 "Vistara")
What is an ideal expected loss when starting out on a new venture? How long does one ready oneself to expect losses before the tide turns? Do businesses plan for losses of Rs 500 crore and above? How long are investors meant to cool their heels hoping for a whiff of change?
These are some of the questions that are being asked in the context of a Rs 518-crore loss of the Tata Singapore Airlines venture Vistara in FY17, up from Rs 400 crore in FY16.
Losses have been growing and industry experts say the way things are proceeding this year, FY18 could lead to an even more dramatic loss figures for the carrier, something that is a worry for the sector as a whole.
Why are losses likely to rise this year? At least three factors have changed. One, oil prices are on the rise. Fuel prices that were at $32 per barrel have slowly inched up to $56 a barrel, up by roughly 50 per cent. Since fuel costs comprise the larger portion of total costs for any airline, this has a significant impact on all players. In addition, the dollar has begun to strengthen a bit vis-a-vis the rupee, but this is a recent phenomena and is yet to fully play out.
Adding to this is the fact that Vistara’s operations are almost double of what it was — in terms of fleet size — when losses touched Rs 518 crore. CAPA India’s aviation outlook for FY18 also projected higher losses for Vistara and other full-service carriers, although it stops short of putting a number to it. CAPA’s head Kapil Kaul says at an industry level, losses could touch $250-300 million.
“Speaking of Vistara alone, I would expect the loss this year could be as high as Rs 700 crore”, says an industry analyst who didn’t want to be named. He says that on account of the increase in fuel prices alone, there is likely to be a general cost escalation of almost 20 per cent. Wage escalation and other cost increases will add to the pressure.
A senior Jet Airways official said this is a ‘high price’ for an airline to pay to be a ‘fringe player’. As thing stands, Vistara’s market share is at below three per cent, even lower than Air Asia India.
When asked about growing losses, a Vistara spokesperson said: "Our financial performance has been showing steady improvement as we scale up, despite rising fuel prices, and we are performing better in the current fiscal year than our forecast. This is due to the fact we are reaching critical mass and are able to command higher revenue quality as well as amortise fixed costs much better now with larger network and scale. Aviation is a scale-driven business.” When asked about the impact of adding new international routes on losses, she added that “while new routes always require time to mature, this is factored into our plans and we expect flying international to be a strong performer”.
Coming to the future of Vistara, there is a growing body of experts and professionals who feel Vistara’s only hope is buying Air India. “To reach the size and scale it needs, this is perhaps the only way forward for Vistara”, an expert argues, saying Air India has assets that have not been exploited.
There are a few other worrying factors. Vistara is operating as a full-service airline on a higher cost base. Its cost per km is almost double that of low-fare rival IndiGo, but both are charging largely similar fares. This year, fares have been even more of a shocker, say industry sources with festival fares — around Dusshera — almost 10-15 per cent below normal. “Madness prevails in the market and fares around Dusshera have been almost 15 per cent lower than last year.” Fares have started picking up a bit as Diwali approaches but they are still below what they usually are.
An airline spokesperson on yields said that it expected to improve yields and “as we scale up our network, we are able to extract a better fare mix that — together with our premium classes — gives us higher average fares and unit revenues than low cost carriers”.
What Went Wrong?
- Fuel prices have gone up by 50%. This makes up a large portion of total costs for any airline.
- Vistara's operations are almost double of what it was, in terms of fleet size, when losses touched Rs 518 crore.
- The airline is operating on a higher cost base. Its cost per km is almost double of low fare rival IndiGo but both are charging largely similar fares.
- Its market share is at below three per cent, even lower than Air Asia India.
- Experts say Vistara's only hope is buying Air India.
A senior aviation analyst argued that what works for airlines globally may not work as well in India as has been seen time and time again. So, the standard Singapore Airlines (SIA) practice to rotate senior management might work everywhere but India had its own peculiarities. The chief executive officer (CEO) of a rival airline said he couldn’t understand the strategy of having a CEO from overseas (in the case of Vistara from SIA) who spends just three years and returns. “It takes close to three years to get a hang of how things operate in India. The moment the man-in-charge has figured it out, it’s time for him to depart. I don’t see this as helping matters,” says he, arguing that the complexity of the Indian market requires some time just to fully understand it. Vistara is now readying for a new CEO after the current CEO Phee Teik Yeoh leaves, after spending a little over three years in India.
But so what if one player Vistara makes sharp losses? Why should others care? A senior IndiGo Airline official answers that. He says that very high losses push airlines into more “desperate measures” that harm everyone, arguing that mindless cuts in fare this year have been more at the instigation of the full-service players than the low-fare ones. Many times the fare wars are led or are at the instigation of Air India or other full service players. “In India’s highly competitive environment, for rationality to prevail in the market, very steep losses for any one player is not good news,” he says.
