Home >News >India >India’s airlines likely to feel the heat of spike in crude oil prices

NEW DELHI : The surge in crude oil prices, after a US air strike killed a top Iranian general, may push airlines operating in India deeper into losses, and threaten the survival of one or two carriers, two airline officials said.

If the conflict between the US and Iran worsens, and crude prices goes above $70-72 a barrel, “there’s a high chance that an Indian airline could go bust," said one of the two executives, requesting anonymity. “A spike in oil prices as a result of the US attack is a major concern, while threat of a war reduces travel demand," he added.

Following the US air strike, oil prices surged 4% to around $70 a barrel in ICE Futures Europe. Jet fuel accounts for one-third of the costs for Indian carriers, which were already struggling when oil was hovering at $65-66 per barrel, said another executive, also requesting anonymity. “Airlines with a strong balance sheet and promoters will survive, while the ones with weak balance sheet will suffer," he added.

Iran’s supreme leader Ayatollah Ali Khamenei on Friday called for vengeance on the US, prompting brokerages to forecast a further spike in oil prices. “(We) expect crude to boil if Iran retaliates," Abhimanyu Sofat, head of research, IIFL Securities, said in a statement.

Kapil Kaul, chief executive officer of aviation consultant CAPA South Asia, said airlines are likely to remain under pressure not only because of high oil prices, but also due to the weakening of the rupee against the dollar. “Expect pricing in Q4 to be soft as was seen in November," he added.

Despite the collapse of Jet Airways (India) Ltd, the country’s largest private airline by domestic market share and fleet, in April, airlines have not been able to take advantage of the capacity reduction to raise fares, because all other carriers added so much capacity, that they were forced to offer incentives and lower fares to lure customers. This, in turn, has severely affected their finances.

Expenses also mounted for Indigo and Go Airways, which have a large fleet of Airbus 320Neo aircraft attached with faulty Pratt and Whitney (P&W) engines. SpiceJet suffered on account of delayed deliveries of Boeing 737MAX aircraft. Ironically, these aircraft were ordered with an eye on better fuel efficiency, industry officials highlighted.

Indian airlines are expected to lose over $600 million ( 4,273 crore) in FY20, compared to an earlier estimate of full-year profit of $500 million to $700 million ( 3,561 crore to 4,985 crore), according to a recent Capa report.

CAPA projections are based on assumptions that crude prices will remain in the range of $60-65 a barrel. On Friday, crude oil rates spiked as much as 4% following the US air strikes in Iraq.

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