Aviation firms stare at quarterly loss with rupee slide, higher fuel cost

A depreciating rupee has compounded the problems for companies grappling with high fuel prices in seasonally weak period

Aviation companies are faced with severe competitive pressure in a seasonally weak season, coupled with high oil prices straining their finances.

The price of jet fuel, 35-40 per cent of cost, rose 27 per cent more than a year before in the June quarter. Also, the rupee is falling against the dollar; after fuel, the next two high cost items of maintenance and rentals are dollar-denominated. Analysts estimate a 10 per cent increase in crude oil prices and a 10 per cent fall in the rupee has an impact of 8.5 to 10 per cent on the profit of airline companies.

The cost spike is during a seasonally weak period. To keep demand high and load factors elevated, the airlines have over the past couple of weeks launched attractive fares. While this is not unusual during the July to September quarter, the timing is a problem. Demand or passenger volume growth, over 20 per cent since the start of the year, moderated a bit in May. While demand has thus far been robust with a load factor above 88 per cent, any further moderation in demand or lower prices will have a bearing on yields (average passenger fares per km).

Hence, analysts believe yields are likely to be weak in both the June and September quarters. Analysts at Morgan Stanley say after an estimated year-on-year decline in yield of 8.5-10 per cent in the June quarter, the September quarter is also likely to be weak. An analyst at a domestic brokerage says InterGlobe Aviation (IndiGo), which had a Rs 5.5-billion profit in the September quarter last year, could see a loss this time if fuel prices and the rupee stay at the current levels. Net profit for the March quarter was Rs 1.2 billion, down 73 per cent from a year before.

The sector is hoping for recovery in the second half of the financial year, given the start of the festival season in October. Slowing in capacity addition would have helped to improve prices but that is unlikely. Given the rise in demand, airlines have ordered for more planes and the sector is looking at an order book of at least 1,100 aircraft.

JM Financial says at a crude oil price of $78 a barrel and a rupee to dollar exchange rate of 68.5, there is limited upside for aviation stocks from the current levels.