New Delhi / Mumbai: Runaway airfares because of record aviation fuel prices that have more than tripled in three years are turning away passengers and threatens to tip airlines into steep losses that may lead to shuttered operations and distress sales in as little as a year, say industry insiders and analysts, unless there is a correction in oil prices and taxes levied on fuel.
Airlines in India, most of them offering budget travel and less than four years old, are already making losses after they started off by competing for market share by offering airfares as low as Re1, excluding taxes. They had hoped their operations would turn profitable once the passenger market expanded but rising aviation fuel prices, which now constitute 60% of the operating cost of an airline up from 40% in early 2007, have eroded those ambitions.
Rising Revenue (Graphic)
When India’s largest airline group by passengers carried, Jet Airways (India) Ltd, announces its fiscal 2008 results later this week, some of those concerns may be reinforced.
The Mumbai-based airline, which had been booking profits since fiscal 2004 despite the advent of low-fare carriers, may report losses for the first time on its domestic operations in the March quarter, said a person familiar with the development but did not want to be identified because results for the period are not final. Jet Airways chief executive Wolfgang Prock-Schaeur did not return calls for comment. Jet, which in an ambitious drive started international operations, has blamed this division for its Rs91.12 crore losses in the December quarter.
Another industry executive said operating losses in the airline industry could double this fiscal year, from an estimated $1 billion (Rs4,270 crore) in fiscal 2008, only on account of aviation fuel prices. “The losses are going to (be) about an additional $850 million to $1billion (in fiscal 2009), if nothing is going to happen to oil prices,” said a senior executive with a private airline, requesting anonymity.
The fresh losses in fiscal 2009, he said, were calculated at a base price of $125 per barrel against $80 per barrel last year. This could worsen in the coming months with so-called front month futures (the price for delivery in the nearest month) for oil scaling $130 a barrel. At New Delhi, aviation turbine fuel (ATF) was selling at Rs53,309 a kilo litre in April, nearly 50% more than the Rs39,767 in October. The fuel sold at Rs17,067 a kilo litre in fiscal 2005. The price of ATF is widely expected to be raised again this month.
Gurgaon-based airline SpiceJet Ltd, widely accepted to have the lowest operating cost among aviation firms in India, too, finds itself in a tight spot. For the first nine months of the fiscal year ended in March, for example, SpiceJet registered a loss of just Rs10 crore. Since then, for the most recent quarter for which the results are still to be announced, the loss is estimated to be between Rs80 crore and Rs100 crore for just three months.
The losses in the previous quarters were kept down because it entered into sale-and-lease-back of its aircraft, or the ability to sell off the aircraft it purchased and continue using them for a rental fee.
“All the measures—reducing (oil) consumption, efficient fuel flying—have all been put in place. Now we are literally at our wits’ end as to what to do about it,” said Sidhanth Sharma, CEO of SpiceJet.
At state-run National Aviation Co. of India Ltd, which runs Air India airline, the increase in ATF prices would have contributed to “25% of losses” in fiscal 2008, S. Venkat, executive director (finance) at the airline said. The airline made Rs700 crore of losses in fiscal 2007, which could more than double even after sale-and-lease-back deals in the year gone by, another company executive told Mint earlier, preferring not to be identified since the results are not final.
The inability of airlines to raise ticket prices, primarily due to competition, have also contributed to the losses, says G.R. Gopinath, vice-chairman of Deccan Aviation Ltd, which opted to merge with larger premium carrier Kingfisher Airlines Ltd last year.
In an assessment report titled ATF in 2008 will Kill the industry prepared last fortnight, aviation consultancy Centre for Asia Pacific Aviation, or Capa, said this fiscal year will be crucial for the viability of the industry and survival of some carriers. “Given the current state of ATF in India, chances of a more strategic and long-term damage to the air transport industry is unfortunately becoming a reality,” the Capa report said.
The firm’s New Delhi analyst Kapil Kaul predicted the growth registered in the past few years by the industry could be jeopardized this year if Union and state government taxes on ATF are not reduced. State taxes on jet fuel, for instance, range from 4% to 30% across different Indian states. “(In this fiscal) there would be more red in the balance sheets of all airlines and spiralling cost of ATF would ensure that some of the airlines cannot hold up,” said Kaul.
Air passenger growth, which clocked some 40% last calendar year, is down to 10% in recent months because of the increase in fares.
The civil aviation ministry said the situation is alarming. Last year’s “growth is not sustainable for a longer period as the industry is facing a major financial crunch”, the ministry said in a note to state governments earlier this month. “Hence, the governments’ intervention through fiscal measures is essential to save the industry from a possible burnout.”
State coffers have benefited handsomely from the aviation boom in India. The consumption of ATF in India has gone from up to nearly 4.5 million tonnes in 2007-08 from 2.81 million tonnes in 2004-05 with domestic flights per week jumping from 6,483 in 2004-05 to 10,963 in the year ended in March, according to the ministry. This has resulted in a quantum jump in revenues from taxes on ATF for the states: for Karnataka it grew it 270% to Rs269.5 crore last year from 2004-05, 107.5% increase in Delhi to Rs440 crore, and in Maharashtra 60% to Rs494.1 crore.
The ministry has sought a reduction in sales taxes of jet fuel capped at an upper limit of 12.5% across states. Some states such as Andhra Pradesh, Kerala and Rajasthan have already brought it down to 4% in the past few months. A demand that customs and excise duties—at 10% and 8%—be reduced hasn’t been agreed to.
Most airlines are already revising downwards the number of new planes they might add to their fleet this year with Jet Airways not adding any and others such as Interglobe Aviation Pvt. Ltd slowing down on aircraft deliveries.
SpiceJet, which plans to lease out a plane to a European carrier next month, is figuring out fresh capital required given the record oil prices. “We had drawn a business plan for cash requirements (for aircraft induction and some operational needs) for 2008-09 based on the initial oil-price dynamics. The dynamics have changed now and we are reassessing the plan,” said Ajay Singh, a SpiceJet director.
The airline, a minority stake of which is owned by the Tata group, has so far declined a possibility of a stake sale but on Tuesday, Singh said such an option “is worth a look”. There could be “collaborative arrangements” and perhaps even a “merger”, he added.