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Airline start-up, sputter: Cos seen hitting hard ground

12-August-2005
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Airline start-up, sputter: Cos seen hitting hard ground

Amidst all the euphoria of airline launches and record aircraft purchase orders from India, analysts have begun to sound a word of caution. A Morgan Stanley report has questioned the wisdom of IndiGo's ambitious 100-aircraft acquisition plan as well as Kingfisher's plan to buy wide-bodied aircraft.

It has predicted that low-cost start-ups will face significant execution risks as new carriers are obliged to connect uneconomical city pairs, are not allowed to fly internationally until the sixth year of operations, and incur fuel costs and other fees that are well above international standards.

“We see risk in IndiGo's order for 100 A320s as well as Kingfisher's ability to introduce five A380s in '10,” says the report. The market appears to be approaching bubble territory given India's infrastructure constraints, seems to be the view of analysts.

However, and understandably, neither Kingfisher nor IndiGo share this assessment. They are quick to point out that they have a well-thought-out strategy in place, which will enable them to overcome the risk factors.

When contacted, UB Group chief Vijay Mallya brushed aside the concerns by arguing that his group has already inked a deal with Indian Airlines to fulfil the mandatory social obligation of having to fly on commercially unviable routes. To beat the five-year ban on flying on overseas routes, he added, the group has set up an airline in the US, which would fly to India.

While the US-based carrier will be able operate on routes connecting to India, it cannot operate flights between India and the Gulf or India and Singapore. On the A380s, Mr Mallya said delivery of these aircraft is scheduled only in '10 and he hoped that Indian airports would be ready by then.

IndiGo too was of the opinion that doubts expressed by Morgan Stanley would fade away in the face of rapid expansion. The mega order for 100 planes incorporates flexibility in induction, said Rahul Bhatia, the chief promoter of the start-up and chief of InterGlobe. “People have been overawed by our order for 100 aircraft. We have lot of flexibility in delivery. Our aircraft will arrive over a period of 10 years starting next year. We can adjust our deliveries and stagger capacity till '16. We envisage exponential growth in the next 10 years,” he said.

Nevertheless, doubts persist. “IndiGo's plan to induct 100 aircraft is seen to be overambitious,” said Kapil Kaul, head of Indian sub-continent and the Gulf region for the Centre for Asia Pacific Aviation (CAPA).

The Morgan Stanley reports also talks about a shakeout in the near term as a large number of players are entering the fray and some of them are coming up with huge capacities.

Some of these companies will survive and some will not, given the elevated execution risks facing an airline with no operating history in an underdeveloped market,” says the analysis. Bombay Dyeing's Go, Coimbatore-based Paramount and IndiGo are working on launch in the near future.

A Delhi-based start-up, IndiGo had created a flutter at the recent Paris air show by announcing purchase of 100 A320s while Kingfisher created a sensation by announcing that it would buy the A380, the largest aircraft that is under production now. The UB Group airline has become the first Indian customer of the A380 while IndiGo's order for 100 planes is unmatched by any precedent in Indian aviation. “Even global giants like Singapore Airlines and Emirates are not in a position to order such a large number of aircraft today,” an industry veteran said.

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