Recession may knock off Airlines' gains from oil price drop

Last Updated: Sat, Aug 06, 2011 18:40 hrs

Airlines would benefit from the decline in crude oil prices, but an impending recession in the US could affect international travel, especially in the business segment, according to airline officials and analysts.

International crude oil prices fell sharply on Friday against the backdrop of the looming economic crisis and downgrade of US credit rating. Both Brent and wholesale price index benchmarks saw oil prices dip, as stock markets tumbled across the world. Analysts expect falling oil prices to provide much needed relief to airlines.

“Over the medium term, crude prices may remain low, as macro economic indicators in the US and other economies are not encouraging. From the perspective of Indian carriers, a fall in oil prices is positive. Load factors and outbound travel continue to remain healthy. The fall in oil prices would lead to improvement in their margins,'' said an aviation analyst.

Fuel costs account for 40 per cent of airline expenses and rising prices have been the main reason for losses in aviation sector. Jet Airways, the country's largest domestic carrier by market share, which posted a Rs 128-crore loss on a consolidated basis in the first quarter of 2011-12, said its fuel bill shot up by Rs 655 crore over the corresponding period of the previous year. Spicejet and Kingfisher, two other listed carriers, have not announced their results . These are, however, expected to post losses for the first quarter.

However, a likely rise in dollar rates poses concerns for airlines, since this would impact their debt costs. Along with dollar denominated debt, airlines also pay aircraft lease rentals, part of maintenance charges and salaries to expatriate employees in dollars.

About 90 per cent of Air India's aircraft acquisition loans, amounting to Rs 20,000 crore, are dollar denominated. Jet Airways had a debt of Rs 13,700 crore, of which Rs 10,200 was dollar denominated. The company converted Rs 2,000 crore rupee loans to dollar denominated loans last year to reduce interest costs. In its latest annual report, the airline admitted the conversion would increase its exposure to foreign currency fluctuations.

“The dollar is expected to remain stronger. Despite the downgrade in credit rating US treasury remains the best option for investment for economies around the world,'' said Abhishek Goenka, chief executive of India Forex Advisors. Goenka feels the dollar would continue to gain against the rupee and could cross the Rs 45 mark, as Indian banks are expected to purchase dollars in a big way to finance oil payments from Iran. “If it crosses Rs 45 mark it will lead to fresh dollar bull run,'' he added.

Jet Airways senior vice-president (finance) M Shivakumar, however, does not foresee dollar gaining in currency market. “ With the US economy in problems, there are less chances of dollar appreciating.,'' he said adding that pension funds which are keen to invest in AAA-rated bonds may be constrained to withdraw funds from US.

Jet Airways earns 57 per cent of its revenue from international operations. About 30-32 of revenue from international operations comes in foreign currency. “I do not see any negative growth but business travel could get get marginally impacted,'' he said.

A senior Air India executive, too, says there would be no impact because of the price of the dollar.

“At current levels, we do not have problems. About 90 percent of our aircraft loans and 70 per cent of our expenses are in dollars. However, we have a natural hedge, as we pay our dollar liabilities from our dollar earnings,'' he said.

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