Dangerously flying

The recent upturn for India’s domestic airlines did not come a day too soon.Some of them were teetering on the brink. Banks had stopped giving loans to some large airlines as they had run out of collaterals to offer against loans.
One bank generously accepted a brand name as collateral from an airline when giving a loan of Rs1,900 crore. Should that airline default on loan repayment, the brand may be of no value to the bank. Had the downturn continued much longer, some of the airlines could have quite possibly collapsed. The present upturn in airline traffic seems sustainable for some time, with the usual seasonal fluctuations in demand.
However, the suggestion by some analysts that the gap between supply and demand will soon disappear and that airlines will need to increase capacity through fresh orders for aircraft is unrealistic.
Airlines would be foolish to place fresh orders for aircraft for the next few years, at least, or even to bring forward the delivery of aircraft currently on deferral. Those deferrals, incidentally, had to be obtained at considerable cost. There are still enough aircrafts on firm order, awaiting delivery to some of the airlines, to maintain the over-capacity situation, even in this boom period. Those airlines with excess capacity could pull the more prudently managed ones down with them.
As one example, IndiGo has 100 A320-family aircraft on firm order, for delivery up to 2016.By end 2010, IndiGo was to have received 35 aircraft — but the number may be lower than that. That leaves about 70 aircraft for the last six years — almost 12 a year. Worse still, 30 of those aircraft were to be the higher-capacity A321s. Very recently IndiGo switched those to the smaller 320s —though there is no mention of how many. That means a substantially higher rate of capacity increase than in the past. IndiGo is not the only airline with a large backlog of firm orders.
Should just one airline place a fresh order for aircraft, all others may be compelled to follow. That would devastate the industry, which is still very vulnerable. Should the airlines go for the sale and lease-back of aircraft on existing firm orders, they are unlikely to get the prices that they had paid for those aircraft.
19/02/10 Hormuz Mama/Daily News & Analysis

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Categories: Indian Aviation- In General Feb 2010