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Aviation Boom - 2.0?

 
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In the long term, will any of these startups be successful?
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No
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Optimus.Prime
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PostPosted: Sun Aug 19, 2012 2:29 pm    Post subject: Aviation Boom - 2.0? Reply with quote

Aviation boom: New entrepreneurs betting big on small towns to generate business

http://economictimes.indiatimes.com/news/news-by-industry/transportation/airlines-/-aviation/aviation-boom-new-entrepreneurs-betting-big-on-small-towns-to-generate-business/articleshow/15548804.cms

Gujarat has nine airports, but its air connectivity sucks. Seriously. You can fly to Mumbai from all the airports, but what about travelling between them? You can't.

There are no air services between cities such as Ahmedabad, Bhavnagar, Jamnagar, Surat and Kandla. That means Mumbai is just over an hour away from Ahmedabad, but Surat and Porbander are separated by about 13 hours.

Not long ago, it took two separate planes to get to Mysore from Delhi. These days, your best bet is hopping off a plane at Bangalore and enjoying or enduring, depending on the traffic, a three-hour drive. Reason: Mysore has an airport but no flights.

As anyone trying to fly between the smaller cities in India is certain to experience, it's not easy to get from here to there and back. Travel often becomes an odyssey. To start with, there are those endless queues, delays and security hassles at airports. Outside, the misery of traffic jams lurks.

For a country of its size, we have to make do with only five and a half airlines (some would say even that is being kind to Kingfisher Airlines). They can't fly everywhere partly because of poor infrastructure and partly out of choice. Flying itself has become expensive. Whatever happened to those Rs 1 and Rs 99 tickets. Heck, whatever happened to those Rs 2,500 tickets.

It shouldn't be surprising then that travel in India often turns out to be a travail. But the most vexing part has to be the sheer lack of connectivity. Even states such as Himachal Pradesh and Uttarakhand, which are key tourist destinations, have negligible air services to their many scenic and religious attractions, according to the Centre for Asia Pacific Aviation, a leading consultancy.

Boom, Boom
Captain GR Gopinath, the man who gave us the Rs 1 ticket with his Air Deccan, is about to address the problem in Gujarat. On Monday, he will launch a regional airline in the state. His Deccan Shuttle will start 12 flights a day between the nine cities using five 12-seater Grand Caravans.
Gopinath's latest venture coincides with a series of launches of small and regional airlines in India. Air Mantra, a unit of financial services conglomerate Religare Group, launched daily flights connecting Amritsar and Chandigarh in July. Starting out with two Beechcraft 1900Ds, a 17-seater aircraft, it is the first airline to offer direct flights between the two cities.

Sandeep Bhatt, CEO, Air Mantra, says the aim is to become a regional airline. Air Pegasus, promoted by Shyson Thomas of Decor Aviation, an airport ground handling agency, is looking to become south India's first regional airline in October. Pegasus will connect 13 airports in the south.

Spirit Air, which connects industrial towns such as Jamshedpur and Ranchi from Kolkata, is expanding to places such as Angul in Orissa, where Jindal Steel and Power is building a Rs 50,000-crore steel plant. Later this year, it will target tourist destinations such as Gaya and Kushnagar later this year.

RAHI Aviation Inspired Realities (RAir), an offshoot of RAHI Aviation Holdings, a Bangalore-based aviation infrastructure and allied air services company, will begin to fly as a non-scheduled operator (one that does not follow a timetable) and a regional service operator early next year.

The company is in advanced discussions with aircraft maker Cessna for its five Air Taxi turbo-props, a 12-seater Grand Caravan and a 39-seater ATR-42. RAir has secured $9 million from two anchor investors and is in talks to wrap up a full investment of $23 million by this Christmas, according to founder chairman Umesh Kumar Baveja.

Non-resident Indians in the Gulf are about to resurrect plans to launch a carrier called Air Kerala that will connect the state and the Middle East. Waiting in the wings are Karina Airlines, Volk Air, Air Freedom and Akashganga Airlines, among others.

