Jet vs Kingfisher (With SWOT Analysis)

On October 28, at a ceremony to unveil Air Deccan's new-look aircraft in Mumbai, chairman of United
Breweries group and Kingfisher Airlines, Vijay Mallya, said with characteristic flourish: "We have given the
full service carriers a run for their money. Now, we will give the low cost carriers a run for theirs."

Though he did not refer to any one airline, it was clear his statement was directed at Jet Airways and
Jetlite (formerly Air Sahara). Ever since Mallya launched Kingfisher in May 2005, making it number one in
India has been a foregone conclusion; it's the world's biggest carriers he wants to take on.

Kingfisher's meteoric rise has taken rival and unquestioned number one domestic carrier in the country,
Jet Airways, quite by surprise. Used to competing with only Sahara (never a worthy opponent anyway),
Jet enjoyed several years of unfettered success after it had trounced Indian Airlines's monopoly and
market, becoming India's premier airline since 1993.

This supremacy has now been challenged by a nimble and aggressive Kingfisher which, in just two years
and following Mallya's buyout of Air Deccan, is commanding the same market share as Jet Airways and
Jetlite.

He may not publicly admit it but Goyal's troubles began soon after Kingfisher took to the skies. "If Naresh
Goyal had a magic wand, he'd probably wish away the last two years. Few things have gone right for his
airline since the second half of 2005," says a close associate who was on his board but has since
resigned.

In Mallya, Goyal appears to have found his first worthy opponent. If Goyal is well connected and knows
how to keep the politicians beaming, Mallya is "not exactly an orphan".

If Goyal has managed to hire professionals and build a brand, Mallya is a past-master at building brands.
And if Jet has never had a problem raising money before, Mallya has group United Breweries (with a
market capitalisation of $5 billion) backing him.

In its initial avatar Kingfisher was aiming to be a low-fare carrier, but soon after its launch Mallya
converted it to premium service, taking Jet head-on. Mallya is spending money like water (the airline lost
Rs 400 crore in the first year) and has left no stone unturned to grab Jet's market, launching direct
advertising campaigns asking Jet fliers to convert to Kingfisher, luring them with miles, better food and a
slicker, cooler yet equally efficient option.

Mallya is proving to be "maniacal" about being on time; every delay is examined threadbare in a much
dreaded early morning conference which he conducts over the telephone with his senior executives, no
matter which part of the world he's in.

When Kingfisher started, many in the industry had questioned its survival. "Not only has it survived," says
Kamal Choubey, officer on special duty to civil aviation minister Praful Patel, "one simply cannot deny that
Kingfisher's product is the best in the industry."

There are few who appreciate Jet's subtle, quiet efficiency when it's up against Kingfisher's flamboyance.
Gopal Sarma, CEO of Feedback Ventures, who accumulated 400,000 miles on Jet Airways' frequent flier
service, says he now often chooses Kingfisher simply because its service on the ground is so superior.

He received a Kingfisher Gold card in the mail and has already accumulated 80,000 miles on it. "If I call
Kingfisher and ask to be put on a flight in two hours, they give me incredible service. With the amount I
travel, I appreciate things like this," he says.

Other than the corporate flyer, Kingfisher is trying to attract the young, upwardly mobile Indian who
aspires to fly Kingfisher simply because he identifies with Mallya and his style statement of living life
kingsize. Mallya's passion for his airline (some call it obsession) is very clear.
In 2006, Jet's initial troubles were compounded by its messy buyout of Air Sahara which many feel was
simply a move to thwart Kingfisher from acquiring it. Against the advice of his senior colleagues, Goyal
offered Rs 2,300 crore (Rs 23 billion) for it, a pretty high price for the airline.

"It was like a bee in his bonnet. Once he set his mind to it, he refused to back down, even though
everyone warned him it wasn't a great buy," says a senior official who has since left Jet.

As was widely predicted, Jet's share price reacted adversely and has never recovered to what it listed at.
The company's total market capitalisation following the announcement of the Sahara deal fell from over
Rs 10,000 crore (Rs 100 billion) to Rs 4,558 crore (Rs 45.58 billion).

The moment the deal was called up, the share price recovered somewhat - a clear indication of what the
market thought of the Sahara buy, but even today it is trading below the price at which it listed.

At roughly the same time the civil aviation ministry threw open international routes to private carriers. Jet
saw this as a natural extension to its business (and one where it enjoys first-mover advantage) and
ordered new aircraft.

With competition rising and losses deepening (in the first half of 2006-07, it totted up losses over Rs 100
crore), it needed to raise money and the intention was to do that through foreign currency convertible
bonds (FCCB) of $400 million.

But with the share price languishing in the Rs 600-800 range, Goyal would have been forced to dilute a
larger portion of his equity than he was willing. So, the issue was postponed.

