Aviation`s appeal

New Delhi: The aviation business is now almost a century old. Yet, unlike for other businesses of similar vintage, its glamour has not worn off, at least for investors. This is in spite of the fact that ever since deregulation hit the business at about the same time as the advent of the Boeing 747, the return on investment in an airline for any 10-year period has rarely if ever exceeded a measly 1.5 per cent.
As risky businesses go, aviation has few peers. Yet the industry continues to attract capital, much of which gets wasted in the sense that an alternative use would yield not just higher private but also better social returns.
A stark reminder of the fascination with the business came again last week when Kingfisher Airlines and the budget airline it bought into, Deccan Airways, announced that their combined losses amounted to about Rs 2,000 crore, with almost half that coming in 2006-07. The two airlines between them also owe more than Rs 500 crore- and intend to borrow more. Some of the new borrowings will go into fleet expansion but a great deal of money is going to be needed to pay running costs. Jet Airways, a competitor, also reported a loss in 2006-07 but has just about turned around this year. Little is known about the financial health of the other budget airlines. However, given the intense competition on the major routes - 80 per cent of the seats are sold below cost - it is unlikely that any of them is making a real profit.
So when all the smoke has blown away, the intriguing question remains: who, apart from governments, has this kind of money to lose, and why? How transparent are airline balance sheets?
26/12/07 Business Standard

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Categories: General Aviation Dec 2007