Flying ‘Low’

Air charter services in India are in dire straits because of the neglect, government’s apathy and high cost structure. An immediate course correction can lift this sector to greater heights

Thomas Flohr has the potential to not only change the dynamics of the loss-making Indian air charter business, but also give it a new direction. A Swiss national and a multi-millionaire, Flohr is the founder, chairman and 100 per cent owner of VistaJet, a fast growing player in the luxury charter business. Flohr was in India recently scouting around for strategic partners and luring high-flying Indians.

An avid flyer, Flohr logs around 800 hours on planes each year, which is more than double of what many Indian air charter firms register in the same period. His fleet of over 60 Bombardier and Challenger jets are all silver in colour with a blood red stripe, the mark of consistency and uniform service quality.
“Our business model is simple: you don’t need to buy your own private jet, but you can still fly most efficiently,” says Flohr, sitting in a lavish suite located on the first floor of The Imperial hotel. “There has been a significant increase in the global Indian consumers. Indians form 5 per cent of our total revenue base. We feel it’s time to increase our presence in India,” says Flohr in his European accent as he gets comfortable.

For the Indian air charter firms, VistaJet’s arrival would mean healthy competition. “We disrupted the market in 2007. My message is: stop buying planes and start using VistaJet,” says Flohr who means business.

But he is not familiar with the nuances of the debt-ridden, loss-making Indian air charter services. Some of the cash-rich companies own four to eight seat charters to flaunt high status, while others keep them parked for over half the year as the usage is low or sparse.

Reality Bites
Marred by neglect and government’s apathy, the non-commercial airline services in India — popularly known as air charter services — are a loss making proposition despite increased flying hours and higher realisations in the past year. As air charters services are often availed by the rich and mighty (who in many instances also own the planes) for a hassle free travel, both within and outside the country at very short notices, the general business principles of profit and loss are often not applied to this sector. As a result, some operators have shut shop, others are mulling folding up or selling their planes to offset losses. However, some are hopeful of structural changes that could turn around the domestic air charter business. They are holding on. But higher taxation, lack of parking facilities at airports, and delays in landing permission continue to hamper this fragmented industry.

Sample this: The operational fleet size of charter planes in the country comprises only of 110 jets, 220 helicopters and 75 turboprops (some reports claim higher numbers but do not reveal the serviceability status of these aircrafts). The number are in thousands in most of the developed economies where charter services are treated as a time-saving tool rather than as a luxury engagement of the rich and famous.

Just look at our neighbour. China’s charter industry has jumped from 65 business jets in 2007 to 466 registered private jets in 2015. But now there is a sharp dip owing to government clampdown on wasteful expenditure and economic slowdown, among other reasons. Brazil had 854 jets at the end of 2014, while Mexico had 873. But Brazil is in deep economic crisis and Mexico has its own challenges. India is among the few green shoots in this business thanks to a stable government and robust economy, globetrotting Indians and home-grown billionaires. Amongst the BRICS nations, Brazil and China have for long remained the target market for Bombardier, Cessna, Gulfstream and Dassault. However, the recent economic downturn is forcing manufacturers to change their approach in China and wait for economic recovery in Brazil. This has raised hopes for Indian operators.

Overall, the business of air charter in India is estimated to throw up Rs 1,800 crore worth of revenues in 2015 compared to nearly Rs 1,000 crore a decade back. Year-on-year growth is in the lower single digits. The most common aircraft used by the operators include CRJ-100, Falcon-2000, G200 from Gulfstream, and Cessna. Apart from outright ownership of jets, many operators run this business on fractional ownership, a method in which several unrelated parties share and mitigate the risk of ownership of a high-value asset like a business jet.

Roadblocks Galore
“We were completely ignored in the draft civil aviation which was released a while ago. But we have established bridges. We are confident that we will get a better deal,” Jayant Nadkarni, president of Business Aircraft Operators Association, said recently during the aviation week in Hyderabad.

According to Club One CEO Bhupesh Joshi, the operational costs are very high. “We have suggested lower parking charges, subsidised fuel charges, opportunity to be present at the booking area of the airports amongst other solutions to promote the air services which are no longer a luxury,” he says. But no one is listening, it appears.

“No politician wants to bat for this industry for fear of being perceived as ‘pro-rich’. No area in the interiors can develop as an industrial hub unless it has air connectivity. And the first ones to provide that are the charter operators,” says Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG.

The air charter business has been done in by an unfavourable policy environment, an abnormally high 20 per cent import duty, curfew hours at large airports during peak hours, poor infrastructure at smaller locations, stiff procedures from local authorities for landing permissions and high airport charges, says Dubey listing out the challenges.

Dhiraj Mathur, partner, Aerospace & Defence, PwC, says barring the fuel price issue, which is common to both commercial and charter airlines, the other problems are unique to this segment. “This is because the commercial airlines inevitably get preference from the airport operators because of their higher revenue potential,” he says.

