The new year began on a positive note for domestic airlines as state oil marketing companies slashed aviation turbine fuel (ATF) price by 14.7 per cent. This is the second consecutive drop in jet fuel price and the sharpest cut since November 2008.
A kilolitre of ATF will now cost Rs 58,060 in Delhi compared to Rs 68,050.
The revision brings relief to domestic airlines which have been struggling to make profit because of a rise in operating costs. Fuel accounts for around 40 per cent of the expenses of domestic airlines. High fuel and depreciating rupee resulted in big losses for the three major airlines in the second quarter of FY19. Collectively, IndiGo, Jet Airways and SpiceJet posted loss of Rs 2,338 crore in the preceding quarter as crude oil price surged 50 per cent on a year-on-year basis.
In fact, in the first half of FY19, the listed airlines together lost around Rs 20 crore per day collectively registering a loss of Rs 3,640 crore, ICRA’s vice-president Kinjal Shah noted in a report last month
Crude oil prices, however, are on a decline over the last few weeks over concerns of a supply glut. Boeing expects crude price to remain around $60 per barrel in 2019.
Inability to pass on high costs has been another bane for domestic carriers. While domestic air traffic grew 19 per cent between January and November on a year-on-year basis, much of it has come on the back of low fares. Airlines have been discounting fares throughout the year to fill up seats or raise cash. Industry experts say fares are holding up now but could come under pressure due to capacity induction and seasonal weakness in February-March.
In its latest India market outlook released in December, Boeing said domestic airlines lost around Rs 1,120 per passengers in the April-June quarter of 2018 due to their inability to charge higher fares. In the same period in 2017, airlines had made a gain of Rs 199 per passenger flown. Airfares in the fast-growing Indian market are 10-15 per cent lower than break-even levels for airlines, Boeing’s senior vice-president, Asia-Pacific, Dinesh Keskar said.
He raised the long-term jet order forecast for the nation to a record high despite market challenges.
“The 14 per cent cut in fuel price is a positive step. However, typically, we have seen fares drop as a result of over capacity,” a senior executive of a private airline said.
Alongside IndiGo, which has planned a 30 per cent increase in seat capacity in the next two quarters, SpiceJet will join the race of capacity induction with the airline inducting 26 aircraft by the end of this financial year which includes 18 Boeing 737 Max and eight 90-seater Q400.
In an investor note last week, brokerage IIFL said, “Industry capacity continues to grow at 18-19 per cent. The significant rise in crude price and pressure on industry-wide profitability had raised hopes of a cut in capacity by weak players.However, with relief due to a sharp correction in crude price, those hopes have been quelled. Historically, an 18-20 per cent growth in capacity has been difficult for the industry to absorb. As consumer spend on air travel has not grown at that rate (exception being FY18), the industry had to compromise on load factors and yields.” For instance, the average occupancy in November dropped 5-6 per cent on a year-on-year basis.
IIFL has upgraded the airline’s earnings estimates, factoring in a lower crude price ($60 a barrel) but cautioned that there was possibility of a cut in earnings if the crude price bounced back.