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'Too many rules cramp Indian aviation'

May 16, 2006 09:30 IST

The sky's getting crowded, and the race to undercut margins to gain market share is heating up.

What does this trend mean for the Indian aviation sector, and in particular, Deccan Aviation, whose Rs 400 crore (Rs 4 billion) IPO opens this week?

JP Morgan views that for an ordinary investor, in a short-term perspective, there will be opportunities; and it is just a matter of picking the right time.

Its Peter Negline says that in a long term, "once the industry structure settles down, all different types can survive, provided they execute well what they do."

On Indian aviation sector, Negline says that there is too much regulation and issues like very high oil prices and the infrastructure constraints are debilitating.

Excerpts from CNBC - TV18's exclusive interview with Peter Negline:

Is aviation an industry to get into at all for an ordinary investor?

Warren Buffet has given his views that he is not really interested in the airline industry. I think it depends whether one is looking from a short term or long-term perspective. For an ordinary investor, in a short-term perspective, there certainly will be opportunities. It is just a matter of picking the right time.

How do you break up the prospects between cutting edge airlines like Jet Airways, which has a premium pricing; and lower volume growth versus a low cost carrier like Air Deccan?

I think they are very different models, as you highlighted. It really comes down to the execution and talent management. Within India there will be scope for full size service carrier to survive and low cost carriers to thrive.

At the moment, I am not sure if anybody is making any money. But over the long-term, once the industry structure settles down, all different types can survive, provided they execute well what they do.

Do you think Indian low cost carriers can repeat the story and success of Air Asia or is it any different?

I think it is far too early to come to a conclusion on that one just yet. There are a lot of regulations in the Indian market like very high oil prices, the infrastructure constraints are very debilitating.

There has to be some political resolve to settle some of those issues. The sooner is happens the better it is. It is not only for the benefit of airlines themselves but also for the consumers and travelling public and the greater economy, which benefits from tourism and travel.

On a ballpark basis, what do you expect

them to do in terms of margins, which have been under pressure and how to perform in terms of load factor?

That is a difficult question. We have not got too stable an industry structure. I do not think any of them are necessarily profitable. I would like to see them establishing a good profit track record before we get a real feel of the level of margins that might be sustainable.

How have you read the consolidations moves by the front-runner Jet with Sahara because for a lot of analyst it has been an expensive deal for Jet?

We would agree with that conclusion. It is far too early to seek consolidation at this stage. We still have a couple of new entrance in and around the market. We saw Go Air emerge a few months ago. We have Indica coming into the market, which I believe will come somewhere in the September quarter. So the market in terms of the number of players is still seeing growth. So it is really far too early to think about consolidation. But that will have to come. So we are just watching and waiting to see how the industry will rationalize.

Given your concerns about government policy or the lack of clarity, what would you do in the Indian aviation space? Do you think that this is a good time to get in for the long-term or would you rather wait for clarity?

The minister is doing a lot of right things. So we would encourage him to continue on his road of de-regulation. But there are obviously a lot of major hurdles. I think at the moment the investor should be a little bit wary. I would certainly be trading in this sector as a short-term trading issue rather than long-term investment at this juncture.

Eventually which sort of model do you think really think stands better in Indian market?

I would like to give you a hard answer to that. But I think it is too far too early to come to a direct conclusion. In the long-term both models will survive. I do not think there is going to be a large number of operators at either end of the scale. I think there will be scope for both because there is a big business class market at one end and there is a large mass market at the other end.

So I think there is scope for both. But they have to execute well what they do to ensure their survival.

Any broad thoughts on the IPO that is about to hit our markets: Air Deccan and its pricing?

I wish them well.

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