Mumbai: Indian lenders are aiming to closely monitor the health of the country’s airlines, some of which are being bailed out by banks with debt recast programmes, to make sure costs don’t go out of control as jet fuel prices surge, owing to instability in West Asia.
The banks may set up a committee to assess the impact of rising oil prices on the ability of the carriers to service this restructured debt, according to the executive director of a large public sector bank that has a substantial exposure to airlines, and other banking officials.
With the spectre of loan defaults looming once again owing to costs shooting up, banks may be wary of giving further working capital loans to airlines. The prospect of this tightening may force the carriers to pass on higher fuel prices in the form of an increased fuel surcharge, making travel costlier.
Jet fuel, the single biggest expense for carriers, accounts for about 40% of the operating cost. Brent crude has crossed $100 a barrel to hit the highest level since mid-2008. State-run oil firms have increased jet fuel prices by 15.48% since 1 January.
Airline stocks have plunged as jet fuel prices have soared. Since the beginning of the year, Jet Airways (India) Ltd, the country’s biggest carrier by passengers carried, has dropped 42.13%, and Kingfisher Airlines Ltd, the second biggest, has lost 39.44%, even as the bellwether equity index, the Sensex, has fallen 9.86%. During this period, the price of Brent crude has risen from $94.81 per barrel to $115.97.
The tough stance of the banks may affect the plans of Vijay Mallya-controlled Kingfisher Airlines and state-run Air India to raise working capital loans.
SBI Capital Markets Ltd was mandated to restructure part of the debt of both the carriers. While Kingfisher Airlines’ debt has been restructured, Air India is currently undergoing the process.
The executive director cited above said the recast debt package is based on an assumption of oil prices at around $80-85 a barrel, but analysts have said oil prices may cross $120 a barrel due to the recent crisis in Libya, the world’s seventh largest oil producer. “This may push up the working capital requirement for airlines. The monitoring committee will decide on giving additional loans,” he said on condition of anonymity.
If Kingfisher Airlines defaults on repayments, the entire exposure will turn bad and its lenders will have to set aside money to provide for it.
According to the banker, the spike in oil prices had not been factored in when the loan restructuring was done.
There is no indication that Air India’s debt recast process has been interrupted because of the oil price surge, said another executive of a public sector bank that has lent to the airline industry. “The banks will (now) have to factor in the fluctuations of oil prices,” he said, declining to be named.
Air India executives did not offer any comments on the matter.
Mallya, chairman of Kingfisher Airlines, said the Libya unrest is a temporary phenomenon and an unnatural event.
Last year, the country’s biggest lender, State Bank of India, and its consortium partners, secured Reserve Bank of India’s approval for a proposal to restructure a loan of around Rs 2,000 crore given to Kingfisher Airlines.
Mallya said his airline was not in need of cash as planes were full and fuel price increases were being borne by passengers.
“The oil prices are going up and we are passing on the same to customers,” Mallya said. “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.”
He also indicated that his airline will engage in talks with investors in the next 10 days for raising $300 million through global depository receipts and this will help lower the cost of money.
Airlines have no option but to raise prices, said Loizos Heracleous, professor of strategy and organization and head of group marketing and strategic management group at Warwick Business School.
“If oil prices continue to rise and fares are not raised, the airlines?will?rack?up more losses,” he said. “This is not good either for the industry or for customers.”
Globally, most airlines have hedging strategies that help them temporarily smoothen the effects of oil price fluctuations, he said. Indian carriers, however, are not great believers in hedging, preferring to use other mechanisms.
“Hedging is difficult and when you get it wrong, it can be treacherous. We are staying away from hedging,” said an executive at Jet Airways. “We have a fuel burn group that is working round the clock to monitor fuel consumption and take steps to reduce costs, monitor engine efficiency and reduce aircraft weight.”
He said his airline became aggressive in reducing costs, including freezing capital expenditure and reducing travel for executives in the context of spiralling oil prices.
Mallya said his airline was doing everything, including cleaning the aircraft to reduce drag while flying, apart from other special fuel-saving measures.
Air India, which has discontinued its hedging operations, is also continuing with its austerity measures, including restrictions on travel for executives and shutting international offices in cities to which it doesn’t fly.
The International Air Transport Association, which represents 230 airlines comprising 93% of scheduled international air traffic, downgraded its airline industry outlook of net profit for 2011 to $8.6 billion in March from the $9.1 billion it had estimated in December 2010, a 46% drop from the $16 billion earned by the industry in 2010.
Given estimated industry revenue of $594 billion this year, the net profit margin will be 1.4%.