The soaring cost of jet fuel has significantly added to the misfortunes of the majority of airlines in India. Indian lenders are reported to be closely monitoring the health of the country’s airlines to make sure costs don’t go out of control and they are able to repay their restructured debt.
As the likelihood of airlines defaulting on even their restructured loans, Indian banks are less likely to be willing to lend further working capital. This is bad news for Kingfisher Airlines and Air India which both have plans to raise working capital loans.
The worry for passengers is that the extra cost of fuel can no longer be met by the cash-strapped carriers and as such fuel duties will rise. Kingfisher boss, Vijay Mallya said: “The oil prices are going up and we are passing on the same to customers. Airlines are in no position to swallow this price hike. Jet fuel is getting costlier because of high tax and this is something the government should look at.”
As Brent crude now costs more than $100 a barrel, Indian state-run oil firms have increased jet fuel prices by 15.48% since January 1. With every rising cost, Indian airlines stocks have declining. Since the beginning of the year, Jet Airways has lost 42.13%, and Kingfisher Airlines has lost 39.44%.
Air India is still negotiating it recast debt package, which at the moment is thought to be based on assuming oil prices remain around $80-85 a barrel. With analysts agreed that oil price will push past $120 a barrel due to the Libyan crisis, most airlines will need to tap into more reserves of working capital. Although there is no evidence Air India’s debt recast process has been interrupted because of the oil price surge, the banks must be looking to factor this in to any future agreement.
Indian airlines are not prolific users of hedges for fuel price rises. Neither Kingfisher nor Air India are hedged, the latter having discontinued its hedging operations. Both are relying on fuel burn techniques to control fuel costs, while also introducing austerity measures.