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Flying High but Falling Lower

The world loves to hate the aviation industry, and rightly so because it has lost more money than any other

If there's one particular industry that has the dubious distinction of losing investors' money the most, it's the aviation industry. The aviation industry's quench for capital, ever since the first flight, has been insatiable. It is one industry that almost everyone loves to hate, even Warren Buffet. “Investors have poured money into a bottomless pit, attracted by growth, when they should have been repelled by it," he says.

Truly, aviation is one of the most capital guzzling industry the world has ever seen. So much so that if a prophetic capitalist had been present at Kitty Hawk - a town in North Carolina where the Wright brothers made the first airplane - he would have done the world a huge favour by shooting Wilbur and Orville down.

Think we are exaggerating? Digest this - according to the Fortune 500 list in 2006, the aviation industry bottomed the list at rank 50 and its profits as percentage of revenues were at a dismal negative 10.6 per cent. In 2007, the $500 billion industry somehow managed to post profits of $5.5 billion, for the first time in the 21st century. For the industry, it was a heart-thumping and once-in-a-lifetimes experience, quite similar to the excitement and euphoria built around Halley's Comet's last sighting. According to Forbes 500 list, for the five year period ending 2006, the annual rate of returns to shareholders was at -3.6 per cent. And the sob story goes on and on...

The Indian aviation saga is not too different from the one prevailing in the United States. While other sectors talk about the strategies, vision, mission and the guidance, the Indian aviation sector and its players - Jet Airways, Kingfisher, Deccan Aviation (now a part of Kingfisher), Spicejet and Jagsons Airlines are finding it difficult to survive on a day-to-day basis.

Jet Airways is the only company that has reported profits for the year ending March 2007. For the other players, profitability it's still a Utopian dream. Even for the quarter ending Dec 2007, Jet Airways reported a loss of Rs. 91.11 crore - the biggest loss in its history. Profits expressed as percentage of revenues for the industry have been on a constant decline - 7.46 per cent in year ending March 2005, 0.95 per cent for year ending March 2006 and -4.9 per cent for March 2007. The combined revenue for the above mentioned players for the year ending March 2007 stood at Rs 9,492 crore, for which the industry returned a the loss of Rs 468 crore. Mentioned above are the returns to shareholders by these airlines

This is what Anoop Bhaskar, Head - Equity, UTI Mutual Fund had to say on the Indian scenario: "Airlines across the globe have lost more capital than any other industry in the world. The realisation per seat per kilometre is still not at a level which can earn a ROC, compared to other industries like capital goods, FMCG, pharmaceuticals or telecom. So we would rather allocate money to a business where the ROC is much better.” As on March 2008, 23 fund schemes had Jet Airways in their portfolio. 19 had Spicejet and 14 had Deccan Aviation. The JM clan in particular is fond of the aviation sector, especially of Jet and Spicejet. The Oracle of Omaha rightly says and we agree to it - the most favoured stake holders of an airline are the users, not the owners.

Air Pocket

Company ROE
Jet Airways -10.50%
Jagsons Airlines -45.80%
Spicejet -73.30%
Deccan Aviation -209.50%
Source: NSE, as on Dec 2007