No soft landings as domestic airlines face profitless growth

As the latest entrant—IndiGo—gets ready to fly into crowded domestic aviation skies, the industry is more than aware of the clouds on the horizon. With both Jet Airways and Air Deccan's share prices being hammered, investors have turned their back on what was seen as a huge success story.

Analysts claim that airlines in India made losses of close to $250 million in 2005 and say this number is set to go higher this year. That's paradoxical as the sector is growing at a healthy 25% with domestic carriers transporting 25 million air passengers. But these figures are not translating into profitability.

Rising fuel costs, stringent competition, lack of proper regulatory laws and rapid entry of new players is fuelling investor angst and hampering profitability. ''Most players will continue to show losses over the next 12-18 months, generating profitless volume growth. Efficient and well-funded operators will survive,'' Centre for Asia Pacific Aviations Kapil Kaul says.

The immediate concern for industry watchers is how the entry of another low-cost carrier would impact the market at a time when not many players are in the black. ''I don't think that you are going to see another fare ware with Indigo's entry. However, there will be no drastic increase in ticket prices over the next few months as new entrants bring in more capacity and turn on the competition,'' says Nikhil Garg, Edelweiss Capital's aviation analyst.

Indigo, which will start operations with one aircraft and will add a new A320-232 every month, will use Delhi as its hub and will fly on under-served sectors. The airline's management says talent and systems will make the difference in a tough market. Industry says the airline has already budgeted a loss of Rs 100 crore in its first year of operation.

Indeed, access to capital is a big issue. After the poor performance of the Air Deccan IPO, whose shares are trading at Rs 74.85 as against an issue price of Rs 148, and that of Jet Airways (Rs 507, a far cry from the Rs 1,200 levels), investors are wary.

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