Around the same time as Jet announced its buyout of Sahara, Air Deccan listed. By then Goyal had seen
Air Sahara at close quarters and even he realised it was not worth the money he'd committed - but
withdrawing proved harder than he'd expected.

"As the court battle with Sahara proceeded, it was far from evident what the final judgment would be. I
think he (Goyal) chose to go in for a known position rather than an uncertain one, which could be worse,"
says a Jet official, who was privy to the goings-on.

These events coincided with a bloodbath in fares in the domestic market as Air Deccan cut prices to take
on new competition, and the new competition cut prices to take on Air Deccan.

"All the players - full service or low-fare - were sucked into it, so obviously everyone started making
losses," says Kapil Kaul, CEO of Centre of Asia Pacific Aviation. With losses on domestic operations
rising and the launch of international operations - which will pay off only later - most investment firms and
brokerages are maintaining a "reduce" position on Jet stock.

Says Gautam Roy, aviation analyst with Mumbai-based financial services firm Edelweiss: "We are not
very optimistic on Jet's immediate prospects. It is more a long term story." It has now been two years
since Jet has been trying to raise $400 million through some form or the other (earlier through an FCCB,
now a rights issue) and it's proved more elusive than Goyal could have imagined.

Although Jet officials say that by end January, they should be able to raise the funds, industry sources
say they'll only believe it when they see it.

Kingfisher's chief financial officer, A Raghunathan, argues that this is one of Kingfisher's big strengths vis-
vis Jet. "Obviously, our own balance sheet is not strong enough. The group's backing is a pillar for us." He
says that the airline has got Rs 500 crore (Rs 5 billion) in equity, loans and guarantees from the group to
raise finances.

Jet loyalists are quick to point out that using group funds to get into a sector where you bleed is not good
business sense, and that Jet has raised over $2 billion in the past from international loans on its own
strength, passing the intense scrutiny of lenders.

Then, during the middle of this year, Mallya made a calculated move, buying out Air Deccan for what
many feel is a "song", to deftly match Jet and Jetlite's marketshare.

So, while Jet's management has been struggling to make sense of what it inherited in the Sahara deal,
Mallya is capitalising on Deccan's advantages and has entered a segment that's sure to give returns in
India.

What has compounded problems for Jet is its chairman, Goyal's centralised style of functioning
(according to sources he only trusts board member and confidant Vic Dungca, based in London), leading
to an exodus at the middle and senior management levels over the last two years.

Often, major decisions exclude top officials, so the joke in Jet is that "whenever anything of significance
happens, senior officials are the last to know"! "To be an able general, you have to carry your troops with
you. That Goyal hasn't been able to do," says a former board member of Jet.

With Kingfisher and several other career options coming up, what started off as a steady trickle has
become a virtual flood. Goyal's problems on this front intensified when four senior executives of the airline
resigned together in April 2007, including highly trusted vice president for corporate and public affairs,
Nandini Verma, who'd spent 20 years with Jet.

The latest who's planning to abandon the Jet stable and jump onto the Kingfisher bandwagon is Charles
Soon, head of airport services, who after being publicly castigated by Goyal for a flight delay has been in
a huff and is looking to quit.

Eight former employees that Business Standard spoke to said that the chairman's style of functioning "left
a lot to be desired". (Executive director Saroj K Datta and chief executive officer (CEO) Wolfgang Prock-
Schauer refused to comment on this, arguing that disgruntled employees will have grouses.) In contrast,
barring erratic timings and odd schedules, United Breweries group and Kingfisher airline executives don't
have many complaints against their chairman. Several Kingfisher senior officials are old UB hands who
have spent 25-30 years with the group.

However, as Saroj Datta puts it, people come and people go. He says that Jet's attrition rate has been
constant and that in any industry with competition and new opportunities, things like this will happen.

"We have 10,000 employees. Even if 100 people leave, it's not very significant. We had seen it and have
been well prepared for it," says he. "Yes, people are leaving, but are loads falling?" asks a Jet source.
Like rival Kingfisher, Jet Airways is a one-man show (without Naresh Goyal or Vijay Mallya, both
companies would be rudderless), making it a shared weakness.

But unlike Kingfisher, which is yet to build a strong foundation, Jet already has one. It has a phenomenal
network and will expand by 20 aircraft from April 2007 to March 2008 (it now has 70 aircraft).

According to Wolfgang Prock Schauer, the last two years have been tough for the entire aviation industry
in India, not just for his airline, and he doesn't think that the rise of one airline - with India and its gigantic
market - has to necessarily coincide with the fall of another.

