Well, history repeats for airlines... this time in India

One of the long-running jokes, or maybe long-running tragedies, for investors is that airlines will not only lose money but they are prone to lose huge amounts. Airlines have revolutionized travel and helped consumers but investors—and taxpayers when national airlines was a popular thing—have borne the costs.

Well, if anyone thought the situation in emerging markets, who are literally starting from the bottom, will be different, they seem to be mistaken. The New York Times has a story covering the sad state of airlines in India. As some may have read in the recent past, India was supposed to be highly-attractive for airlines given the growth potential. Yet the reality, at least so far, has been anything but a fairy-tale.

Airlines around the world are suffering as businesses and individuals cut back on nonessential travel, but in India, by some measures, they are suffering more. And analysts say that in the months to come, Kingfisher, one of India’s top domestic carriers and one of the country’s most recognized brands, may be in for more pain than any other airline here.

Kingfisher’s troubles present a cautionary tale for investors and suppliers eager to do business in one of the few major economies still experiencing significant growth. Even as incomes and consumption continue to rise in India, success is not guaranteed — nor even a smooth ride.

Of the $9 billion that the International Air Transport Association estimates the global airline industry will lose in 2009, nearly a quarter will be lost by Indian airlines, which fly just 2 percent of the world’s passengers.


Indian airlines grew too much, too quickly during the recent boom, analysts say. At its zenith the industry was adding six planes a month, when there was only enough demand for half that number, according to the New Delhi office of the Center for Asia Pacific Aviation, a consulting and research firm. To gain market share and attract customers who may never have flown before, airlines were pricing tickets way below cost.

Adding to their problems, Jet and Kingfisher made expensive acquisitions in 2007 — Jet Airways bought Air Sahara and Kingfisher Airlines bought Air Deccan. Analysts say that the airlines had paid too much for the acquisitions and have taken too long to integrate the operations they acquired.

Next, surging fuel prices forced up ticket prices just as the global slowdown cut business and leisure travel. To make things worse, Indian airlines face much higher fixed costs than carriers in many other countries, like fuel taxes that can be five times the global average.

It's still possible things may rebound but given how airlines have to taken on massive debt to purchase planes, not to mention pay the fuel bill, it's not clear if any near-term recovery will help.

I'm not sure how the picture in China or other areas are. Jim Rogers was bullish on airlines last year but I'm not sure if that was a short-term trade that he got out of, or if he is still long. The Indian airline scenario, at least right now, shows the pitfalls of investing in industries that appear to have high growth.


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