The Case for Small Carriers
Indian aviation is again having a moment after about four years of skulking in the corners of a slowdown. Importantly, the action this time has shifted to small carriers, which could answer India's poor air connectivity problems because major Indian airlines can only be expected to pare services on many routes, given their troubles with fuel prices and huge debts. For instance, Kingfisher, which had made Mysore its own in its prime, has since cut the city from its schedule as it has with Agra, Pantnagar, Kohlapur, among other routes, due to its financial struggles.
Yet, the action comes at a time when few are expected to touch the sector with a barge pole. India's biggest airline by market share, Jet Airways, and low fare rival SpiceJet posted profits in the June quarter, but these are still early days to suggest that the sector has emerged from the shadow of the troubles sown by soaring fuel prices and a weakening rupee.

Even for a sector that has always been inherently risky, the past two years have stood out as an absolute nightmare. Indian carriers lost a combined $2 billion last year. Kingfisher, which once embodied aviation's glitz and glamour, is gasping for breath and fighting for survival.

Gopinath's previous ventures themselves a low fare carrier called Air Deccan that was sold to Kingfisher and air cargo service Deccan 360 were modest successes.

Even India's past experiments with regional airlines are far from encouraging. A comprehensive policy packed with incentives to promote regional airlines was unveiled in 2007. Expectedly, a number of names such as Trans India Aviation, Star Aviation, Air Dravida and Avicore appeared on the scene with big plans, looking to benefit from cheaper jet fuel and zero landing and navigation charges.

Gurgaon-based MDLR Airlines, whose founder Gopal Kanda has been arrested for allegedly abetting the suicide of a former employee, and Jagson Airlines, a helicopter operator, too revealed their ambitions to become a regional player. But nothing happened. The closest India came to having a regional airline was when Madurai-based Paramount Airways launched operations in 2005, only to fold up in early 2010.

So it would seem an odd, even reckless, time to start an airline. Harvansh P Chawla, chairman, Karina Airlines, says when he told friends about his venture, their reaction was: "Are you serious? You must be out of your mind."

Yet, the executives of all the startup carriers are sanguine about their future. Their business strategy typically focuses on connecting small towns with tourist hotspots or remote locations and dodge competition with bigger airlines.

"We are not here to compete with any scheduled airline but to act as a feeder to such airlines. The sectors which do not make commercial sense for them with 150-plus seater aircraft but has potential with less than 50-seater aircraft would be operated by us," says Mantra's Bhatt.

What about demand? Legacy carriers are right when they say many markets do not have enough passengers to justify flights. But that is because carriers such as Jet and IndiGo fly big planes like the Boeing 777 (seating capacity: 312) and Airbus 320 (around 160). Filling planes that can accommodate four to 70 passengers becomes easier from places such as Hubli, Vijayawada, Ranchi, Jamshedpur etc.

"There is always someone flying to these industrialised areas or tourist spots," says Alexander Koshie, a consultant to Spirit Air. RAir's Baveja says the aviation market in India is concentrated in the larger commercial space with aircraft over 50 seats or in the non-scheduled, charter space where general aviation aircraft with less than 10 seats are used. "Existing players are not geared to service the demand emanating from tier-2 and tier-3 markets."

Pegasus' Thomas justifies the need for more carriers in India. "There is a huge vacuum because of what happened to Kingfisher and Paramount. Existing players have jacked up prices. A Bangalore-Delhi ticket has risen to Rs 8,000 from Rs 4,500."

American Way
The second boom in Indian aviation closely resembles that of the American market in the early 1970s. US carriers such as Southwest Airlines and JetBlue Airways forced their way into the business by offering service to airports overlooked by major rivals.

George W Hamlin, president, Hamlin Transportation Consulting, says the small airline business in the US began with air taxis, which provided service with very small aircraft to points that were not part of the scheduled air service system. "This evolved into what became known as 'code-sharing', where the air taxi (increasingly known as 'commuter' or 'regional' carriers) replaced the large/trunk airlines at very small points where it was no longer efficient to operate."

