he domestic airline industry, despite strong traction on growth, is facing challenging times. The industry is facing a double whammy with increasing aviation turbine fuel (ATF) prices and depreciation of INR against the US$. Coupled with pressure on yields, this has aggravated the turbulence in the industry.
ATF represents the single largest cost element for airlines, accounting for ~30-40% of their total operating expenses. As such, the profitability of the airlines is significantly impacted by the ATF prices, which have been subject to high volatility. Post ~10.4% increase in average ATF prices in FY2018, they have further witnessed a YoY increase of 33.6% during April-September 2018. This is the combined impact of an increase in the US Gulf Coast jet fuel price and 6.4% depreciation of the INR against the US$ during this period. Sequentially, the ATF prices have increased by 12.3% in September 2018 over March 2018, and the INR has depreciated by 10.4%.
According to Ms. Kinjal Shah, VP and Co-Head- Corporate ratings, ICRA Ltd, “This has resulted in a notable increase in fuel cost/ available seat kilometer (ASKM) for the three listed airlines during Q1 FY2019. Indigo, Jet Airways and Spicejet witnessed an increase in fuel cost/ ASKM to 1.52, 1.60 and 1.56, respectively, in Q1 FY2019 from 1.22, 1.27 and 1.25, respectively, during FY2018. However, despite this increase in ATF prices, most airlines have witnessed a pressure on their yields owing to increased competitive intensity fuelled by the capacity growth.”
Furthermore, ~35-50% of the airlines’ operating expenses – including operating lease payments, fuel expenses and a significant portion of aircraft and engine maintenance expenses – are denominated in US$. This means every additional rupee depreciation i.e. 1.37% depreciation at current levels, will impact the operating profit margins of the airlines by 0.48%-0.69%. In addition, some airlines also have foreign currency debt. While the domestic airlines also have partial natural hedge to the extent of earnings from their international operations, overall, they have net payables in foreign currency. The recent significant plunge in INR has resulted in substantial increase in operating expenses, including mark-to-market losses on foreign currency debt and other payables.
The above two factors – sharp rise in ATF prices and rupee depreciation – have exerted significant pressure on operating profitability of airlines. As ATF prices have increased further during Q2 FY2019 and INR has depreciated further, the RASK-CASK (revenue per available seat kilometer – cost per available seat kilometer) spread is expected to get squeezed further. While the airlines have resorted to rationalisation of non-fuel costs, they are not adequate to compensate the large hike in ATF prices. If the average ATF price for FY2019 were to increase by 35% and the increase cannot be passed on to the customers, the three listed players consolidated will witness an operating loss of 3.9%, as against an operating profit margin of 7.3% for FY2018, Adds Ms. Shah.
The Indian aviation industry (consolidation of Air India, Indigo, Jet Airways and SpiceJet) is thus likely to report an aggregate loss of ~Rs. 88 billion in FY2019. Furthermore, some of the airlines have large capacity expansion plans, which may be either owned (through debt funding) or on operating lease. The industry is expected to require capital infusion of ~Rs. 200 billion over FY2019-FY2021.
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