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.

IndiGo’s yield (passenger ticket revenue/revenue passenger kilometre), in fact, fell a sharp 10 per cent y-o-y in the September 2018 quarter, continuing its decline from the March and June quarters. SpiceJet too saw its average fares fall about 1 per cent y-o-y in the September quarter. Jet Airways managed a 2 per cent rise in its average fares in the quarter but this was hardly commensurate with the increase in costs.

According to Padmanabhan, what makes matter worse is that instead of increasing, ticket prices have dipped marginally.

Higher costs and comparatively cheaper fares meant that IndiGo’s CASK (cost per available seat kilometre) rose 24 per cent y-o-y in the September quarter while its RASK (revenue per available seat kilometre) fell nearly 8 per cent. SpiceJet’s CASK rose 25 per cent while its RASK fell 2 per cent y-o-y in the quarter. Jet’s CASK in the quarter increased 12.5 per cent y-o-y while its RASK was nearly flat compared with the year-ago period. CASK is a measure of cost per unit for an airline while RASK is a measure of its revenue per unit. The unhealthy combination of higher CASK and lower or flat RASK dragged the airlines’ bottom-lines further into the red.

Way forward

Given that ATF prices are what they are and the market dynamics — where the airlines cannot charge higher fares — are not likely to change, what is the way forward?

In not such good news, Kinjal Kirit Shah, Vice-President, Corporate Sector Ratings, ICRA Ltd, says that to better their financial performance, Indian carriers will have to pass on the increased costs to the customers.

“While the airlines have resorted to rationalisation of non-fuel costs, they are not adequate to compensate the large hike in ATF prices. Hence, currently, raising airfares is the most important factor,” she says, adding that the airlines also have to make concerted efforts towards containing their non-fuel CASK.

Moving beyond increasing fares, Padmanabhan suggests a multi-pronged approach of cost optimisation, route rationalisation and revenue enhancement. He adds that airlines have completely lost pricing power as a result of the rapid influx of capacity.

Niche routes?

Another way out could be capital infusion. Shah feels that this is needed for some airlines to reduce their debt burden and, thus, interest costs.

One more possible option could be carving out niche routes though the jury is still out on how effective an approach this can be.

Niche routes are tourism-based and can only provide a limited cushion and, as Shah points out, Indian carriers have carved out several niche routes, and these are already operating at high passenger load factors (PLFs).

“Due to the passenger traffic growth on these routes and thus the number of flights, many of these airports already have slot constraints,” she adds.

India not alone

What should perhaps give solace to the loss-making airlines at this time is that the Indian aviation sector is not alone in facing a financial crisis as the profitability of airlines globally has come under pressure. Shah says that global carriers have also witnessed pressures on profitability due to increased fuel prices, but adds that the impact varies depending on their ability to increase yields which, in turn, depends on the markets that they are catering to.

“For instance, West Asian carriers like Etihad and Emirates have witnessed significant pressures on profitability due to the decline in yields in their key Gulf markets.”

Further, AFP reported in mid-November that Emirates posted an 86 per cent drop in its half-year profits as it was hit by a hike in oil prices and currency devaluation.

Emirates recorded a profit of just $62 million in the first half of the 2018-2019 fiscal year compared with $452 million in the same period last year, AFP said.

If crude prices continue falling, as they have started to, perhaps airlines across the world can breathe a little easier. However, given that the loss-making Indian carriers are facing issues other than high ATF prices, how much this will help them remains to be seen.

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