Pegasus is looking to act as a similar "feeder" airline. One of its key strategies is to service international flights in Kochi that arrive early morning and depart late evening. "It is a significant market from neighbouring cities," says Thomas.

Others like Air Mantra are borrowing a page from the Southwest rulebook. In a classic profile of Southwest in Texasmonthly.com, SC Gwynne wrote that the carrier began flying three Boeing 737s between Houston, Dallas and San Antonio in 1971.

"Before Southwest, it usually made sense for a businessman to drive from San Antonio to Houston for an afternoon meeting. Not anymore. For $40, you could hop on a flight... and be in Houston for the meeting and lunch and still be back in San Antonio by late afternoon to shoot a round of golf. Its flight service began to resemble a bus schedule. In this way, the airline shrank the state."

A similar opportunity to shrink India beckons the new carriers. Air Mantra is wooing people government officials, professionals, lawyers who do the "morning-evening" trips between Amritsar and Chandigarh. Bhatt says these people would want to go to Amritsar in the morning, visit the Golden Temple and return home by evening. "It's not luxury, but convenience that we are offering."

How Will They Fare?
Hamlin says there can be a successful business case for smaller airlines, either operating independently, serving markets, possibly local, that are too small for large carriers, as well as the hub-feeding (from smaller points) in partnership with larger airlines."

But Capa South Asia CEO Kapil Kaul says starting a regional airline makes a business case only in the long term at least 200 cities will be connected in a few years. The biggest problem related to an airline startup is capitalisation, he says, adding that to fully fund the business of a regional airline, one needs at least Rs 150 crore.
"That's the challenge for the new guys. Few people can put up that kind of money or the collateral. And banks have historically burnt their fingers with airlines. That's why new entrepreneurs start with around Rs 20 crore, secure one or two planes and abort the project."

Indeed, in 2002, a year after the aviation industry recovered after the September 11 attacks in the US, at least six private airlines sought the government's permission to launch operations. None took off. India then had two private scheduled airlines and 39 non-scheduled airlines. Three more scheduled operators and another 100 non-scheduled carriers have started operations since, but a regional airline was still missing.

Starting Troubles
Recently, Invision Air, a non-scheduled operator based in Mumbai, announced its intention to grow into a regional player. "We did have plans to launch a pan-India fleet of chartered aircraft in all the six metros. But because of what happened in the last two years in Indian aviation, we deferred plans," says Jayant Nadkarni, co-founder and chief operating officer.

Invision will revisit the plan when the aviation scene improves. Until then, it is content playing a non-scheduled operator and flying aircraft on the behalf of a business or corporate house. It remains to be seen how serious some of the other new players are.

Although Volk, Akashganga and Freedom have got NOCs from the aviation ministry, according to an official, they are yet to announce concrete plans. Calls and texts to a number shown on Volk's website remained unanswered. Freedom and Akashganga could not be reached for comment.

A senior government official in Kerala who asked not to be named says the plan to launch Air Kerala will not fructify. "Firstly, the rules don't permit it. An airline must fly five years domestically before it flies abroad. The central government is not going to make an exception for Kerala," he says. "And when a government airline [Air India] is making losses, why would the Kerala government want to enter aviation? It is having trouble running its road transport corporation."

Kaul says it is surprising that, given the challenges and losses the industry faces, people enter aviation. "Some people are still attracted to the glamour and razzmatazz of an airline." But most are not aware of the realities of the market or the complexities of running an airline, according to him. If indeed there is a business case in some routes, an existing airline will start operations with smaller aircraft such as an A320 or (Bombardier) Q400, according to Kaul. (SpiceJet is a shining example of this strategy).

Some of the new airlines are already facing obstacles. Pegasus, for instance, was about to start services in July but has postponed the launch to October because it is yet to secure aircraft. "Mallya [Kingfisher boss Vijay Mallya] and [M] Thiagarajan [Paramount MD] have created problems for us. Nobody is comfortable sending aircraft. Earlier the leasing condition had advance rentals of about 3-4 months; now rentals have shot up to 24 months."

