Wednesday, July 8, 2009

Airline-Sector Woes Slam India's Highflier

Running an airline is a reliable way to lose money. The turbulent ride of India's Jet Airways shows why. Naresh Goyal shook up Indian aviation when he founded Jet in 1992. With punctual flights, new planes and friendly service, Jet was the first carrier here to truly modernize air travel.
Jet controlled nearly half the domestic market by early this decade, with most of the rest going to state-owned Indian Airlines. In Jet's 2004 fiscal year, as many of the world's carriers were still recovering from the Sept. 11 terrorist attacks on the U.S., it outpaced the industry with net profits of $33 million. Jet's initial public offering, in 2005, valued Mr. Goyal's 80% stake at $2 billion. Now, Jet is scrambling to stay aloft. Low fares from no-frills competitors ravaged revenue. Staff costs soared as rivals poached pilots and mechanics. Airport congestion in India made for a logistical nightmare -- forcing Jet to open an international hub 4,000 miles from home, in Brussels. Amid a glut of capacity, Jet's market share slid from a high of almost 49% in 2003 to roughly 25% this year. The airline started posting sharp losses in late 2007. Jet eked out a net profit in its latest quarter by selling assets, slashing costs and booking tax credits, but the outlook remains tough. "It's been hard," said Mr. Goyal, the 59-year-old founder, in an interview at his $15 million London townhouse. "We were making so much money, and now we're losing money." The carrier's woes began as India's economy boomed in 2005, thus highlighting a broader problem for the global airline sector: Even in good times, the industry struggles to generate sustainable profits. Jet Airways has struggled to capitalize on growth as it got squeezed between uncontrollable costs and increasingly unfettered competition. Jet's slide can be traced to a sea change in the global aviation business. Deregulation, the rise of Internet ticket sales and other factors have made it easier than ever for upstarts to challenge bigger, established carriers. In India, where state-run carriers and government policies stymied air travel for decades, the sudden transition proved tumultuous. Last year was particularly rough. The airline business floundered as fuel prices surged, the credit crunch hit and world-wide travel plunged. Jet is reacting by cutting staff, closing offices around Asia and reducing flight frequencies. Searching for profitable routes, Jet recently took planes from India's crowded domestic market and expanded service to Dubai. It soon plans to start flying to Saudi Arabia. Mr. Goyal cut his teeth in the airline business by working -- and sleeping -- at his uncle's New Delhi travel agency while he was an 18-year-old student. Seven years later, in 1974, he started his own agency, bankrolled by personal savings and a gold bracelet of his mother's that he pawned. As the Indian sales agent for overseas carriers including Air France and Hong Kong's Cathay Pacific Airways Ltd., he learned the ins and outs of upscale air travel. Jet was one of several carriers launched after India began deregulating domestic aviation in 1991, and initial competition was fierce. Jet survived as rivals failed, thanks in part to Mr. Goyal's longstanding links to foreign carriers with which Jet cooperated to fly international passengers. Although Indian law had granted state-owned Air India a monopoly on foreign flights since 1953, Mr. Goyal prepared for the day that Jet would be allowed to extend its network overseas. He entertained politicians, aviation officials and travel professionals in his London townhouse overlooking tony Regents Park. "I was convinced one day India would have to open up," he says. Anticipating the change, Mr. Goyal focused on creating a passenger experience to rival the world's best carriers. He poured tens of millions of dollars into cabin entertainment systems, ergonomic seats and staff training. He also turned the trend of outsourcing to India on its head by hiring American pilots, recruiting managers from leading Asian and European carriers, and unabashedly aping the innovations of up-market trailblazing airlines such as Singapore Airlines Ltd. "Naresh Goyal's policy of hiring expats broke the mold in India -- he was a pioneer," says Craig Jenks, president of Airline/Aircraft Projects, a global aviation consulting firm in New York. In 2004, India allowed private airlines to fly overseas. Mr. Goyal jumped at the opportunity. He ordered 10 Boeing 777s, and fitted the first-class cabins with spacious private compartments modeled after those created by Dubai's upscale Emirates Airline. Jet's initial public offering in 2005 was 16-times oversubscribed amid national enthusiasm for the airline and its whole industry. But Jet's success also spawned competition. Vijay Mallya, chairman of brewing and distilling giant United Breweries (Holding) Ltd., launched