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 Indian Aviation: 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.
One airline executive, however, doesn’t think the independent report from KPMG Advisory Services Pvt. Ltd paints an accurate picture.
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)
“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