Companies like Pegasus and Spirit are also up against banks that have turned wary because of the troubles in the aviation sector.

Promising Future
That is not to suggest that it is all gloom and doom for upstart airlines. Spirit's Koshie says the carrier is looking at routes where the "big guys will not be able to undercut fares". General manager of operations, Rakesh Saxena, says not even Bombardiers can land on the routes that Spirit is present. "The average runway is 3,000-4,000 feet long. We can also land on a football field."

Hamlin backs this argument. "In general, it is difficult for large airlines operating large aircraft to downscale operations and utilise smaller aircraft successfully."

Craig Jenks, president, Airline/Aircraft Projects Inc, a New York-based consultancy, says experience in the US, Europe and elsewhere shows that a well-run independent regional airline will always have a cost discipline and revenue nimbleness unattainable by larger airlines. Small carriers also don't have a massive overhead like their bigger competitors. Short hops and low overhead mean low fares.
The new carriers also can draw lessons from the follies of existing players. Thomas says the aviation business is 100% sustainable. "Of course, it is not everybody's cup of tea. One should have control of revenues."

To cite an example, he says that his crew flying from Bangalore to Hyderabad and then to another airport will return home after an eight-hour shift to avoid hotel and pickup costs. About Pegasus' capitalisation problems, Thomas says these are only initial hiccups. "We will present a workable business case to banks and provide adequate collateral. Banks are reluctant, but that doesn't mean they will not lend."

India's upstart airlines can draw lessons and comfort from the Southwest story. In 1994, United Airlines, then the world's largest carrier, launched a short-hop airline, the United Shuttle, which mimicked Southwest down to its no-frills service, 737-only aircraft, low fares, and electronic ticketing. The service was shelved seven years later and United declared bankruptcy in 2002.

United competed with a carrier a fraction of its size and failed. Will India's aviation underdogs relish a similar fight? "If you run an airline properly, it will not fail," says Thomas. Who can fault that logic?

America's tryst with small airlines
This business in the US began with small operations known as air-taxis, which provided service with very small aircraft to points that were not part of the scheduled air service system. For most part, this was a "point-to-point" air service that didn't directly connect with the larger carriers. If there were connections, it involved two separate tickets, and two separate check-ins, with no guarantee of connecting if a flight was late.

This evolved into what became known as "code-sharing", where the air taxi (that came to be known as "commuter" or "regional" air carriers) replaced the large/trunk airlines at very small points where it was no longer efficient for the large airline to operate. Since the commuter aircraft were smaller, this enabled multiple frequencies on a given flight segment, whereas the trunk carrier may have been operating only one or two trips a day because they were using larger aircraft.

The addition of flight frequency, with multiple departures at different times of the day often stimulated traffic in these situations, resulting in a successful business from the perspective of both carriers. After the economic deregulation of the US airlines began in 1978, the trunk carriers developed large "hub and spoke" networks.

The regional carriers participated in this process by providing the service to smaller spoke cities from the hub, eventually flying larger sophisticated aircraft including both modern turboprops and regional jets. This business model was very successful in the US market, but there is now diminishing demand for regional airline feeder services due to mergers, which have reduced the number of trunk lines and hubs, as well as higher fuel prices, which have had a negative impact on the economics of regional aircraft, particularly regional jets.

Source: Hamlin Transportation Consulting

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jasepl
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PostPosted: Sun Aug 19, 2012 2:56 pm    Post subject: Reply with quote

There is definitely a market for intra-state traffic. Especially in Gujarat, which has the biggest number of operational airports, but all of them are linked to Bombay.

That said, I don't see these little ego-driven startups lasting, even if they ever get off the ground.

As I've said so many times, there is room for them to flourish, if the partner with a Jet or an IC and operate as a franchisee. That enables feed into the overall global network as well as the ability to maintain the more marginal AMD-RAJ type routes.

Big airlines all over the world use such a set-up rather well already.
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HAWK21M
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PostPosted: Wed Sep 26, 2012 4:42 pm    Post subject: Reply with quote

Make the sector profitable first......
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