"While things may look rosy for Kingfisher right now, Jet has been through and survived worse," says a
former Jet Airways board member, his point being that Mallya should not underestimate Goyal's
strengths. "I have never known a man so persistent once he's made up his mind. If Naresh Goyal wants
to talk to you, no matter which corner of the world you are in, he will get you," says the former Jet board
member, adding that after he's got what he wants out of you, it may be a long while before you hear from
him again.
Goyal has a phenomenal network across the world, knows his business like Mallya knows liquor, and
never forgets a face, name or number. A hard taskmaster, he expects a lot from his staff. The Sahara
acquisition in retrospect looked better than one would imagine: the airline had ordered 10 B737-800s,
which in today's market would fetch a premium, it has gained two hangars in the process (which Jet was
finding difficult to get) and has entered the lower-end market segment where growth is concentrated
today. Twenty-one of its 24 aircraft are up and running and a turnaround looks within reach, Jet officials
believe.

The other factor in Jet's favour is a recognition of Kingfisher's strengths, especially in terms of quality.
CEO Prock-Scaheur says: "We have to take the product and the quality of its service very seriously." but
he maintains that none of this is reflecting on Jet's loads - "Our business class loads have not gone down
and our Jet Privilege membership is expanding rapidly. Yes, instead of people saying 'I fly only one
airline', they now choose. But that hasn't made any material difference to us," he says, arguing that his
airline's strong brand and obsession with quality and consistency will stand the test of time.

The airline business the world over is cyclical, primarily about keeping costs in check to ensure survival.
And here is where Jet Airways officials feel it has a distinct edge over rival Kingfisher. In the end, they
feel, this one factor alone will separate the wheat from the chaff.

Jet's Strengths

* A phenomenal and well-developed network both of the airline and the chairman.
* Goyal's knowledge of the sector.
* A massive pool of loyal customers.
* Excellent lobbying skills and ability to leverage connections within government.
* Ability to survive downturns earlier.
* Financing raised on strength of own balance sheet.
* Has built a professional organisation.

Jet's Weaknesses

* A perceived drop in service standards when pitted against Kingfisher.

* Struggling with the carcass of Air Sahara.
* Poor people management skills of chairman.
* Inability to raise money for the last two years.

Kingfisher's Strengths

* Superior product on ground; in the air Jet business class is being equated with Kingfisher's economy.
* UB group backing for raising financing.
* Well capitalised airline, prepared to take losses.
* Better handling of employees and staff; less centralised style of functioning.
* Chairman Mallya's grand vision where it is looking to be among the best in the world.
* The Deccan deal - which gives it market share, a new market segment and was cheap.
Kingfisher's Weaknesses

* Kingfisher is yet to build itself into an organisation; structures yet to fall in place.
* Not as professionally run as Jet; yet to build a professionally competent team.
* Mallya's knowledge of the sector does not parallel Goyal's.
* Chairman's people skills are better but employees have to work very erratic hours.
* Unable to leverage connections to the same extent while lobbying.
* Kingfisher's loads are lower than Jet's, which could be a reflection of its marketing and sales ability.

Last Updated: August 2010

The Indian aviation industry is one of the fastest growing aviation industries in the world with private airlines accounting for
more than 75 per cent of the sector of the domestic aviation market (as of 2006). The industry is growing at a compound annual
growth rate (CAGR) of 18 per cent. The country has 454 airports and airstrips, of which 16 are designated as international
airports.

Mr Praful Patel, Union Civil Aviation Minister has stated that the Indian aviation sector will become one of the top five civil
aviation markets in the world over the next five years. Currently, India ranks ninth in the global civil aviation market.

Passengers carried by domestic airlines from January-June 2010 stood at 25.71 million as against 21.1 million in the
corresponding period of 2009—a growth of 22 per cent—according to data released by the Directorate General of Civil Aviation
(DGCA). In terms of market share, private carrier Jet Airways was the market leader with 26.5 per cent share, followed by
Kingfisher Airlines with 21 per cent, Air India with 16.9 per cent, Indigo with 16.4 per cent, SpiceJet with 13.3 per cent and
GoAir with 5.8 per cent during the month of June 2010.

Leading aircraft manufacturers Airbus and Boeing have expressed optimism over the growth of the civil aviation industry in
India. As per Airbus, the country would need 1,032 new aircrafts worth around US$ 138 billion by 2028. On a similar note,
Boeing has also predicted that the sector would require 1,150 commercial jets worth US$ 135 billion in the next 20 years.

The Hyderabad International Airport has been ranked amongst the world's top five in the annual Airport Service Quality (ASQ)
passenger survey along with airports at Seoul, Singapore, Hong Kong and Beijing. The Hyderabad International Airport is being
managed by a public-private joint venture of the GMR Group, Malaysia Airports Holdings Berhad and the State Government of
Andhra Pradesh along with the Airports Authority of India (AAI).