upscale Kingfisher Airlines. It was meant to double as a flying promotion for his top beer brand, Kingfisher. A tiny upstart launched in 2003, Air Deccan, proved even more damaging to Jet. Copying the no-frills approach pioneered by Southwest Airlines Co., it served secondary cities that Jet didn't touch. Deccan opened a floodgate by showing the low-cost model could work in India. In 2005, a group of entrepreneurs started a similar low-cost carrier, SpiceJet Ltd. That same year, a major Indian travel-services company started its own budget carrier, IndiGo. Mr. Goyal fought back by acquiring no-frills competitor Air Sahara, which he rebranded as JetLite. Indian carriers grabbed the spotlight at the 2005 Paris Air Show, the aviation sector's big industry event. There, they announced orders for planes valued at more than $15 billion. IndiGo ordered 100 Airbus airliners even before it secured government permission to start flying. Although Kingfisher had only been flying for two months, Mr. Mallya splashed out by ordering five Airbus A380 superjumbos, the world's largest passenger planes. India's growing middle class was helping tug the global aviation industry from its post-9/11 slump. "Everyone is talking about China," observed Airbus Chief Operating Officer John Leahy at the Paris Air Show that year. "But the biggest growth story we see is India." Foreign investors, financiers and leasing companies, all hungry for new markets, raced to bankroll India's breakneck airline expansion. Indians who had long squeezed onto wheezing, sweaty trains began jetting about the country. Jet soon faced another hurdle: India's outdated aviation infrastructure clogged up. Air-traffic delays added 10% to flight times and cost $80 million in wasted fuel during 2006, Jet executives said, and things were getting worse. "The average 70-minute domestic flight spends another 35 minutes circling," Mr. Goyal complained last spring. The lack of modern aircraft-maintenance facilities in India forced Jet to send planes overseas for routine upkeep, adding millions of dollars to its bills. The cost of retaining veteran mechanics, flight attendants and pilots soared as new rivals poached qualified staff. Even Jet's budget subsidiary, JetLite, and other no-frills carriers struggled. "There are no low-cost airlines in India, only low-fare, no-profit carriers," Mr. Goyal said at a Jet media gathering in 2007. Yet Indian carriers kept chasing market share by slashing fares and adding planes, even as losses ballooned. By last June, Mr. Goyal saw that competition had made business untenable. "We're all in trouble," he lamented at an industry conference, saying each domestic carrier should slash capacity by 30%. Kingfisher's Mr. Mallya scoffed that Mr. Goyal "doesn't know how to do math." But Kingfisher was losing so much money that it soon canceled airplane orders and new routes vital to its overseas expansion. In a sign of the industry's distress, the bitter rivals last October announced an alliance to share airport facilities, coordinate schedules and reduce capacity. The deal still faces regulatory approval. Mr. Goyal had enjoyed a major edge over rivals in one key battleground: overseas flights. Indian deregulation in 2004 opened up international routes only to private carriers that had flown domestically for at least five years. Jet's experience allowed Mr. Goyal to move first, launching flights to Singapore, London and Kuala Lumpur in 2005. Jet quickly grabbed traffic from state-owned Air India, which had struggled to compete globally due to its poor service. Wealthy Indians who had preferred foreign carriers such as British Airways PLC were glad to have a local alternative. Ajit Balakrishnan, founder of India's largest Internet portal, says Jet staff "deliver a superb product" on the domestic flights he takes weekly from Mumbai, and so he jumped at the chance to fly Jet overseas. The 60-year-old veteran advertising executive often books on Jet, which began offering service to New York-area airports in August of 2007. He recommends Jet to foreign friends for its "modern luxury." But Mr. Goyal's intercontinental ambitions faced huge obstacles at India's overtaxed airports. Flights from India to the U.S. or Europe require big planes to carry sufficient fuel, and big planes need lots of passengers to run profitably. In mature markets, airlines generally fill long-haul flights with traffic from many smaller planes arriving at a hub for connections. To coordinate this, airlines need lots of boarding gates, airplane parking spots and runways slots. India's major airports lacked all of them. Anxious to expand, Mr. Goyal hit on an unlikely option during a state visit to India by the King of Belgium in 2005: using the Brussels airport as a hub for North American-bound flights. The facility had sat largely empty since the collapse of national carrier Sabena four years earlier. Talks with Belgian officials at Mumbai's