Crude price fears scuttle airlines’plans

Crude price fears scuttle airlines’plans

Mumbai: As they head into the traditional lean season, and with crude prices threatening to rise again, all major airlines in India are either reworking or deferring their expansion and fund-raising plans.

Kingfisher Airlines Ltd, the country’s second biggest airline by passengers carried, has deferred its expansion and is reworking a plan to sell shares abroad to raise up to $300 million (Rs 1,340 crore), chairman Vijay Mallya said recently.

The cash-strapped airline had planned to issue global depository receipts earlier this year.

Low-fare carrier firms InterGlobe Aviation Pvt. Ltd (IndiGo) and Go Airlines India Pvt. Ltd (GoAir) have deferred plans to raise money by selling shares to the public.

The country’s second largest low-fare carrier SpiceJet Ltd hasn’t been able to raise money from the market for its expansion.

Meanwhile, Jet Airways (India) Ltd, the country’s largest airline by passengers carried, is currently valued at $800 million, which is around 60% lower than what it was valued at in 2005, when it listed on the bourses. The airline was a purely domestic one at that stage.

National airline Air India, in the midst of a turnaround, continues to delay salary payments and has now started defaulting on interest payments to banks.

There is a common thread to the problems and issues of most airlines—higher jet fuel prices.

With crude oil hovering around $114 to the barrel, the price of jet fuel has rocketed, taking a toll on profitability. Airlines are paying 57,166.96 per kilolitre of fuel from 1 June, 33.53% higher than the 42,808.92 they were paying last June.

Then there’s the lean season that starts next month. Several airlines are already offering promotional fares to woo passengers in July.

“If the state governments do not lower the sales tax on ATF (aviation turbine fuel, or jet fuel) and airlines are unable to pass on the price hike to passengers, airlines, from a long-term perspective, are going to face the issue of sustainability," said Mahalingam Shivkumar, senior vice-president (finance) at Jet Airways.

“At this level of fuel prices, the volume (of passenger traffic) will come down and growth will be hit," he said.

On 6 June, the International Air Transport Association (Iata), the industry lobby that represents some 230 airlines accounting for 93% of scheduled international air traffic, further downgraded its 2011 airline industry profit forecast to $4 billion, a 54% fall from the $8.6 billion profit forecast in March and a 78% drop from the $18 billion net profit recorded in 2010. On expected revenue of $598 billion, a $4 billion profit translates into a 0.7% margin.

In a media statement, Iata said the cost of fuel is the main cause of lower profit. The average oil price for 2011 is now expected to be $110 per barrel, a 14.6% increase over the $96 on which the March estimate of profit was based.

“For each dollar increase in the average annual oil price, airlines face an additional $1.6 billion in costs. With 50% of the industry’s fuel requirement estimated to be hedged at 2010 price levels, the industry’s 2011 fuel bill will rise by $10 billion to $176 billion. Fuel is now estimated to comprise 30% of airline costs—more than double the 13% (it did) in 2001," Iata said.

Due to sales tax that could be as high as 23%, fuel costs could account for as much as 40% of an airline’s costs in India. Shivkumar said it was 34.25% for Jet Airways on a stand-alone basis. For JetLite (India) Ltd, the low-fare subsidiary of Jet Airways, it is 45%. Jet Airways purchases some of its fuel from the international centres it flies to and where there is no sales tax, while JetLite is purely a domestic operator.

While high fuel prices have inflated Jet’s costs, they have also forced Kingfisher to delay its overseas share sale and Air India to prune flights.

High “jet fuel prices have derailed our turnaround plans. We were forced to cut and combine several flights as we were not able to pay 16 crore every day to oil marketing companies", said a senior Air India executive, who did not want to be identified.

Air India has accumulated 13,300 crore in losses since its merger with Indian Airlines in 2007. The airline has had to make spot payments for fuel because of defaults since December.

A senior investment banker said IndiGo and GoAir have shelved their plans to sell shares to the public for the time being. “Both the airlines are trying to come out of this scene unhurt. And it makes no sense for airlines (to sell shares) when the market is not good," he added, asking that he not be named.

SpiceJet, too, is waiting for the right time to raise funds. Senior executives at GoAir and IndiGo did not offer any comments, while a SpiceJet spokeswoman said the current market conditions of high crude oil prices are hampering its plans to raise $75 million to fund expansion plans.

“There is no point in building big airports and allowing more planes to be imported. Airlines will run into losses and nationalized banks will have to come and bail them out," said a senior airline executive with a private airline, who did not want to be identified.

In a conference call with investors on 20 May, K.G. Vishwanath, vice-president (commercial strategy and investor relations) at Jet Airways, said his airline was renegotiating every contract in the context of high fuel cost. These include lighter seats and other equipment on board to reduce weight.

According to a note by consulting firm Frost and Sullivan, if the oil prices continue to rise it will be bad news for aircraft manufacturers, plane-leasing firms, component manufacturers, airports and aircraft maintenance, and repair and overhaul companies.

A consultant to aviation companies said that from an economic angle, high jet fuel prices will hit the growth of airlines in India. This person, who did not want to be identified, added that it would also affect the ability of Indian airports to develop into international transit hubs. The consultant recommends a liberal jet fuel pricing and selling policy.

Not everyone buys the argument about fuel playing havoc with the financials of airlines, though.

“The world has seen oil prices peaking up to $147 a barrel in August 2008. Though energy consumption is going up, the world is largely using coal and gas instead of purely oil. The trend indicates that oil prices are not going to further shoot up," said Mahantesh Sabarad, senior vice-president (equity research) at domestic brokerage Fortune Equity Brokers (India) Ltd. “Specifically for airlines, there is a huge amount of growth happening. With capacity not growing much, it is relatively easy for airlines to price their tickets competitively without losing much demand."