Timothy J Roemer, the US Ambassador to India has said that the US will work with the Indian government and the domestic
private sector to make the country an aviation hub. Speaking at India Aviation 2010, Roemer said that the public-private
initiative, US-India Aviation Programme, would work together with the DGCA on helicopter aviation security.

The AAI is set to spend over US$ 1.02 billion in 2010, towards modernisation of non-metro airports. AAI is planning the city-
side development of 24 airports, including those at Ahmedabad and Amritsar. Additionally, 11 new greenfield airports have been
identified to reduce passenger load on existing airports, according to Praveen Seth, member-operations, AAI.

AAI also plans to spend around US$ 3.07 billion in the next five years for developing, upgrading and modernising metro and
non-metro airports.

With the growth in the industry, airport retailing has also gained pace in the recent times. Development of new terminals and
airports such as the recently inaugurated T3 in New Delhi has provided added impetus to this segment. The highest margin
earners in this segment are food and beverages, beauty product, electronic items, apparel etc. It has been predicted that airports
would provide around 300,000-400,000 square feet retail space by 2015. Many companies are also planning to leverage on this
growing segment by launching specific products for air travellers. For instance, French premium skincare brand L'Occitane is
planning to develop a special range to cater to the airport retailing segment.

Investment Policy

The consolidated document on FDI policy was released on March 31, 2010.

Currently, for the civil aviation sector (Airports):

 FDI up to 100 per cent is allowed under the automatic route for greenfield projects.
 For existing projects, FDI up to 100 per cent is allowed; while investment up to 74 per cent under the
automatic route and beyond 74 per cent under the government route.

Government initiative

As per a new Civil Aviation Requirement (CAR) issued by the DGCA, airlines would have to mandatorily pay a compensation
for delay or cancellation of flights or in case the passengers are denied boarding although possessing a confirmed ticket. The
regulation would come into effect from August 15, 2010.

The Road Ahead

Investment opportunities of US$ 110 billion are being envisaged up to 2020 with US$ 80 billion towards new aircraft and US$
30 billion towards the development of airport infrastructure, according to the Investment Commission of India.

GE Aviation and Air India will jointly invest US$ 90 million to set up a maintenance, repair and overhaul (MRO) facility in
Mumbai.

Indocopters Private Ltd, distributor for Eurocopter helicopters in India, is planning to set up a helicopter MRO facility in
Bhubaneswar, the company’s fourth service centre in the country.
 
Strengths: 

1. Growing tourism: Due to growth in tourism, there has been an increase in number of the international and
domestic passengers. The estimated growth of domestic passenger segment is at 50% per annum and growth for
international passenger segment is 25% 

2. Rising income levels: Due to the rise in income levels, the disposable income is also higher which are expected to
enhance the number of flyers.
Weaknesses:

1.Under penetrated Market : The total passenger traffic was only 50 million as on 31st Dec 2005
amounting to only 0.05 trips per annum as compared to developed nations like United States
have 2.02 trips per annum. 

2.Untapped Air Cargo Market: Air cargo market has not yet been fully taped in the Indian
markets and is expected that in the coming years large number of players will have dedicated
fleets. 

3. Infrastructural constraints: The infrastructure development has not kept pace with the growth
in aviation services sector leading to a bottleneck. Huge investment requirement for physical
infrastructure for airports. 
Opportunities: 

1.Expecting investments: investment of about US $30 billion will be made.

2.Expected Market Size: Average growth of aviation sector is about 25%-30% and the expected
market size is projected to grow upto100 million by 2010.

Threats Huge investments are expected to take place in aviation sector in near future. It is
estimated that by 2012.

1.Shortage of trained Pilots: There is a shortage of trained pilots, co-pilots and ground staff
which is severely limiting growth prospects. 

2.Shortage of Airports: There is a shortage of airport facilities, parking bays,air traffic control

facilities and takeoff and landing slots. 

3. High prices: Though enough number of low cost carriers are already existing in the industry,
majority of the population is still not able to fly to other destinations. 
While India will soon become one of the world's top five aviation markets, eventually ending up fourth behind the
United States, the European Union and China, I disagree that India will need 2,000 planes over the next five years.

Already, India has more than sufficient airplanes, since only 1,000 or so are necessary. The rest of the growth could
be achieved through better scheduling. Take for example Air India's Boeing 777-200LR, which are used to operate
flagship services to New York's JFK Airport. If these flights were extended to Kuala Lumpur or Bangkok, and
schedules altered so that flights depart Mumbai [ Images ] early morning, arriving at night at JFK, then turned around
for a trip back to Mumbai (thus ensuring early arrival there), it would allow more destinations to be served.

