It Pays More to Ferry Goods than Men

PASSENGER TRANSPORT FIRMS LAG BEHIND

In transportation — rail, road and air — it is not the glamorous passenger business that makes money. Moving cargo is where the profits are. In the past three years, as the economy lurched from one crisis to another and aviation companies took a beating, goods transporters have defied conventional wisdom and performed better on a host of parameters, a study by the Economic Times Intelligence Group shows. They have better margins, earn better return on capital and have posted a decent growth in net profit compared to the passenger transport sector, showing that goods transportation is probably more profitable than the volatile, service-oriented passenger transport business. 

Take, for example, the financials for the year ended March 2011. While all airlines posted 20%-plus growth in revenue, their profits were severely battered. Jet Airways posted a net loss of . 86 crore, while Kingfisher's net loss stood at . 1,027 crore. Goods carriers, on the other hand, fared much better. Container Corporation of India posted an 11.35% rise in net profit, Gati's profit rose 48.42%, while profits at Blue Dart Express jumped 54.8%. Jet earned a margin of 11.24% compared with Container Corp's 31.15% for that year. Cargo companies were also able to use their capital more effectively. Allcargo's return on capital employed was 17.5% for March 2011, compared with SpiceJet's 13.41%. Blue Dart's ROCE was much higher at 28.2%. 
    "In passengeroriented industries such as aviation, high competition has reduced pricing power, whereas there isn't as much competition in logistics. It is more of a wholesale market and hence its profitability would accordingly be stronger," says Sandip Sabharwal, chief investment officer, PMS, at Prabhudas Lilladher. 
There are a number of reasons for this. Ferrying passengers from one place to another is expensive. The capital expenditure is very high, whether it is airlines or road transport. Companies rarely have pricing power and when they do, it is only for a short period, such as the holiday season from November to February. Even Indian Railways, a monopoly, makes little money in its passenger businesses. In the past five years, the contribution from passenger business to the Railways' turnover has dipped to about 26.97% in 2009-10 from 30% six years ago. Revenue from goods transportation is more than double that of the passenger business. For the year ending March 2010, 67% of Railways' revenue came from goods traffic while the rest was from passenger transportation. 
"Airlines are a more capital-intensive business. These companies have more debt on their balance sheets and have to pay high interest to service loans. Fuel is also not subsidised for airlines, and they have to pay tax on the fuel. On the other hand, cargo companies get subsidised fuel and have lower debt on their books," says Saurabh Mukherjee, head of equities, Ambit Capital. In order to spend money, airlines borrow. If revenues sag or the capital markets tank, the gap is usually filled by more borrowings. 
After some time, it becomes a vicious cycle, forcing airline companies to take on ever higher levels of debt. "It is not that logistics carriers are doing anything great in a slowing economy; it's just that airlines have done poorly because of high fuel taxes and more government controls. The high debt has compounded the situation for airlines," said AK Prabhakar, senior VP, Anand Rathi Securities. 
Goods carriers also have pricing power as they work on a cost-plus basis. For passenger carriers, it is the other way round. Increasing ticket prices invites a backlash in the form lower bookings and revenue. The only consolation for aviation/passenger companies is that everybody suffers during bad economic conditions. All cargo companies suffered in the year ended March 2010 with only Allcargo and Patel Integrated managing to keep their heads above water. 
But if you are an investor looking for safe, steady returns in a volatile market, what would you choose? An airline saddled with debt and bleeding profusely or an unglamorous goods carrier with little debt and a steady track record? Over the past year, the share prices of the three listed airlines —SpiceJet, Jet Airways and Kingfisher — have declined 71%, 66% and 55%, respectively.