Mumbai: India’s airlines expect to post aggregate losses of around $2 billion (Rs8,660 crore) in the 12 months to March 2009, but an aviation expert at audit and consulting firm KMPG’s Indian operations says these firms could be profitable by 2010-11 as long as oil prices continue to stay at current levels.
The optimistic outlook is presented in a report titled IndianAviation: Flying Through Turbulence, and it says India’s airlines can become profitable by focusing on improving efficiencies and processes and switching to a “leaner” business model.
Planes parked at Delhi airport. According to KPMG, India’s airlines can turn in profits by focusing on improving efficiencies and processes and switching to a ‘leaner’ business model (Photo by: Madhu Kapparath/Mint)
One airline executive, however, doesn’t think the independent report from
KPMG Advisory Services Pvt. Ltd paints an accurate picture.
“I do not think it is possible to make a credible forecast on what will happen in 2011. KPMG must have made these conclusions based on certain assumptions. One will have to make five-six speculative assumptions to make such predictions. I don’t think it will be realistic to make such forecast from the part of airlines as the oil prices are not predictable,” said InterGlobe Aviation Pvt. Ltd-run IndiGo’s chief executive Bruce Ashby.
One of these assumptions is the price of oil. Even as the Organization of the Petroleum Exporting Countries speaks of $150 oil (it is trading at around $143 now) and analysts speak in terms of $170 oil (Goldman Sachs says $200 oil is a possibility), KPMG’s report expects the price of crude to stay at current levels.
“We are not forgetting that aviation turbine fuel (ATF) now constitutes 45% of the operating cost, from 25% two years ago. Though ATF will continue to be a critical factor, airlines can post break-even by adopting strict cost-cutting measures,” said Rajeev B. Batra, executive director of KPMG and the author of the report.
Batra also said that a passenger growth of 15% is sufficient for airlines to make profits. Passenger traffic grew by 40% last year, but has grown in single digits in the first quarter of 2008-09.
The KPMG report comes at a time when most airlines expect to make significant losses.
India’s largest private airline Jet Airways (India) Ltd recently said that the industry is losing at least $20 per passenger, signifying close to a 20% oversupply or imbalance, which has lead to route and capacity rationalization.
“The estimated fuel cost per passenger carried (for Jet) is $85. As against this, average yield per passenger is only $150, while seat capacity in industry continued to grow at 18% in Q4 against a passenger growth rate of 11%,” Jet Airways said in a presentation during its annual results.
Jet estimated the industry’s losses at $1 billion in 2007-08 and said that this number could double in 2008-09.
“Profits or losses purely depends upon ATF prices. An airline can be extremely disciplined, but there is a limit to cutting down costs,” said a Mumbai-based industry analyst on condition of anonymity.
In his report, Batra wrote that despite oil prices having reached record highs, some of the world’s leading airlines, such as Air France-KLM, Cathay Pacific, Singapore Airlines, Qantas, British Airways and Emirates, booked profits in excess of $1 billion in the last fiscal year, bettering their previous year’s performances.
Weighing the costs
• In removing seatback phones from its MD-80s and B737-400s, a US airline shed 200 pounds (90kg) per plane, translating into 3,400+ gallons (12,886 litres) saved annually
• Alaska Airlines indicated in March 2004 that removing just five magazines per aircraft could save $10,000 per year in fuel; the carrier has also reduced the weight of catering supplies
• Air Canada considered stripping primer and paint from its B767s to save 360 pounds per plane
• By removing six seats, JetBlue cut A320’s weight by 904 pounds
• AirTran ordered carbon fibre seats for its B737-700s to shave 19.4 pounds per row, resulting in estimated fuel savings of $2,000 per year per aircraft
• Alaska’s new beverage cart, at 20 pounds less, could save $500,000 in annual fuel costs
Source: KPMG