Low cost airlines go slow on expansion plans

The losses are finally coming home to roost. Domestic Indian low-cost airlines have sunk deep into the red. This has finally led to a rethink on capacity induction among some airlines. The Kingfisher Airlines-Air Deccan combine, for example, has apparently decided to shrink its combined fleet induction for 2008 to match demand.

Last week, Air Deccan announced a Q1 loss of Rs173 crore for the April to June 2007 quarter, higher than the loss for the previous year. Even though it has a higher average yield per passenger, the full-service Kingfisher Airlines is reported to be losing around Rs1 crore a day. This is despite record growth; the number of passengers travelling by air shot up by a record 38.5 per cent in financial year 2006-07.

Airline sources said the two carriers would cut their 2008 aircraft induction plans from 18 new aircraft to eight. This is expected to ease the overcapacity that has led to mounting pressure on margins.

In fact, not taking delivery of aircraft can be profitable, because Airbus A320s are in demand the world over, and leasing companies as well as airlines are willing to pay a premium for delivery slots to airlines willing to sell them.

Kingfisher, with 127 aircraft on order, and Air Deccan, with 60 aircraft on order, jointly have delivery slots worth close to $400 million in the coming year. Deferring eight deliveries could give the Kingfisher-Deccan combine a benefit of about $50 million, if they sold their slots in the market.

The Jet Airways management has expressed concerns over the unrealistically rapid expansion of capacity in the Indian skies. Airlines in India have brought in about six aircraft a month over the past two years.

With the current go-slow process in play, the pace of growth is likely to come down to less than two aircraft per month. However, full-service carriers like Jet Airways and the new Air India are likely to continue expanding.