Indian carriers, already battered by falling fares and high oil prices, are now facing one of the worst December quarters on record as the rupee falls to new lows against the dollar at Rs53.25. As with most airlines on a global basis, aviation fuel and lease rentals are paid in US Dollars along with loan repayments. Indian airlines, especially the privately owned airlines, have a great many expat pilots on the books and these too are paid in US Dollars. Taken together it means the average Indian carrier is paying around 62% of all costs in US Dollars. This is against a backdrop of aviation fuel being 32% higher on last December at a $104 average.
This means that in actual fact, allowing for currency fluctuations, Indian airlines are paying 51% more for their jet fuel than last December at the same time the likes of Jet have been slashing their prices by over 20%
It is not hard to see where this is leading… Jet Airways stated that even a Rs1 increase on fuel pushes their expenses up by Rs100 crore. The situation at Kingfisher, with so many expat staff on the books, seems dire.
India’s airlines look set to post a record loss of $2.5 billion this fiscal year even though they flew about 52m passengers in 2010-11 in India and traffic this year has been growing in double digits once again. So what is the problem? It is as we mentioned here a few months ago – ticket prices are far too low and are still falling, Indian airlines are running a 15% loss on every passenger booked. This is a case of systemic failure within the Indian commercial aviation sector. Anyone investing or indeed banks pumping money into the sector must stop and demand business strategy changes at once. Indian airlines are banking on two or three players going under soon so that prices can be raised with confidence – At this rate though there may be no airlines left and those that are will be carrying massive debt piles and hardly any reserves.
Lessors should stay away from India and ready plans for repatriation of aircraft if required. Something will have to give soon in this market. Investors on the other hand should note the red flags and stay well away at least until there are some exits from the market of airlines.
Jet dropped to a two-year low of Rs.176.95 on Tuesday, down 7.36%. The Sensex lost 1.33%. The last time the airline’s stock was at Rs.170-180 was in April 2009. SpiceJet closed unchanged at Rs.16.10 a share and Kingfisher was down 1.61% at Rs.21.40.
Indian carriers look down the barrel as rupee continues to fall
