Indian airlines to slip into loss in Q2 on jet fuel cost, weakening rupee

While fuel cost is the single largest cost head for airlines, a weaker rupee means higher maintenance outgo, increased lease and interest costs on foreign currency loans

A bitter fare war coupled with increase in expenses will push several Indian airlines into losses in the second quarter.

The higher expenses are on account of an increase in the price of jet fuel and weakening of the Indian rupee against the US dollar.

While fuel cost is the single largest cost head for airlines, a weaker rupee translates to higher maintenance outgo, increase in lease costs and interest payment on foreign currency-denominated loans. These costs account for over two-thirds of sales.

“The impact of on loss due to depreciation of rupee on the lease liability could be as high as Rs 420 crore and Rs 180 crore for SpiceJet,” according to an estimate by brokerage firm ICICI Securities.

While the July-September period is a period when demand is weaker, what is compounding the woes of airline executives is that the competition between the airlines to provide low fare has continued even in the first week of October which is peak festive season. “Even during the days of Durga Puja tickets to Kolkata were being priced at Rs 5,000 or Rs 6,500. This is an all-time low and unheard of,” a senior airline executive said.

Analysts are of the view that the supernormal profit of the first quarter due to the grounding of Jet Airways was an aberration. The capacity situation has now normalised. “After a remarkable Q1 FY 20, the capacity shortfall due to the grounding of Jet Airways began to normalise and that had coincided with the onset of the lean season. The weakness of the economy is also trickling into the sector with yields likely to have gone up only by 5-7 per cent despite capacity constraint,” brokerage firm SBI Caps noted in a research report.

After the closure of Jet Airways, airlines rapidly inducted capacity with SpiceJet alone inducting 30 planes in two months. But according to the estimate of Directorate General of Civil Aviation (DGCA), there is a vacuum left. “The loss in the fleet on account of Jet Airways has largely been recovered and we expect a fleet of more than 616 aircraft in a month time now, We expect to return to double-digit growth in the early part of next year,” DGCA head Arun Kumar said

Rating agency Crisil expects domestic passenger traffic to grow at 6-8 per cent in FY20, mainly due to the non-revival of Jet Airways. “This is way below the 14 per cent growth logged in fiscal 2019 and the compound annual growth rate (CAGR) of 18 per cent seen in the last five years, but is higher than our earlier estimate of 2 per cent growth and factors an upward revision in capacity addition plans of low cost carriers," said a Crisil research report released in September.