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Jet Airways hopes to minimise the impact of sharp rupee depreciation by growing its international network over the next few months. In the short term however the airline will have to bear the double whammy - rising costs and the inability to pass them on due to tepid passenger demand in domestic market.
Lease rentals and maintenance costs of aircraft, salaries to expatriate pilots, global distribution system (reservation system) expenses, parking and landing costs at international airports are paid in dollars.
Also since crude oil import is paid for in dollars any fluctuation in the currency impacts aviation turbine fuel prices and hurts airlines.
Jet Airways has a natural hedge against dollar price movement as it earns over 30% of its revenue in dollars but it does not sufficiently cover its foreign currency expenses.
“About a third of our revenue comes in dollars and over 40% of the expenses are in that currency. Over the last two months, the rupee has fallen over 20 %. So, we are going to see an impact in our costs. We have a natural hedge, but our revenue does not fully cover our dollar expenses,” said a Jet Airways executive. The airline did not respond to an email query on the issue.
"There will be short term pain due to rupee depreciation. There is no silver bullet for the problem,'' he added. Increasing international network following its alliance with Abu Dhabi's Etihad Airways will lead to an increase in dollar revenue and help narrow down the exposed limit to under 10%.
The airline's Q1 FY 2014 results were impacted by $ 21 million (about Rs 138 crore) due to rupee devaluation. The average dollar price during the quarter was around Rs 59 and this resulted in 31% rise in lease rentals and 6% rise interest on dollar-loans. With dollar touching 68 mark the impact will be higher. Jet owns 30 of 95 planes in the fleet and the balance are on lease. The airline posted a consolidated loss of Rs 348 crore in Q1 FY 2014.
Jet Airways has dollar debt of $ 1.4 billion and a majority of it is aircraft acquisition related carrying an interest rate of three%. A twenty% rise in dollar means the interest payable goes up to 3.6%.
Last year the airline had stopped uplift of on-flight meals from certain international airports and decided not to hire foreign pilots, to save costs. The airline had begun doubling the meal uplift from India on certain routes to the Gulf and Southeast Asia and it continues the exercise in some measure today.
This measure, it was hoped, would save $ 20 million in costs annually. However the airline had to lift its ban on hiring expatriate pilots to fill the requirement on its Boeing 777 fleet. The airline has wet leased three Boeing 777s to Turkish Airlines. In a wet lease the leasing company or airline provides pilots and crew to the lessee.
Below cost pricing and rapid rise in expenses will result in domestic airlines posting a loss of $ 400-450 million for the second quarter FY 2014, according to Centre for Asia Pacific Aviation.
"The cost environment remains hostile with high fuel prices compounded by a weak Rupee. There exists an overall systemic weakness with low fares and high costs, and with industry risks at a peak there do not appear to be any clear initiatives underway, either by industry or government, to correct the deteriorating financial situation,'' CAPA said in its report.
