Dalal Street, here we come

Purely on the basis of numbers, it8217;s easy to be lulled into the belief that airlines will be the next big thing on the stock market, after IT and retail.

Purely on the basis of numbers, it8217;s easy to be lulled into the belief that airlines will be the next big thing on the stock market, after IT and retail. After all, here8217;s an industry that is projected to grow at 25 per cent a year till 2010. Here8217;s an industry where all players are planning to double, triple, quadruple their fleet size. Here8217;s an industry that is barely represented on the stock market today, but is likely to see a spate of big, high-profile IPOs initial public offerings in the foreseeable future.

But look beyond those numbers at how the industry works, glean from global experience, one thing comes through: the airline business is tough to crack, with more losers than winners. Revenues are not a problem, profits are 8212; new airlines are losing money, while the older ones are struggling to maintain profitability. Taking off is not a problem, staying up there is 8212; competition is stiff and customers are as loyal as the next bargain ticket.

In India, low-cost carriers LCCs are at the vanguard of change and spearheading the expansion. Air Deccan is looking to increase its fleet size from 24 aircraft now to 115 by 2012-13, Kingfisher from 11 to 46 by 2010, GoAir from 3 to 33 by 2009. To fund these ambitions, some of them, as well as other key players in the aviation business, plan to raise money from the public See table: On the radar.

For airlines, the key to profitability lies in maximising passenger load and minimising costs per available seat kilometre. The airline business is cost-intensive, with net margin being in low single-digits. An airline incurs huge initial costs to buy or lease planes, and develop the business. Fuel costs, more so in India, and staff costs are other major cost heads.

It8217;s a battle of attrition for LCCs. The next two to three years are critical for them, as they will need capital to expand their fleet as well as absorb losses. The challenge is to get efficient in various financial and service benchmarks, and have deep pockets till they get there. For all the glamour of this business, the two listed airline stocks, Jet Airways and SpiceJet, have underperformed the Sensex.

Airlines hog the limelight, but not many make money. In the US especially, post-9/11 has been characterised by bankruptcies, layoffs, smaller fleets and debt restructuring See graphic: Risky business. Four of the top 10 airlines 8212; Delta, Northwest, United Airlines and US Airways 8212; have filed for bankruptcy. Europe has around 50 LCCs, and that number is fluid. There are examples of solid, enduring businesses like Southwest Airlines in the US and RyanAir in Europe, but these are far and few between.

In fact, it8217;s the other air transport businesses that make more money. A global study of the 1992-1996 period, a reasonably profitable period, showed that airlines earned 6 per cent return on capital employed 2-3.5 percentage points less than the cost of capital, airports earned 10 per cent, catering companies 10-13 per cent, handling companies 11-14 per cent, aircraft lessors 15 per cent, aircraft manufacturers 16 per cent and global distribution companies 30 per cent.

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In this context, an interesting IPO could be that of Cochin International Airport, which posted a net profit of Rs 28 crore on revenues of Rs 101 crore in 2004-05, and whose Rs 10 share is finding buyers at Rs 350 as it plans to go public. Soon, the fly past by airlines, maybe an airport or two, over Dalal Street will begin. Who will soar, who will crash land is a call that lies a few years ahead.

On the radar
Listed
8226; Jet Airways
8226; SpiceJet
Planning to list
8226; Air Deccan
8226; Air-India
8226; Cochin International Airport
8226; Delhi International Airport
8226; Indian Airlines
8226; Kingfisher Airlines