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The rupee's sharp fall to 66.65 to a dollar will partially offset the gains airlines have made from the lower crude oil prices.
While fuel bills of airlines have fallen 30 per cent due to a slump in crude oil prices, the depreciating rupee is a cause of concern for airlines because 25-30 per cent of their costs (excluding fuel) are dollar-denominated.
These include aircraft lease rents, maintenance costs, salaries of expatriates, interest cost on dollar debt, ground handling and parking charges abroad and payments to global distribution companies, among others. Inclusive of fuel (as crude is paid for in dollars by oil marketing companies), dollar-linked costs of airlines would be 60-70 per cent.
"From the second quarter of FY15 to now, the rupee has depreciated from 61 to 66 and that is having a big impact on us. However, the fall in crude price has compensated the negative impact caused by rupee depreciation," said Kiran Koteshwar, chief financial officer, SpiceJet.
"Concerned about the Indian rupee trading at 65.75 against the US dollar... can see it drop further this year to mid 67s... am relooking at exposures," AirAsia India managing director Mittu Chandilya had tweeted last week.
Air India and Jet Airways have a natural hedge as the two airlines have larger international operations than other carriers. For instance, Jet Airways earns 59 per cent of its revenue from overseas flights. But in case of no-frills airlines such as IndiGo, GoAir and SpiceJet, the operating income in dollars is limited. Vistara and AirAsia do not have international flights yet, while IndiGo and SpiceJet have limited international operations. However, airlines do earn non-operating income like incentives and credits from aircraft and engine manufacturers in dollars.
"About 20 per cent of our capacity is on international routes and international operations contribute about 25 per cent to our revenue. The dollar income from operations is 10-15 per cent. As we increase our fleet, we will look to increase our international operations and that will serve as a hedge against currency fluctuations," Koteshwar added.
