Mumbai: Indian airlines are moving closer to break-even as operating costs have fallen faster than fare reductions, planemaker Boeing Co. said on Thursday. A stable rupee will help further cost reductions, Boeing added, ironically on a day when the rupee weakened to close below 65 to a dollar.
According to a study done by the aircraft manufacturer, the difference between the average fare and the average break-even fare for a Mumbai-Delhi flight was at Rs.1221 in May 2014. This difference reduced to just Rs.395 by May 2015—a nearly 68% reduction in losses.
The reason behind this is a 24% fall in total operating costs while average fares have fallen by just 13%.
Releasing the study in Mumbai, Boeing said while local airlines are continuing to lose money, break-even is within sight in the domestic market.
Operating costs could have reduced further if not for the high level of taxes imposed on jet fuel.
“Fuel prices have decreased 33% from their October 2013 peak, but yet Indian airlines pay up to 50-60% more for fuel than the airlines in the US,” said Dinesh A. Keskar, senior vice president, sales, Asia Pacific & India, at Boeing Commercial Airplanes.
Fuel costs are approximately 45% to 55% of the revenue of domestic players. A 4% reduction in it can potentially add around 2% to the operating margin, according to analysts.
Keskar added that if the rupee continues to be stable, airlines could see a further reduction in costs. On Thursday, the local currency weakened to below 65 to a dollar.
Typically, Indian airlines earn in rupees and spend in dollars for fuel, maintenance and other charges.
According to aviation consultancy firm Capa India, Indian airlines have lost more than $10 billion since fiscal year 2009. Airline debt stands at around $11.3 billion, rising to close to $14 billion if liabilities to vendors are included. At an industry level, airline debt is now equivalent to more than 100% of airline revenue.
Despite the stretched financials of airlines, Boeing Co. expects a demand for 1,740 planes in India over the next 20 years, anticipating that more people will travel by air over the course of time. The price tag for these planes is estimated at $240 billion.
In its annual Current Market Outlook, released on Wednesday, Boeing raised its prediction for aircraft demand by 8.75% compared with 2014’s forecast. In March 2014, Boeing said airlines in India will need 1,600 new aircraft, valued at $205 billion, in the next 20 years.
At present, Indian airlines together have around 400 operational planes and about 500 on order.
Worldwide, Boeing expects a demand for 38,050 new planes over the next 20 years. India will account for 4.5% of this demand.
Keskar said India’s domestic passenger traffic is at the highest levels. More than 66.4 million domestic passengers travelled by air in 2014. “We are expecting 75 million passengers flying this financial year,” he said.