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A weaker currency and potential hedging loss — several airlines have hedged their fuel requirement at a higher price than the current $67 per barrel — would reduce the positive impact of lower fuel costs for airlines, analysts said.
In India, jet fuel prices dropped about 31 per cent between October and February before rising eight per cent in March to Rs 50,363 per kilolitre in Delhi. Fuel accounts for 30-40 per cent of a domestic airline's expenses and the proportion of fuel costs to total costs is declining because of the price benefit in recent months.
However the fuel price benefit was not reflected in the December quarter results of listed carriers. Jet Airways reported Rs 3 crore consolidated net profit while SpiceJet’s loss widened nearly 60 per cent to Rs 275 crore in that quarter.
SpiceJet loss increased due to a spike in redelivery costs at the time of return of leased planes. The airline's revenue also plunged 27 per cent to Rs 1,311 crore as it reduced its Boeing 737 fleet to 18 from 42 in March 2014.
While Jet Airways reported an 11 per cent decline in its fuel costs in the December quarter, overall expenses were up 5 per cent to Rs 5,249 crore. The decline in the airline's fuel bill was offset by an increase in employee, sales and distribution costs, lease rent, and maintenance expenses. Jet Airways' revenue on international routes was affected by pricing pressure.
Jet Airways’ management informed analysts in a conference call last month that distribution costs were higher because of forward bookings in which airlines pay a fee to reservation systems per booking. It also said subsidiary JetLite's maintenance expenses climbed because of a one-time overhaul of four engines.
Jet Airways did not respond to an email query on the issue. However, the airline's Chief Executive Officer Cramer Ball told analysts last month, “With the global and local operating conditions improving, we can expect to see the real impact of low fuel prices by the final quarter. Fuel price fell over 50 per cent internationally, what is being passed on has been lower than that. We have more benefits to translate to our bottom line in the first two months of the calendar year.”
HSBC global research analysts Rajani Khetan and Mark Webb in a recent report said zero hedging should enable Indian carriers to enjoy the benefit of falling fuel prices more than their hedged regional peers. Among Asian currencies the rupee had depreciated less, implying Indian airlines would lose less of their fuel gains to home currency weakness than their regional peers, they added.
Air India hedges a minor quantity of fuel. While the board has allowed for hedging of up to 20 per cent of its requirement, the actual quantity hedged is far lower. In contrast, some Asian airlines hedge 50-60 per cent of their annual requirement. Singapore Airlines and Thai Airways reported weaker operating results in the December quarter because of hedging losses. A JP Morgan report noted the rupee had depreciated 2.4 per cent between June and February while other currencies had fallen more. “Weakening local currencies in most Asian markets could partially offset the gains as fuel costs are largely paid in dollars and carriers with high dollar debts could book foreign exchange losses,” said Corrine Png of JP Morgan Equity Research.
“While the price of Brent crude per barrel has halved from $110 per barrel around July 2014 to around $55 now, fuel price per litre has reduced only from Rs 70.2 to Rs 50.4 over this period, a reduction of around 28 per cent. The benefit of low oil prices has not been passed on to the distressed airline sector. Indian jet fuel continues to be costliest in the world, almost 60 per cent higher than global prices of Rs 28-30 per litre. With fuel comprising nearly half the cost base of an airline in India, there is no way the Indian aviation and tourism sectors can leverage the huge potential India is blessed with. Only intervention by the Prime Minister’s Office can help address this long-pending reform,” said Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG.
