimate of USD80 million. The reduction is presumably due to large cutbacks in its operations, as many of its ageing aircraft have been grounded due to a lack of spare parts.

Pakistan International Airlines, which has accumulated losses of USD647 million in the past three years - and is said to be losing USD20 million per month this year - has called on the government to assume all of its debts in return for taking control of a global portfolio of the state-owned carrier's properties worth USD1 billion. With a change at the top of Pakistan politics, a response to PIA's urgent request for support could take some time.

Both the Pakistan and Indian governments appointed new leaders for PIA and Air India earlier this year, in the hope fresh blood can inspire a turnaround in performance.

Air India is reportedly working on plans that could see its international network capacity slashed by up to 20% from Sep-08. But new Chairman & Managing Director, Raghu Menon, said he expects fuel prices to fall in Sep-08, indicating the carrier would prefer to maintain the integrity of its network and its market share. Other cost-cutting steps are under way, but the major reductions would come from flying less.

Right now, with Jet Airways continuing to expand (adding its 20th international destination - Dubai - to its network on 23-Aug-08) and Kingfisher Airlines set to embark on its international expansion (to London initially, followed by the US, from Sep-08), Air India is in no mood to give an inch to the local rivals. As a result, the red ink must continue to flow - and subsidies also.

For PIA, SriLankan and Biman, the next few months will be extremely challenging. SriLankan Chairman, PB Jayasundera, stated the carrier "faces a challenging future, as does the entire global air transport industry" - particularly those in the Subcontinent.

Although there will be massive temptations for governments to seek to revert to old-fashioned protectionist strategies, they would be both ineffectual and inappropriate.


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