The US-India direct link market is already saturated and Praful Patel's desire for more Indian carriers to fly to the US
and vice versa is unreasonable. The demand for business passengers (who require non-stop trips) is already well
served by multiple flights on Continental, Air India, and American Airlines.

Additional direct links include the upcoming service provided by Jet Airways [ Get Quote ], with Kingfisher having
plans for the future, Air India, and Delta. Connecting opportunities are provided by a host of airlines: British Airways,
Lufthansa, and Emirates.

Currently, Emirates sustains a lot of its destinations on connecting traffic to the Indian subcontinent. The high volume
of flights to India by Emirates would have to be matched for Indian airlines to effectively compete. And the airlines
cannot even sustain the capacity levels they are currently at, let alone add more, as evidenced by Jet Airways'
downgrade of North American flights from the Boeing 777 to the smaller A330.

Indian airlines cannot compete due to their fragmentation and competition for the same passengers. On these routes,
foreign airlines mainly compete for passengers from the US; Indian airlines get India-based traffic. Therefore, India-
based airlines cannot have more flights to India without bringing about significant changes in their business models.
Also, Air India's problems stem from three issues: exorbitant cost structure, poor quality, and inefficient business
model.

The first thing that needs to be addressed is Air India's cost structure. If it were a private airline, Air India could apply
for bankruptcy, but as a national airline that option is not on the table.

However, Air India can use a similar strategy by forcibly renegotiating the contracts of its workers to allow for more
flexibility and realistic pay. It can shed unnecessary jobs, reduce salaries of executives.

In line with this fact, the Indian government should search for private investors to buy up to 49 per cent stake in the
airline, and set up an initial public offer to raise cash.

The next step would be to get quality up to the standards of other Middle Eastern/Asian carriers.

To compete on routes to Asia and the Middle East, the quality has to be improved and sustainability of these routes
depends on whether an Indian airport can become a connecting hub.

The only airports where operating an India hub could be viable are Delhi [ Images ] and Bangalore, as Mumbai is too
crowded, and Chennai, Hyderabad and Kolkata [ Images ] are too small. But even those that can still need changes to
become viable as hubs.

For this, the airport needs to be turned into an international transit zone, like Dubai [  Images ], Tokyo, or major
European airports. This would allow passengers to connect from one international flight to the next without having to
go through immigration and rechecking their bags. This would make Delhi more attractive, as it is in a good location
to handle Asia-Europe, Asia-Middle East, and the Kangaroo Route.

About India to US flights, non-stop links are fine, but to capture a more significant passenger share, airlines need to
offer attractive one-stop options, with a through-hub in Europe.

The goal of these services should be to grab plenty of leisure traffic and connect them through the European hub.

India needs a strong Air India to fuel its aviation growth.

#1    Day of the LCCs (If Run Well)

I agree to some extent about LCCs, or low-fare carriers "spoiling" the game. But haven't they exposed the
inefficiencies of the full-service carriers? 
The theoretical cost drivers of an LCC are very slightly different from a full-service carrier: 
1) Food and beverage cost -- One meal, a bottle of water, some lemonade and tea/coffee. I am sure it won't
cost the airline over 150-200 INR per seat per flight. 
2) In-flight magazine and entertainment. Hard to put a number on it, but capital expenditure allocation plus
operating expenses can't be over 50 INR per seat per flight. 
The question is, if all airlines are subject to similar taxes, similar ATF costs, similar aircraft spares and
maintenance costs, why do they charge 1000 to 3000 INR extra just for food and some in-flight
magazines/newspapers? And why should the Indian consumer spend that much extra? 
A few more thoughts on where inefficiencies may exist: 
1) Domestic business class. I have never seen more than 10% to 20% occupancy in one Indian private
airline's business class, and I have flown them over 40 times in the past three years. Would it not be viable
to reduce the price from an exorbitant 20000 INR-plus to a more palatable one and improve load factors? Or
maybe give frequent flyers selective upgrades whenever there is some availability? 
2) High pilot and in-flight crew salaries. I'm not sure if differences exist, but this could be one of the
reasons. 
It's time that full-service airlines start looking toward the "premium economy" segment, which many the
world over have done. These are people who can't officially or personally fly business, but are willing to pay
a bit extra for added comfort -- which could be something as simple as better attention and access to
redundant unutilized assets like vacant fuel-guzzling business class seats.

By: Abhishek Sharma, 

urbulent Times: What's Next for the Indian Airline Industry?

Published: September 24, 2009 in India Knowledge@Wharton  

When the owner of a private airline calls his pilots

"terrorists," something is seriously amiss. But that is
exactly what Jet Airways chief Naresh Goyal did this
month. On the third day of a mass sick leave by his pilots,
Goyal lost his cool. "They are behaving like terrorists," he
said. "They cannot hold the country, passengers and the
airline hostage. We won't tolerate such blackmail."

