Airlines eye orders as income stream

Cashing in on a sharp increase in global aircraft prices, Indian domestic carriers hope to earn around $100 million (Rs 400 crore) in 2008 by either hawking their delivery slots with aircraft manufacturers or by entering sale and leaseback deals with leasing companies.

The income earned from such activities is crucial for the domestic airline industry, which had accumulated losses of over Rs 2,200 crore in 2007. These losses are expected to rise to Rs 2,800 crore in 2008.

With capacity growth outstripping demand, many leading low-cost carriers in particular are cutting aircraft delivery schedules to consolidate growth plans and reduce mounting losses.

In 2007, the available seats per km were 51 billion against a demand for 35 billion.

For instance, the largest low-cost carrier Air Deccan has decided to take delivery of half the 16 aircraft (eight Airbuses and eight ATRs) slated for 2008.

It expects to earn $30 million by selling delivery slots to other carriers and leasing companies.

Air Deccan took delivery of 20 aircraft in 2005 and 10 in 2007.

"Since only 2 per cent of Indians travel by air, there is a large market potential. But infrastructure constraints, chiefly driven by the lack of competition between airports, are becoming key constraints for growth," said G R Gopinath, executive chairman of Air Deccan, which will shortly merge with UB group's Kingfisher Airlines.

Delhi-headquartered Spicejet is expected to earn Rs 160 crore as premium for a sale and leaseback deal with a leasing company.

When the company signed its aircraft deal with Boeing in 2004, the cost of an aircraft was around $26 million against a current list price of $60 million.

A SpiceJet spokesperson declined to comment on the issue.

Mumbai-based low-cost carrier GoAir is also opting for a sale and leaseback option for the seven aircraft due for delivery this year. It is expected to earn Rs 80 crore to Rs 150 crore this year from this alone.

Larger airlines may follow suit. Kingfisher Airlines, which is on an expansion spree especially as it enters international skies, said that it is not averse selling slots in 2009 if it gets a good price.

"We cannot comment on details of deliveries, but if we get a good price for our slots then why not (sell them)?" said Hitesh Patel, executive vice-president, Kingfisher.

Most low-cost carriers opted for long-term bulk orders with aircraft manufacturers to cope with their hectic growth projections.

IndiGo, for instance, ordered 100 aircraft with Airbus. Airlines are required to pay 10 per cent of the cost upfront on these orders.

In return manufacturers gave them large discounts on the shelf price. With high demand for aircraft globally, prices have gone up 40 per cent, providing a useful arbitrage opportunity.

Sale and leaseback deals, however, typically involve higher rentals than the prevailing market rate which may put pressure on airline costs in the future.

"It's a risky business, but at the moment everyone is playing the valuation game rather than looking at future costs," said a senior industry executive.

Also, aircraft prices might not go up because manufacturers have accelerated production schedules "" for instance, Airbus has increased its daily output "" which will reduce the shortage and, therefore, the premiums.