Bizarre Story of VRL Logistics: Will its Airline Idea Prove Deadly ?

Not many airlines in India have succeeded. This is a well known fact.

In 1992, the airline business in India was opened up to private companies. 6 private airlines—Damania Airways, Skyline NEPC, Modiluft, East West, Gujarat Airways and Span Air—started operations, but could not last more than five years.

Religare Voyages Ltd, which ran Air Mantra, stopped operations within 8 months of operations in March 2013, owing to very poor response.

MDLR Airlines Pvt. Ltd, the only regional carrier that started operations in 2007, stopped flying after 1 November 2009.

Others such as Star Aviation Pvt. Ltd, ZAV Airways Pvt. Ltd, Jagson Airlines Ltd and King Air Pvt. Ltd, were licensed to fly as regional carriers, but none of them could survive.

In 2014-15 Ventura Airconnect flew its aircraft for 541.08 hours and carried 4470 passengers only which indicates less than 56% occupancy. The company struggled to break even despite government’s subsidy support.

Other airline operators operating currently do not have any  exciting business story to tell.

The numbers of Air operators and aircraft have shown a down trend.
The numbers of Air operators and aircraft have shown a down trend.

Against such a dubious historical background of India’s aviation, Hubli based VRL Logistics’ promoters decision to launch a Regional Airline did not go well with its investors.

Businesses of current Air Operators can not be termed as brisk.
Businesses of current Air Operators can not be termed as brisk.

VRL Logistics has been into passenger and goods transportation business. It is also a parcel delivery service provider and has interests in wind power generation and air charter operations.

In 1983 it had 8 vehicles and a modest turnover of Rs 2.8 million. Its goods transportation fleet includes 3,872 owned vehicles, and passenger transportation fleet includes 381 owned vehicles as on March 2016.

downloadThe company was listed on the bourses on 30 April 2015. Till May 23, 2016, VRL Logistics’ stock (52-week H/L — Rs 478.70/253.00) had gained as much as 92% from its issue price of Rs 205 per share. It was being traded at an impressive 26 times estimated earnings for the current fiscal (9)

But, on May 24, 2016 the stock hit the lower circuit in the early trade. It fell 20% to close at Rs 315.10 per share on the BSE, giving up most of its gains followed by another 13 percent slump the next day. In those two days, the company’s market cap fell to Rs 25,130 million which had risen to Rs 42,550 million in August 2015.

By June 2, 2016, the share price had reached Rs 268. It somehow recovered later and reached Rs 282 level by June 7, 2016. Now trade analysts see it as a good BUY. Till April 21, 2016, analysts had suggested BUY @ Rs 433 !! 

The Fall. Prime Reason: The company’s promoters—Vijay Sankeshwar and Anand Sankeshwar—decided to venture into the Regional Airline Business through a separate company. They own a 69% stake in the transportation and logistics firm. 

images (5)The performance of VRL Logistics shares indicates that investors had great hopes from the stock. Investors had anticipated that VRL Logistics would be a consequential beneficiary of pickup in domestic macro and the roll-out of the much awaited tax reform, GST (goods and services tax).

But the news of promoters venturing into aviation came as rude shock to investors in VRL Logistics. They seem to have been disenchanted by the promoters’ aviation plans. Investors worry that the promoters may resort to selling their 8-10% stake in VRL in order to raise funds for the airline business. An estimate indicates that the promoters might have to sell 9.5 – 10.5 million shares of VRL.

The promoters had hinted a few days ago that they do intend to enter the civil aviation industry by incorporating a separate company to undertake the business of a regional airline.

But after May 24, 2016, when the shares of VRL Logistics fell sharply, the company and its promoters have been coming up with clarifications in an effort to calm the investors.

Sunil Nalavadi, CFO, VRL Logistics: “The promoters want to start this business in their individual capacity.”

Vijay Sankeshwar, Chairman and Managing Director: “The proposed regional airline venture would be a personal investment and would not impact the firm’s balance sheet. The investment in the airline venture will be about Rs 14,000 – 15,000 million. Out of that, I may dilute to the extent of Rs 3,000-4,000 million worth of shares over a period of next 3 years. A further Rs 10,000 million will be debt to fund the regional airline business.”

In a release submitted by the company to the stock exchanges, he has mentioned that he would primarily play the role of a financial sponsor for the planned airline business. The proposed airline business when set up would be run by professionals with strong sector experience.

To soothe the investors’ sentiments further, Vijay Sankeshwar has stated that the said airline proposal was at a very premature stage. “We remain the largest shareholders of VRL with a 69% stake in company today and do not anticipate our stake to significantly decrease in the company. VRL Logistics will continue to be the primary focus and interest of promoters and I will continue to be in full charge of the day to day operations.” Sankeshwar has said.

The popular perception in India is that no regional airline has been successful so far in India. Its business is enormously different from that of the goods/passenger road transportation because of several inauspicious factors.

Against this backdrop, and with the recent Vijay Mallaya experience, the bankers, too, are less generous in extending funding to any new airline venture. The lenders may ask for bigger security margin.