In trying to control the damage, Goyal brought back his

public relations agency, which earlier had been shunted to
the sidelines, to handle the media. He was advised to
start talking about the "Jet family" and how each and every employee was dear to him.
"'Terrorist' was poor PR," says Jitender Bhargava, executive director at national carrier Air
India.

Jet's tug-of-war with its pilots is just the latest among several difficult situations it has faced
in recent months, and is symptomatic of pains being felt across India's civil aviation
industry, according to Wharton management professor Saikat Chaudhuri. "All [carriers] are
in trouble," he says, noting that Indian airlines are "disproportionately disadvantaged" by
high state tariffs on aviation turbine fuel (ATF), and many operate unsustainable routes
while responding to severe competition with steep price discounts.

"The recession has made all that worse," Chaudhuri adds. Kingfisher Airlines, for example,
has the highest outstanding dues to airports and oil companies, compelling it to provide
bigger guarantees. "Every week we hear the problems of some airline or the other
highlighted."

At Jet, Goyal had already undermined his case a month before the latest standoff with
pilots. In early August, several private-sector airline owners -- including Goyal and
Kingfisher Airlines' Vijay Mallya -- got together under the banner of the Federation of Indian
Airlines (FIA) and threatened not to fly on August 18. Their demand: concessions from the
government. "This is a well-considered decision of all members to protest against high
aviation turbine fuel and airport charges," FIA secretary-general Anil Baijal stated at the
time. Mallya said that private operators would suspend operations indefinitely if the
government did not include them in relief it proposed to dole out to state-owned Air India.
(See: "Labor Pains: Is Industrial Unrest Growing or Slowing?")

The government responded by saying Air India would operate additional flights that day.
Then it asked the airlines to refund money to all passengers who had bought tickets. The
airlines, which have run up huge fuel bills and claim to have no cash even for salaries,
ended their protest with a whimper. IndiGo, a low-cost carrier (LCC) that is making money,
was the first to back down. Others soon followed suit. According to the financial
daily Business Standard: "The airline owners, back-pedaling furiously because they realize
that they have overstepped the line, say now that they did not want to threaten the
government or blackmail passengers; all they wanted to do was highlight their problems."

Trouble has been brewing at Jet Airways for some time now. In October 2008, huge
protests ensued when 800 cabin crew and ground staff were fired overnight. (An additional
1,000 were told they would be next to go.) Employees learned of their dismissal when their
morning pickup didn't arrive at their homes. With politicians breathing down his neck, Goyal
made a PR event out of it. In a late-evening news conference, he announced that all
terminated employees would be taken back. "They are like my family. I cannot see them
unhappy," he said. "I could not see tears in the eyes of my employees. I could not sleep
when I saw what had happened."

Complaints in 'Epidemic' Proportions

No tears were shed for Goyal this month, however, as he grappled with pilots over several
issues, including pay and perks, alleged preferential treatment for expatriate pilots and job
security. But the immediate bone of contention was the formation of a pilots' union -- the
National Aviators Guild -- in June. Jet had fired for an unspecified breach of discipline two
pilots who had joined the union; management said it did not have to provide a reason for
their termination. More dismissals followed.

On September 8, 420 pilots called in sick. Over the next four days the number grew daily,
to 539, about half of Jet's approximately 1,000 pilots. The protest took its toll: From
September 8 to September 12, Jet had to cancel 71% of its flights, including 85% of its
domestic flights and 40% of its international flights.

On September 13, an accord was reached, though little seems to have been achieved. "It's
time to get back to work," Goyal told his staff. "It is now time to look to do what we know
best -- fly." The agreement between Jet Airways management, the pilots' union, and
representatives of pilots who aren't union members, called for "sick" pilots to report to work
immediately, for dismissed pilots to be taken back, for no action to be taken against any
pilot for the protest, and for a consultative mechanism to be set up to discuss similar
problems in the future.

Yet several issues remain unresolved, and many pilots are still fuming. Among the issues is
management's ability to terminate them without assigning a reason. "Don't I even have the
right to be given a simple explanation as to why I lost my job?" Sam Thomas, one of the
first pilots to be dismissed, asked Jet executive director Saroj Datta on business channel
CNBC TV-18. Datta's response: "We are fully and legally permitted under contracts for
anyone's services to be terminated [without explanation]." The pilots deny they went on
strike. (Thomas claimed that an epidemic struck.) Management denies that the union's
formation had anything to do with pilots' dismissals.

