Mumbai: Costlier jet fuel and a weakening rupee are pushing down yields at airlines, driving them towards operating losses in the March quarter despite higher passenger loads.

IndiGo last week reported a net profit of Rs117.64 crore during the quarter, down from Rs440 crore a year ago due to costlier fuel, lower yields and foreign exchange (forex) loss. Had it not been for finance income of Rs248 crore earned from fixed deposits and mutual funds, the airline would have likely reported a loss during the fourth quarter of FY18.

Full service carrier Jet Airways and no-frill carrier SpiceJet, which are expected to report their quarterly results in the coming days, are not expected to fare much better than IndiGo, which is the largest domestic airline in terms of passengers carried.

“Jet Airways’ unit yields are expected to decline 2% year-on-year (Y-o-Y) while unit fuel cost would rise 12% year-on-year (during Q4 FY18)," said Elara Capital’s quarterly preview on India Aviation, a research report, dated 6 April.

“Company’s domestic passenger growth was also lowest at 12% year-on-year during Q4 FY18," the report added.

According to Indian Oil Corp. Ltd, jet fuel prices rose by more than 19% in the last one year. Jet fuel prices in Delhi stood at Rs61,450 per kilo litre on 1 April 2018, against Rs51,482 a kilo litre a year ago.

According to Elara Capital, SpiceJet is one of the few airlines that likely saw higher yields in Q4 FY18. The Ajay Singh-led low-fare airline has seen yields rising for three consecutive quarters in FY18.

“Our air fares analysis indicates SpiceJet better managed its yields that is expected to improve 7% Y-o-Y, due to its higher exposure in lower demand quartile routes that witnessed less decline in fares driven by seasonal decline in demand," said Elara Capital’s report. “We expect aviation firms under our coverage (IndiGo, SpiceJet and Jet Airways) to report 14% Y-o-Y decrease in their cumulative PAT due to anticipated flat yields of IndiGo, and 13% Y-o-Y increase in unit fuel cost to Rs1.4/seat-km," the report added.

However, the depreciation of the rupee is expected to hit SpiceJet and other airlines. Indian carriers not only use dollars to buy and lease aircraft, and pay expat workforce, but also to pay for maintenance work and fuel.

Most airlines have seen high load factor during the January-March 2018 quarter, as several airlines offered discounted tickets to fly more passengers.

Listed airline Jet Airways reported an average load factor of 88.43% during the quarter.

During the same period, IndiGo and SpiceJet reported an average load factor of 91.17% and 95.43% respectively, according to Directorate General of Civil Aviation data.

“At a time when costs are going up, and in the absence of advance bookings, airlines are desperate to get higher load factor, for which they are attracting passengers with lower fares," said an analyst with an international brokerage tracking the sector.

The analyst mentioned above, who did not want to be named, said current trends are not sustainable in the longer run.

“The price correction could happen in the next one-two quarters," the analyst added.

SpiceJet and Jet Airways will look to save costs by inducting fuel-efficient Boeing 737 Max aircraft in their fleets.

SpiceJet has placed an order for 205 Boeing 737 Max aircraft, the first of which will be delivered in August 2018. This is expected to bring down operating costs by about 15% for the airline.

Recently, Jet Airways finalized a deal to buy 75 more Boeing 737 Max planes, after ordering 75 similar aircraft in 2015.

“While the management expects operating costs to dip with 15% fuel savings and lower maintenance, it expects ownership costs to fall as deliveries in the initial three years will be under sale and lease back," said an April Edelweiss report on SpiceJet.

“SpiceJet expects overall 8-9% cost savings from new planes," the report added.

At a recent post-results analyst call, IndiGo’s senior management told analysts that the current environment—with low yields and high costs—is unsustainable for the industry.

“Yield decline has been seen across all airlines and across both domestic and international segments. Our low-cost structure will help in withstanding the short-term pressures," said IndiGo’s chief financial officer Rohit Philip, adding yields have been firming up during the last fortnight but it is not clear yet if this will hold up.

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