Cut in ATF price to fuel aviation sector profit

Lower aviation turbine fuel prices have helped in offsetting negative impact of weakened rupee

A 40 per cent year-on-year drop in jet fuel's price will lead to improved operating profits for domestic airlines. On Monday midnight, state oil companies cut the price by 11.7 per cent, the sharpest cut in six months. The price is revised monthly.

Lower aviation turbine fuel prices have given a breather to airlines and helped offset the negative impact of a weakened rupee. About 25-30 per cent of airline costs (excluding fuel) are dollar-denominated.

For the first quarter of 2015-16, the fuel bill of Jet Airways and SpiceJet was down by 20 per cent and 53 per cent, respectively, from a year before. Sharper with SpiceJet due to a capacity cutback.
 

Fuel now accounts for 27 per cent of Jet's operating expenses from 36 per cent a year earlier. With SpiceJet, it is now 34 per cent of expenses from 43 per cent in the first quarter of last year.

BOOSTING AVIATION

• Lower aviation turbine fuel prices have given a breather to airlines and helped offset the negative impact of a weakened rupee
• Domestic carriers are better placed than East Asian peers because of near-zero fuel price hedging & rupee's strength in comparison with those currencies
• Experts warn that inability to maintain a pricing discipline could erode profitability

Both the listed airlines also reported an operating profit in the January-March quarter, driven by the fuel cost benefit. Jet made a profit on operations (before other income, exceptional items and interest cost) of Rs 162 crore in the June quarter as against a Rs 117 crore loss in the same quarter last year. SpiceJet made a Rs 70 crore profit against a loss of Rs 104 crore earlier.

While jet fuel prices in India are higher than elsewhere in the region, due to higher taxes, domestic airlines are better placed than East Asian peers because of near-zero fuel price hedging and the rupee's relative strength in comparison with those currencies.

However, analysts caution that inability to maintain a pricing discipline could erode profitability. “Robust traffic growth is expected to continue and airlines should have the ability to maintain pricing discipline, due to modest capacity expansion. The greatest risk to recovery and profitability, other than the increase in fuel prices, is the failure to maintain pricing discipline. In the first quarter, airlines have already visibly compromised yields to generate cash,” the Centre for Asia Pacific Aviation said in FY16 outlook.

Says an analyst: “There will be an improvement in the financial results of airlines because of lower fuel prices. But, we are not expecting super profits because of the impact of rupee depreciation and a 15 per cent to 25 per cent drop in fares and yields.”