"These pilots have made no demands apart from their basic right to form a union," says
International Transport Workers Federation civil aviation secretary Gabriel Mocho. "Jet
Airways has sacked pilots for trying to form a union, in direct contravention of not only
international freedom of association conventions, but also Indian national law. If anyone is
holding the country to ransom, it is Jet's management. What has made several airlines
disappear is mismanagement and excessive greed, not their workers' actions."
"One cannot say that their demand for a union is not justified, because in a democratic
country unions are allowed," says Vishwas Udgirkar, executive director of
PricewaterhouseCoopers India (PwC). "But creating a forum where all representatives come
together and participate in addressing the issues is a far better way of resolving the
problems."

A Business Standard editorial provided another viewpoint. "Naresh Goyal has asked how
pilots earning $8,000 a month can be equated with shop-floor workers who are entitled
under the law to launch industrial action, like striking work. His argument is that pilots get
paid very well, and are in charge of the planes they fly -- that is, they perform a vital
supervisory/management role in that they command a plane and its crew. No one, for
instance, has heard of a ship's captain going on strike on a wage issue. So how are airline
pilots different?... To say that a manager has the right to strike is surely an oxymoron."

An Industry in 'Survival Mode'

What's new is the dramatic change in the environment. It's been a bad year for airlines
globally. The International Air Transport Association had forecast a loss of US$9 billion in
2009. On September 15, it revised the number to US$11 billion. The estimate for 2008 has
been increased from US$10.4 billion to US$16.8 billion. "Expect more casualties," says the
association's director general and CEO, Giovanni Bisignani. "The world is changing. The
industry is in survival mode."

The industry's fortunes have been especially bad in India. The country accounts for just 2%
of the global market, but its losses are expected to top US$2 billion. "The past one year has
[presented] serious challenges for the aviation sector," says Susnato Sen, practice head
(infrastructure) for the Tata Strategic Management Group (TSMG). "The sector was faced
with a double whammy of high fuel prices and a considerable drop in traffic due to the
economic slowdown. While there seem to be indications of a recovery in the economy, the
woes of the aviation sector are far from over."

Chaudhuri calls the current situation "a reality check" following the boom years when
passengers were willing to pay higher fares, and low-cost airlines could coexist with full-
service carriers. "The industry is behaving as if India were a fully developed country," he
says. "Anything that grows too fast there will [have] problems. But sustainability would not
have been an issue if it were not for the recession."

Consider Jet's finances. According to a report by Enam Securities, in the April-June quarter,
the first of the fiscal year, Jet had operating revenue of US$470 million, down 19% from the
same period last year. (These do not include the numbers for its low-cost subsidiary,
JetLite.) In the international segment, the company has given nine aircraft on wet lease
(providing the aircraft and crew) to foreign airlines. The US$47 million lease figure "was the
key driver for cash profits." The overall outlook, however, is bleak. Enam projects a
consolidated loss after tax of US$176 million in 2009-10 and US$78 million in 2010-11
(including JetLite, which has turned profitable). In 2008-09, Jet lost US$456 million.

Kingfisher isn't doing any better. In the April-June quarter, it lost US$48 million, its
10th straight quarterly loss. Oil marketing company Bharat Petroleum has filed a petition in
Karnataka High Court in an attempt to recover more than US$60 million. The airline owes
more than twice that amount to other government-owned oil marketing companies. That
may explain why Mallya, normally the most optimistic and ebullient of businessmen, joined
Goyal and the others to threaten a strike.
Air India, which has been merged with domestic carrier Indian Airlines, is in equally bad
shape. Salaries have been paid behind schedule and the organization's many unions are
becoming restless. Losses last year topped US$1 billion, which is why it has approached the
government for a US$1 billion rescue package.

Many Sources of Woe

The global slowdown's impact on India is only one reason for airline industry's troubles. The
high price of aviation turbine fuel is another. It accounts for about 40% of Indian carriers'
operating costs, compared with 25% to 30% for carriers globally. Part of the reason for the
disparity is the high sales tax imposed by state governments. "The aviation sector has been
hit hard by the fluctuation in the fuel price and the current economic slowdown," says
Udgirkar of PwC. "In India, this sector is viewed as servicing the higher economic strata and
so, unlike other infrastructure sectors, it has not got government support by way of tax
reductions or other sops."

A slump in demand is another factor. In 2006, passenger volume grew by 46.4%. Growth
slowed to 32.5% in 2007, and in 2008, volume retreated by 4.7%. Indian carriers had
ordered numerous new aircraft in the days of galloping growth. Now they have been left
with overcapacity and a pipeline of aircraft deliveries they don't know what to do with.

Most people blame the global slump and bad planning. But G.R. Gopinath, chairman and
managing director of Deccan Cargo & Logistics and the man who started the LCC movement
in India with Air Deccan (later sold to Kingfisher), sees it differently. One of the reasons
passenger load factors have come down, he says, is that a year ago the airlines got
together and fixed fares. "If it had happened in another country, they would have been
punished for cartelization. But instead of the government taking action, consumers punished
the airlines by not flying and occupancy rates have tumbled since then.

