NEW DELHI: Indian aviation majors are set to record one of their worst financial performances this financial year (FY19), with high fuel costs and currency depreciation expected to result in losses (before tax and interest) to the tune of Rs 9,300 crore. According to Crisil, this is worse that the Rs 7,348 crore of EBIT losses recorded in FY14.
Companies like Indigo, Spicejet and Jet Airways have already begun posting losses. While SpiceJet and Jet Airways reported Rs 38 crore and Rs 1,323 crore net losses in the first quarter, Indigo has recorded a Rs 652 crore net loss for the second quarter.
Indian airline companies’ woes are being fed by a double whammy -- a 28 per cent average increase in aviation turbine fuel costs and a 13 per cent depreciation in the rupee so far compared to the end of March, 2018.
These two heads account for a large majority of an airline’s expenditures, with ATF accounting for 35-40 per cent of total costs. Maintenance, aircraft and engine rentals, which are denominated in US dollars, together account for another 30-35 per cent of the costs. “The blow on this count is also expected to be severe given that the rupee has depreciated 13 per cent against the dollar since March 2018,” Crisil noted.
“Airlines have sizeable foreign currency debt, while their revenues are largely earned in rupees,” said Nitesh Jain, Director, CRISIL Ratings. “With ~73 per cent of their debt denominated in foreign currency, the debt liability of the three listed airlines (aggregate market share of 71 per cent) will go up by 10 per cent this fiscal.”
And, while the government has lowered the excise duty levied on ATF by 3 per cent to 11 per cent, this is not expected to materially curb the losses.
“Almost two-thirds of an airline’s cost, and therefore profitability, is susceptible to fluctuations in forex rates and ATF prices,” observed Sachin Gupta, Senior Director, CRISIL Ratings, “To offset the increase in operating cost, the industry will have to raise average fares by 12 per cent -- that, too, assuming there is no change in the passenger load factor (PLF). But the aggressive expansion plans of carriers and the race to maintain high PLFs will keep competitive intensity high and limit their ability to increase fares.”
Another factor likely to keep fares down is the significant fleet additions being planned in the near-term, which is set to add over 20 per cent in capacity.