Gloomy Picture
Behind the fancy jets and champagne glasses, the air charter business has a dark underbelly. A closer look at the mandatory filings made before the Registrar of Companies by some of these firms paints a gloomy picture. Maintenance, airport charges, taxes and fuel cost account for around 80-90 per cent of their revenue. Then there are loans, debts and accumulated losses carried on the books year after year.

In some instances, the promoter group and their companies have been putting in smaller amounts as advances or in lieu of some equity participation to keep the engines running. In other cases, the accumulated losses of some of the operators stand run at more than 50 per cent of their respective net worth.

Taj Air, promoted by Tata Group companies, had liabilities of more than Rs 70 crore as on 31 March 2015 which was in far excess of its assets of Rs 17 crore, revealed the filings. “The company has been continuously incurring cash losses and continuation of the company as a going concern depends on continued operating commitments from promoters to fund the operation,” it said in the filings.

In the case of AR Airways, better known by its brand name Club One Air, the company had accumulated losses amounting to Rs 64 crore at the end of 31 March 2015 which was more than 50 per cent of its net worth, the filings revealed. Others like Deccan Charters have been struggling with mounting debts and adverse auditor comments, the documents showed. These are not just isolated instances but represent a general trend of the air charter operators.

Green Shoots
But all is not lost. Amidst the losses and negative net worth, there are some heartening signs too. The financial year 2014-15 bode well for a number of chartered operators on the revenue front. For instance, AR Airways witnessed a 77 per cent growth over the previous year clocking Rs 64 crore in revenue, up from Rs 36 crore in the previous fiscal, while Taj Air saw its revenue grow 65 per cent in FY15 to Rs 76 crore, up from Rs 46 crore in the previous fiscal.

Similar is the case for some of the other private air charter services as well. The growth was possible due to two specific issues. One, the change of government at the centre signalled higher economic activities luring investors and firms from across the globe. This led to an increased number of private visit by consultants and top management teams who did not wish to attract much attention.

Using air charter services came in handy, says Joshi. “Growth in mining, ports, manufacturing and infrastructure development has fuelled the need for corporate leaders to visit locations in the interiors that are otherwise difficult to access,” says Dubey of KMPG.

Bollywood stars like Akshay Kumar, Salman Khan, Shah Rukh Khan and others use it for promoting films across cities. This phenomenon seems to have found wings very recently, says Joshi. Then there are the cricketers who keep the air charter firms up and running. Club One, for instance, regularly flies Sachin Tendulkar, Suresh Raina, Amitabh Bachchan and many others.

Club One Air claims it will achieve a turnover of Rs 200 crore by 2021 and that it shall cross Rs 100 crore by 2016-17. The airline has inducted its third Falcon 2000 to its fleet of 10 aircraft. It has also set up F&B and ground-handling services under the brand name Club One Class and Club One Concierge. The aircraft utilisation will touch around 55 hours per month going forward, it adds.

Since 2002, Taj Air and its fleet comprising an eight-seater Falcon 2000 and a nine-seater Falcon 2000LX, among other aircraft, fly within India and internationally.

Oberoi Aviation too boasts of ultimate luxury in the air. These are perhaps the kind of Indian air charter firms that may entice Flohr and his VistaJet to spread his business wings in India eventually.

Thomas Flohr, Founder & Chairman, VistaJet

Vistajet Eyes India
How do you explain $16,000 an hour fares on VistaJet?
We own our fleet that is why our fares make sense. Buying a plane requires $50 million. Add to it interest and depreciation of 12 per cent and it comes to $6 million. Most use charter aircraft for 300 hours a year. The capital cost comes to $20,000 per hour. But we are offering the same thing in $11,000-$16,000 because VistaJet flies 800 hours in a year. Therefore our capital cost works out to be $7,500 per hour. Fly VistaJet and forget all hassles.

What brings you to India? Are you looking to set up a base in India?
The recent surge in economic activity has attracted a large number of entrepreneurs who are flying into India. Plus, there is a significant increase in the number of global Indian consumers. We don’t need to set up a base anywhere. We have 61 identical planes which fly across the globe. We flew over 15, 000 flights in 2015 and the share of Indians in this is pretty significant.

What are the regulatory challenges that you are facing in India?
The over-flight permit requires government support. Getting permit from the Directorate General of Civil Aviation takes three days which is a lot of time. In the US you can get permit within eight hours and in China it takes about 10 hours. The delay in getting permits gives a bad impression to the captains of the industry.

Do you have plans to cater to the Indian market specifically?
Eventually yes, but right now, our priority is the US and the China market. In the next phase, our focus will be India and one more country. We are contemplating a possible partnership with a domestic charter company, but aren’t in talks with any one.

Who do you think is your biggest competition in India?
Our biggest competition in India are owners of aircrafts. Companies that fly for 200-300 hours in a year feel it is economical for them to purchase a $50 million aircraft. We will have to prove them that flying with VistaJet is economical too. &
ashish_BW & arshadkhan_BW

Monday, 25 April, 2016