"Airlines are themselves partially responsible for the crisis they are in today as they have
failed to build a sustainable aviation model suitable for the country," he adds. Gopinath
reserves part of the blame for the government. "For the first 50 years, policies for the
country were made to suit Air India and Indian Airlines. More recently, [the government]
appeared to be biased toward Jet Airways. Now, the new airport operators seem to be in
favor." Udgirkar of PwC agrees that a consistent, level playing field is lacking: "The
government seems to be protecting the interests of the airport operators without
considering the problems of the airlines. It needs to support both segments equally."

Chaudhuri feels the government may have legitimate reasons for supporting Air India in its
recent bailout request. "It is owned by the government, and the owner is stepping in to
help; they have some right to do it. If you are a private concern, you cannot expect the
government to help you out in the national interest." Air India's supporters have pointed out
that it has not always gotten the best deal from the government, as in the case of Emirates
and other private carriers being granted supposedly more lucrative routes and flight
timings, Chaudhuri adds.

Competitive Rates?

Others blame LCCs for the mess. According to Bhargava of Air India, LCCs have made the
entire business uneconomical. "They set prices that defied all logic. They were below
breakeven. For instance, in 1998, a ticket to New York cost $800. In 2009, it has gone up
by $60, though fuel prices have risen six-fold."
A clear case exists for the government to reduce fuel tariffs to "give the airlines breathing
room," says Chaudhuri. The airlines, too, need to focus on controlling costs, especially
pilots' salaries, and rationalizing routes by operating low-cost flights in sectors and times of
the day wherever it makes sense, he adds. For example, it doesn't make sense to offer low
fares on morning and evening flights between the major metros "because you will have
business executives traveling," but airlines could lower fares for afternoon flights or smaller
routes.

Some airlines are already offering distinctly different full-service and low-cost flights,
Chaudhuri notes. Examples of the latter are JetLite, Jet Konnect, Kingfisher Red and Air
India Express. That trend is visible among international airlines, too, with some offering a
"premium economy" class, he adds. Air France, British Airways and KLM have always had a
premium economy class one notch below business class; Qantas added one recently and
Cathay Pacific and Lufthansa are considering the same, he says. These premium economy
offerings target business travelers who are willing to travel economy class, especially given
the recent recession.

"The industry as a whole needs to sit back and think about the pricing strategy," Udgirkar
says. "Competitive rates are fine in order to attract volumes, but they should not result in
losses. The airlines need to avoid the very unhealthy practice of a price war. The low-cost
airlines which attracted an entirely new set of customers have not been able to control their
costs and have been unable to sustain their price competitiveness. Worldwide, the low-cost
airlines have many avenues to control costs. For example, they either have separate
airports or non-peak charges at the regular airports. This is not the case in India." Adds Sen
of TSMG: "The LCC model in India has never really taken off. It is more an LFC [low-fare
carrier] model."

Excess capacity and mismatched cost and revenues also plague the industry, Sen says.
Based on robust growth in recent years, most airlines had major aircraft acquisition plans.
With so many aircraft scheduled to be delivered in the next seven to 10 years, the industry
faces serious overcapacity. Airlines are trying to postpone deliveries.

Additionally, the airline industry has a high and largely fixed cost structure. Cut-throat
competition has resulted in falling average ticket prices, with increases difficult because
customers in India are highly price-sensitive. This has resulted in a misalignment of
operating costs and revenues. Most of the airlines have failed even to recover operating
expenses, let alone capital expenditures.

Another issue, Sen notes, is the slow pace of infrastructure development. "Airport
development has not been aligned to growth in air traffic. Here in India, while we have had
phenomenal growth of airlines, airports continue to grow at a much slower pace. This has
resulted in acute congestion at airports, especially in metro airports. This in turn has
resulted in increased operating costs."

What next? "Crisis is part of the aviation industry's genetic profile. And still it survives, more
or less intact," says the Centre for Asia Pacific Aviation Outlook 2009. "But today, the
industry is at a crucial turning point.... The industry has been historically unable to deliver
returns to cover even the cost of capital. Government protection and subsidies are going....
Airlines will in the future need to generate revenues consistent with, and behave like,
companies in other commercial industries." The report goes on to warn that "substantial
staff cuts are inevitable and some industrial turbulence [is] likely."
"It will take a couple of years for the yields to come back," Chaudhuri predicts. Revenue will
not be quick to rebound, but the industry has little choice but to focus on a combination of
cheaper fuel, route rationalizations across sectors and timings, and cost controls, he says.