Rising crude oil price may impact airline margins

ATF prices rose 15% in December compared to June.

Margins (profit as a proportion of sales) of airlines may be hit in the coming quarters, following a surge in prices of crude oil and Aviation Turbine Fuel (ATF).

ATF prices increased by around 15 per cent in December compared to June. Average jet fuel prices in the current quarter have also risen by over 10 per cent compared to the second quarter. Rising jet fuel prices over the period have increased the operational costs of airlines.

“With fuel prices rising, spends on jet fuel have risen to around 50 per cent of the total operational cost of domestic carriers as compared to 35 per cent of the total operating cost in June. This increase is alarming and if it continues, the airlines will be badly impacted in the next two quarters despite huge demand,” said Mahantesh Sabarad, senior VP of equity research at Fortune Equity Brokers.

Domestic low-cost carriers earn Rs 4 per kilometre per passenger and their expenditure is Rs 2 per kilometre per passenger.

Expenditure on jet fuel constitutes 30 per cent of the total cost of the domestic carriers. In contrast, expenses on jet fuel constitute only 20 per cent of total cost for international carriers.

However, some industry insiders feel airlines in India will be able to absorb the impact of rising fuel costs till crude prices touch $95 a barrel.

“The outlook for this year has been made keeping in mind oil prices in the range of $85 to $95 a barrel. The airlines will be able to absorb the impact if crude remains in this range but anything beyond that will create trouble for the airlines,” said Kapil Kaul, head of the Centre for Asia Pacific Aviation in India.

But there are others who feel that air fares may go up if fuel prices continue to rise and this might subsequently impact the growth in passenger numbers. “Any increase in jet fuel prices will adversely impact the operating margins of airlines. If the increase continues over a longer period, then fares are likely to go up,” said Kapil Arora, partner (airlines sector), Ernst & Young.

“Down the line, we could also see fares going up and this might hamper the growth trajectory of the airlines,” said Sabarad.

Barring Kingfisher, both Jet Airways and SpiceJet have made profits in the first two quarters of this financial year.