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India's new airlines face major cash, operational challenges

India's new airlines face major cash, operational challenges

2015 10 12

2015 10 12

By Anirban Chowdhury, The Economic Times - INDIA

MUMBAI: A majority of India's new and aspirant airlines appear to be facing major cash and operational issues, delaying salaries, putting off aircraft induction, grounding planes and cancelling flights, leading to questions about whether they can cope in a sector that demands patience to deal with bureaucratic delays and the ability to overcome lobbying by incumbents.

Chennai-based Premier Airways is waiting for an air operator's permit and hasn't paid salaries for the past three months, said four people, including ex-employees.

Regional airline Flyeasy, based in Bengaluru, is also waiting for a permit. The company has delayed salaries for two months and lost senior executives such as head of sales and marketing Mani Rayaprolu.

Three other south-based airlines that are operating flights have their own set of problems, with either aircraft being grounded or mass flight cancellations.  Many of Premier's 150 employees are said to have quit and joined airlines such as SpiceJet and IndiGo. Earlier this year, the airline agreed to purchase 40 A320 Neos from Airbus but hasn't been able to get Reserve Bank of India approval to import the planes.

"I don't think they have the money. I won't be surprised if the project is dead," said a top executive at a supplier, who didn't want to be identified.

Flyeasy, owned by ABC Aviation and Training Services, planned to start operations with five Embraer planes and later cut it down to two to be leased from Saudi Arabian national carrier flynas. Sources said the airline hasn't sent pilots and engineers to test-fly and check the aircraft, following which the lease would start.

Both airlines are without a fleet and losing people. And they haven't even launched.

"Financial planning for a new airline means that you need budget operating costs up to the first three years. Not having money to make salaries within the first year of operation frightfully questions the very intent to manage a stable airline," said Mark D Martin, founder and CEO of Martin Consulting LLC.

"Adequate capitalization with a proven and qualified management team is key. Without fully funding the business plan, starting operations in this hyper competitive environment is foolish," said Kapil Kaul, CEO, South Asia at consultant CAPA-Centre for Aviation.

In both cases, the reason is said to be delays in getting investments. Sources said Premier's investors "didn't honour their commitments, which led to cash problems." Flyeasy has sought permission to raise foreign direct investment before it gets a flying permit, government sources said. It has been in talks with Middle East investors.

Umapathy Pinaghapani, Chairman and Managing Director of Premier Airways, acknowledged there had been hiccups, although he said the company is "progressing well towards its launch."

"There have been some delays in capping the investments and firming up the aircraft, which is already being addressed. Our team size has grown to 100-plus and in my 34 years of experience, I don't see any startup coming up without challenges," he told ET. "These are temporary hurdles and they won't get me down."

Flyeasy Managing Director Rajesh Ebrahim denied the company is facing a financial problem or attrition and also said it isn't looking to raise FDI.

"As long as the regulator is happy that we can sustain for a longer period of airline operations it explains our financial position...there's no point in discussing the FDI since we haven't approached anyone. Except the sales and marketing head, none of our senior executives or staff has resigned, nor will they," he said.

Carriers that are operational haven't been free of turbulence. Hyderabad-based TruJet had one of its three ATR 72-500 planes grounded due to "technical issues" recently, said Managing Director Vankayalapati Umesh. When that was sorted, another plane developed engine glitches and had to be withdrawn. The airline, which started in July, now operates two planes.

According to the Directorate General of Civil Aviation, Vijayawada-based Air Costa had the highest number of flight cancellations in July, followed by Bengaluru's Air Pegasus.

"Network and scale are crucial for an airline to compete with peers. But in the initial days, it is reliability which builds its brand image," said Habibullah Ubaidullah, a Trichy-based independent consultant who follows aviation in southern India.

Industry officials said the two Tata Group joint venture airlines are the only newcomers with a stable financial position, although they too have yet to make a dent in the market. Vistara is rethinking its strategy and configuration to push loads and AirAsia, with five planes in its fleet, is going slow on expansion. Both airlines have said they are waiting for the government to ease rules to fly overseas so they can align their networks with that of their global shareholders Singapore Airlines and AirAsia Bhd.

The five airlines that started flying since last year together controlled 4.5% of the market in July, as per DGCA figures.

Critics have questioned the government's open-handed giveaway of approvals to airlines. Between 2009 and 2014, the government issued 16 no-objection certificates, of which nine were given between 2012 and 2014. Several lapsed and the companies didn't renew them.

"When you know that so many airlines have fallen by the wayside in the past, it is critical to look at their financial viability in the initial stages itself," said Mohan Ranganathan, a consultant and member of the Civil Aviation Safety Advisory Council.



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