Rupee appreciation will improve airline profits

The strengthening of rupee against the dollar in the last month will improve operating profits of domestic airlines,  according to  Bank of America Merrill Lynch (BOAML)  analysis. Rupee has appreciated approximately six percent versus the US dollar over the past five weeks. Airlines stand to benefit  since significant portion of domestic airlines' costs are  in US dollars.

The BOAML analysts estimate that each one  percent  appreciation in rupee will improve  Jet Airways and SpiceJet's  earnings before interest, tax, depreciation, amortisation and rentals (EBIDTAR) by 0.4 percent and 1.8 percent respectively in current financial year.

Appreciating rupee will have an indirect impact on price of aviation turbine fuel, the report says. State oil marketing companies cut aviation fuel prices by 4.3 percent earlier this month the first such reduction since June.

For FY 2012 Jet Airways and SpiceJet posted a EBIDTAR of Rs 1168 crore and Rs 83 crore respectively.   However  both these airlines  posted huge losses due to rising fuel costs and depreciating rupee. Fuel costs account for 30-40 percent of domestic airlines' operating expenses and carriers were hit hard by both these factors. As a result Jet posted annual net loss of Rs 1236 crore while SpiceJet lost Rs 605 crore in last financial year.

However airline executives  say it is too early to predict  impact of  rising rupee on airlines' finances. "The volatility is very high with ATF and currency. We have to wait before we make any decisions on fuel surcharge,'' said a senior executive from Jet Airways.

Other analysts also remain cautious. A research report prepared by ICICI Securities says the average fuel prices increased 17 percent between July-September and average ATF price for first quarter 2013 remains  2.2 percent higher than the previous quarter.

 " ATF is nearly 60 percent costlier in India than neighbouring countries. A 4-8 percent reduction means very little in real terms. The real requirement is to put ATF in declared goods category if we really wish to make air travel affordable for masses,'' said Amber Dubey, partner and head-aviation at KPMG.

ICICI Securities also notes that domestic airlines margins are being squeezed because of higher ATF prices and fall in passenger traffic. However the revenue per passenger and average fares are higher in Q1 FY 2013 in comparison to same period last year. It estimates all the three listed carriers to post loss. BOAML too predicts Jet Airways and SpiceJet to post losses in the current quarter because of seasonal weakness and lower fleet utilization but expects the airlines to bounce back in the third quarter due to 7-8 percent improvement in  fleet utilisation, 8-10 percent improvement in yields and strong rupee.