Wednesday, November 28, 2018

Can domestic airlines ride out the storm?

The quarter ending September 30 was another dismal three months for the three listed aviation companies in India — IndiGo, SpiceJet and Jet Airways.

First came IndiGo, which reported its first net loss of ₹652 crore since its inception over a decade ago, and listing, three years ago. There was more in store. Next came the news that Jet Airways had only been able to contain its losses at ₹1,261 crore. SpiceJet, the third listed carrier, reported a loss of ₹389 crore for the quarter ended September 30.

The reasons for such a poor performance are becoming all too familiar — a weakening rupee against the dollar, rising aviation turbine fuel (ATF) prices, inability to raise ticket prices and adding more aircraft.

As a result of the rally in crude oil prices and the capitulation of the rupee, IndiGo’s fuel costs shot up more than 80 per cent year-on-year in this quarter, while that of SpiceJet and Jet Airways increased 56-60 per cent. The increase in fuel costs in the September quarter was even higher than the about 50 per cent y-o-y rise in the previous June quarter, that had already sent the airlines into a tailspin. Fuel accounts for about 40 per cent of an airline’s operating costs and is paid for in dollars.

Says Jagannarayan Padmanabhan, Director, CRISIL Infrastructure Advisory, “For the last year, the movement in fuel prices and the depreciating rupee have had a negative impact on the cost structure of these companies.”

It did not help that their other major expenses — aircraft rentals, maintenance and employee expenses — also headed north in the September quarter, even if the pace was slower than that of fuel costs. While on the one hand, costs — primarily fuel — shot up, on the other hand, the airlines found themselves unable to pass on their increasing costs to passengers in the form of higher ticket fares because of stiff price competition in the sector driven by big capacity jumps in seats.
27/11/18 Anand Kalyanaraman/Ashwini Phadnis/Business Line