luxurious Taj hotel quickly yielded an action plan. "It was a proper business meeting with an agenda," recalls Mr. Goyal, who was more accustomed to India's glacial bureaucracy. Winning regulatory approval for the unusual arrangement from Belgium and the U.S. took months, but by late 2007, Jet's wide-body airliners were arriving in Brussels each morning from Delhi, Mumbai and Chennai, mixing passengers and departing again for New York's JFK International Airport, Newark Liberty Airport and Toronto. Another three planes did the same trip in reverse. The four-hour Brussels stopover lengthens passengers' trip time compared with a nonstop flight. It also forces Jet to move hundreds of passengers and their bags quickly through a foreign airport at great expense. But thanks to close cooperation with the privately owned airport, which was hungry for business, Jet was able to offer nine different connections between Indian and North American airports, compared with only three connections possible with nonstop flights. But as fuel prices rose in 2008 and America's financial problems rippled to India's outsourcing operations, Jet flights through Brussels grew emptier. Costs rose. Only weeks after adding a seventh Brussels flight last Oct. 31, from Bangalore, Jet reversed course on Nov. 25 and canceled the route, citing economic turmoil. Jet now serves 60 destinations, including 19 outside India. "The crisis has forced us to look much more closely at costs," Mr. Goyal said at his London mansion. Mr. Goyal says he remains committed to Brussels and predicts the North American operation will break even this summer. But many rivals doubt the long-term viability of a hub so far from home. "It doesn't work," says Pierre-Henri Gourgeon, chief executive of Air France-KLM SA, which operates huge hubs in Paris and Amsterdam. Successful hubs rely on big traffic volumes, which Jet cannot guarantee, he says In mature markets, airlines generally fill long-haul flights with traffic from many smaller planes arriving at a hub for connections. To coordinate this, airlines need lots of boarding gates, airplane parking spots and runways slots. India's major airports lacked all of them. Anxious to expand, Mr. Goyal hit on an unlikely option during a state visit to India by the King of Belgium in 2005: using the Brussels airport as a hub for North American-bound flights. The facility had sat largely empty since the collapse of national carrier Sabena four years earlier. Talks with Belgian officials at Mumbai's luxurious Taj hotel quickly yielded an action plan. "It was a proper business meeting with an agenda," recalls Mr. Goyal, who was more accustomed to India's glacial bureaucracy. Winning regulatory approval for the unusual arrangement from Belgium and the U.S. took months, but by late 2007, Jet's wide-body airliners were arriving in Brussels each morning from Delhi, Mumbai and Chennai, mixing passengers and departing again for New York's JFK International Airport, Newark Liberty Airport and Toronto. Another three planes did the same trip in reverse. The four-hour Brussels stopover lengthens passengers' trip time compared with a nonstop flight. It also forces Jet to move hundreds of passengers and their bags quickly through a foreign airport at great expense. But thanks to close cooperation with the privately owned airport, which was hungry for business, Jet was able to offer nine different connections between Indian and North American airports, compared with only three connections possible with nonstop flights. But as fuel prices rose in 2008 and America's financial problems rippled to India's outsourcing operations, Jet flights through Brussels grew emptier. Costs rose. Only weeks after adding a seventh Brussels flight last Oct. 31, from Bangalore, Jet reversed course on Nov. 25 and canceled the route, citing economic turmoil. Jet now serves 60 destinations, including 19 outside India. "The crisis has forced us to look much more closely at costs," Mr. Goyal said at his London mansion. Mr. Goyal says he remains committed to Brussels and predicts the North American operation will break even this summer. But many rivals doubt the long-term viability of a hub so far from home. "It doesn't work," says Pierre-Henri Gourgeon, chief executive of Air France-KLM SA, which operates huge hubs in Paris and Amsterdam. Successful hubs rely on big traffic volumes, which Jet cannot guarantee, he says. Mr. Goyal says falling Indian wages now give him a leg up, because labor accounts for only around 15% of Jet's costs, compared with more than 20% for most Western carriers. Still, he says Jet will refocus on cutting costs and expanding in less-competitive markets of Bangladesh, Nepal and Sri Lanka. "I want to learn how to buy my insurance for the next four years," Mr. Goyal said of his efforts to protect Jet. "I'm the biggest shareholder, so I suffer the most."

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