Will VRL Logistics foray into aviation meet with the same fate as the earlier airlines? Vijay Sankeshwar does not think so. He has different ideas and has maintained that the airlines that ran into huge losses or shut down did not lay their plans properly.

He is currently finalising plans to start a regional air carrier from Bengaluru. He sees a huge potential in the Regional Aviation business as air connectivity in South India is inadequate.

VRL promoter Anand Sankeshwar sees room for another player in world’s fastest growing aviation market. As per Anand, lower crude oil prices, growing passenger traffic, and the emergence of regional airports supporting travel to tier-II and III cities make India attractive for Regional Airlines business.

According to Sankeshwars, the opportunities in the airlines business were phenomenal and they were excited to be a part of the fastest growing aviation market in the world.

The media did raise the natural question – “What would be the preferred airline model”

Vijay Sankeshwar has replied, “Definitely not Kingfisher Airlines. I will create my own business model.”

Stories like that of the Kingfisher Airlines, do not seem to deter VRL Logistics promoters’ resolve. “My principles of cost focus and high utilisation have made us a leader in domestic transport, which I think are key attributes to succeed in the aviation sector as well. Spike in oil prices and shortage of pilots can play spoilsport,” Vijay Sankeshwar has said.

21_Kapil-Kaul-1Kapil Kaul, CEO (South Asia) at aviation consultancy firm CAPA India, agrees that there are significant opportunities in regional aviation, but cautions that promoters tend to underestimate the long-term needs of the aviation business.

Craig Jenks, president at New York-based aviation consultancy firm Airline/Aircraft Projects Inc., noted that India still has limited surface connectivity, including for short-medium distances, which leaves room for regional airlines.

1464065481VRLPresently, VRL Logistics is also involved in Air Charter operations. In 2008, VRL Logistics had diversified into Air charter business and purchased a 6-seat twin-engined Premier IA aircraft from Hawker Beechcraft Incorporation. In 2013, the company added one more Aircraft to the Air Charter business. Its brief particulars are:

Rs in million
As on 31/3/2015 As on 31/3/2014
Assets 358.39 381.54
Liabilities 3.49 2.03
Segment Revenue 116.84 77.51
Earnings in foreign currency (accrual basis) 39.66 24.06
Loss 23.39 21.39
Segment depreciation and amortisation 19.00 18.98

During 2014-15, the company’s Air charter activity reads as:

Aircraft Hours Domestic Departures International Departures Domestic Passengers carried International Passengers carried
Domestic International
97.33 6.42 104 4 35 0

It appears that VRL Logistics has been serving Air Charters to Corporates and HNIs only. Evidently, the company did not make any money with its aircraft. But, at the same time, it served as its status symbol, a brand image. Mere possession of an aircraft acted as an ornamental aura that boosted its core business. Herein lies the significance of aviation. 
The company has not yet reached the bigger audience, namely, the Indian Middle Class. The opportunity is there. Once tapped, the floodgates will open. The great Indian Middle Class does have the capacity to make or break a business.

Vijay Sankeshwar is well aware of all this. He has said that he was looking at having a fleet of 8-10 aircraft and that he had not yet decided on the type of aircraft or pricing. “We are still working things out and have to get regulatory approvals. We have not yet started negotiation with manufacturers,” he said.

The Sankeshwars are slated to invest Rs 13,000 million in the airline venture over the next 3 years, putting in Rs 3,000 million in equity and raising debt for the balance amount. They have repeatedly stressed that they will run it independent of VRL Logistics. They have taken this in principle decision after a lot of study and inputs from industry experts. They have already expressed their intent to enter into the new business activity in a letter to the Board of Directors.

Factors Affecting Sankeshwars’ Enthusiasm.

Despite various negatives, analysts are not so perturbed yet as they believe that VRL Logistics aviation business news has been probably blown out of proportions.

There indeed has been some encouraging positive trends in Indian Aviation in recent past. The circumstances in 2016 are quite different from those in 1992-96. The timing of Sankeshwars’ decision coincides with the announcement of India’s new policy on civil aviation. 
As on today, Tier II and Tier III cities around 300-400 kms of Bangaluru are not very well connected by air. VRL Logistics knows this very well as it has been operating its fleet of trucks and buses for the past several years in the region. 
A wide network of travel agents, warehouses, transit stations, branches are already in place who rigorously deal in movement of men and material. A number of such people could become Business Associates and may be willing to offer the requisite guarantees. Unlike a start-up airline, marketing and sales, as such, should not be any issue to worry about.
These thoughts must have been weighing in Sankeshwars’ minds apart from other facts and figures:

– The Union Cabinet is expected to clear the national civil aviation policy by June 8, 2016. The policy is likely to offer a slew of sops to Regional Airlines in the form of exemptions such as airport charges, service tax on tickets, and excise duty on aviation fuel.

– Low ATF prices,

– India has world’s fastest growing aviation market, 

– The emergence of regional airports supporting travel to tier-II and III cities, and 

– The support of agents extending buy-back offers.

The decision to start a Regional Air service in its own stronghold does make a prudent business sense as analysts point out that the apprehensions, if any, are misplaced. 

It now remains to be seen whether that decision would become a Masterstroke after it is implemented.

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