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Aviation's moment

Low fuel price gives carriers time to reform

Business Standard Editorial Comment  |  New Delhi 

Last week, state-controlled oil marketing companies cut aviation fuel price by 11.7 per cent after crude oil witnessed further fall. With this, aviation fuel prices are down almost 40 per cent from last year's level. As fuel is their principal expenditure, this has benefitted Indian carriers greatly. For the quarter ended June 30, the fuel bill of the two carriers listed on the stock market was down sharply: SpiceJet by 53 per cent and Jet Airways by 20 per cent. Fuel accounted for 34 per cent of SpiceJet's total expenditure for the quarter, down from 43 per cent in the year-ago quarter, while in Jet Airways' case, it fell from 36 per cent to 27 per cent. Both carriers posted an operating profit for the quarter, as against a loss in the year-ago quarter. Even state-owned Air India, which has been mired in losses for several years, hopes to report a marginal quarterly profit towards the end of the current financial year.

This state of affairs is likely to continue for some more time. Crude oil prices are expected to remain low for a while, thanks to the Chinese economy slowing down, which will help keep aviation fuel prices under check. To help matters, domestic air traffic is growing fast. According to the International Air Transport Association, India's domestic passenger volumes grew 28.1 per cent in July, which makes it the fastest growing market in the world. Globally, the traffic grew just 7.8 per cent. As a result, most Indian carriers have seen an improvement in their plane load factor.

This combination of lower fuel costs and strong demand is a golden opportunity for the Indian aviation sector to turn around and reorganise business models. However, it is important that the carriers should not get into a fare war at this stage. That could be suicidal. The Centre for Asia Pacific Aviation, in its outlook for 2015-16, said that in the quarter ended June 30, carriers "compromised yields to generate cash". At this moment, discipline in pricing is, therefore, of critical importance for airlines. As it is, fares are at rock-bottom now, which perhaps is the reason for the strong growth in air traffic. Any reduction from here, or some kind of a slump sale, will fritter away the gains they have made in the last few months. Thankfully, the likelihood of a price war is low because the market is all set to move into the busy phase for at least three to four months. Carriers usually launch slump sales in order to get rid of unsold inventories during the lean season. Also, experts expect modest capacity expansion in the quarters to come, which should help the carriers hold their tariffs.

The only cloud in the horizon is the recent fall in the rupee. About a quarter of a carrier's costs are in dollars, so any depreciation is bound to increase the burden. To that extent, some of the gains of the lower fuel prices have been nullified. This makes the need for pricing discipline all the more urgent.

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First Published: Wed, September 09 2015. 21:38 IST