Airlines fear worst September quarter in recent times

Last Updated: Thu, Aug 22, 2013 05:11 hrs

With nearly 70 to 75 per cent of their operational costs tied to the dollar, most Indian air carriers say the September quarter could be the worst in recent times, in the wake of a sharp depreciation of the rupee, while competition and a non-peak travel season stopped them from raising fares.

Around 50 per cent of the operational costs of most airlines, especially the low-cost carriers (LCCs), belong to aviation turbine fuel (ATF), imported and pegged to the dollar.

Another 20 to 25 per cent of their operational costs belong to lease rentals for the planes, which have to be paid in dollars, and spare parts for maintenance, also imported.

  • 50% of the operational costs of most airlines, especially the low-cost carriers, are due to imported fuel, the cost of which is pegged to the dollar
  • 20-25% of total operational cost is due to plane lease rentals, paid in dollars, and spare parts for maintenance, which are imported
  • $350,000-400,000 forked out a month for lease rentals on each aircraft
  • $100,000 is spent every month on importing spares to keep the planes running

“What we are seeing is worse than 2008 because at that time, the rupee was around Rs 43 against a dollar, though ATF fuel prices had hit a high of $140 a barrel, which is now around $110. But with the rupee at 63 and expected to fall to even 70, our fuel costs, as well as the cost of paying lease rentals and importing spares, could be higher than 2008 levels,” says a top executive of a leading LCC in the country. “This quarter (July-September) would be the worst in recent times,” added the official, who did not want to be named.

Airlines have to fork out $350,000 to $400,000 every month for lease rentals on each aircraft. They also have to import spares of around $100,000 each month to keep the planes going.

In simple terms, based on the fact that the rupee has depreciated, airlines have to fork out over 16.5 per cent more to pay lease rentals and spares, compared with what they did in January this year. On January 2, the rupee value was 54.36 against a dollar, while it closed at 64.04 on Wednesday.

The Indian Oil Corp ATF price has gone up six per cent during the same period. So, if both are bundled, the overall increase in airlines’ operational costs are around seven per cent, compared with what they were paying in January this year.

The interesting point is that the rupee price of ATF, due to the steep depreciation, has reached virtually the same level (Rs 70,203 a kilolitre in Delhi) as that in 2008, when jet fuel prices reached a new record of $140 and hit Rs 71,028 in August that year.

It would have been easier for the airlines to address the problem if they could push up fares and make up for the increase in operational costs.

However, between January this year and now, air fares have fallen around 30 per cent, from an average gross fare of Rs 5,600 to Rs 6,000 in January to currently at Rs 4,000 to Rs 4,200 a passenger. That is primarily because August, unlike January, is not a peak season and with the slowdown getting deeper, volume growth is also tapering.

More from Sify: