The Hindu Business Line : Will the relief mechanism give airlines the thrust they need?

Call it the fallout of the incidents that took place in the domestic aviation industry last month or the generosity of the Government towards airline companies and their employees, a small relief package has finally been presented to the bleeding industry.

How long and what benefits the airlines would reap from it will be ascertained only over a period of time. But from a short-term perspective, it looks like the airlines should be able to curtail their mounting losses to some extent.

As part of the much awaited respite, the Government has removed the basic Customs duty of 5 per cent on aviation turbine fuel (ATF). Also, the oil marketing companies reduced the sale price of ATF by 15-17 per cent across the four metros on Friday.

Last month, the sector had already got six months to clear more than Rs 2,900 crore previously owed to the domestic oil companies. The domestic airlines have been given a 90-day grace period to clear their current fuel bills.

On the one hand, skyrocketing ATF prices resulted in a tremendous surge in the operating costs of the airlines; on the other, it had a cascading impact on their bottomlines. Currently, cost of fuel contributes 40-50 per cent to the overall costs of the airlines in India.

High jet fuel prices meant hikes in air fares which, in turn, led to depleting load factors. Good times, which were short-lived in any case, made Indian carriers place huge aircraft orders. And, when bad times struck, those planes became a liability. Excess capacity in the market, combined with slowing down of traffic from outside India as a result of the global economic crisis, eroded airlines’ profits much faster.

Gloomy numbers

While the benefits of the package will take some time to show up, the second quarter numbers of airline companies remained gloomy.

And the prime culprit was the high price of ATF. Market experts say cooling of oil prices is likely to bring some cheer, at least in the short term.

“The situation for Indian aviation industry remains the same as what it was couple of months back.

The only silver lining is the falling crude oil prices which, in turn, have brought down the fares of Spicejet, Indigo and GoAir by around 20-40 per cent,” said Mr Hitesh Agrawal, Head of Research, Angel Broking.

However, he said the drop in fare levels has come at a time when people are travelling less. This could hamper airlines’ prospects of reaping benefits immediately. “Travel plans for business and individual travellers have taken a back-seat,” said Mr Agrawal. Nevertheless the southward movement of fares should bring back passenger volumes, giving the industry a breather in the coming months. Kingfisher Airlines, Jet Airways and Spicejet all remained in red in the second quarter ended September 30.

Jet Airways has partly withstood the loss and has done better than expected, according to analysts.

Mr Mahantesh Sabarad, Senior Research Analyst, Centrum Broking, said the company achieved this on the back of year-on-year increase in the number of international fliers. Jet’s Revenue per Passenger Kilometre in its international business surged 139 per cent YoY to Rs 380 crore, he said. One of the airline’s revenue drivers was also the additional fuel surcharges that it was recovering from passengers.

On the other hand, Kingfisher Airlines reported a net loss of Rs 483 crore in the quarter ended September 30, up 91 per cent from same period last year (Rs 253 crore). Spicejet registered a four-fold increase in its losses for the same period, which stood at Rs 198 crore, against Rs 38 crore in last year’s corresponding quarter.

Rationalising fares

The high price of ATF remained a killer for all airlines. While for Jet the cost of fuel grew 143 per cent in the second quarter compared to the same last year, the impact on Kingfisher was Rs 640 crore in the quarter ended September 30, Kingfisher said in a statement. The average price of ATF increased by about 60 per cent between April and September 2008.

However, since full-service carriers did not reduce their fares, their operating margins received a positive impact from it, said Mr Agrawal from Angel Broking.

At the same time, experts also say that decent passenger growth can be sustained only through reduced fare levels. “Jet’s fares are currently 55 per cent up as against the industry average of 40 per cent on a year-on-year basis. It should look at reducing passenger fares in the future for a good passenger volume,” said Mr Sabarad from Centrum Broking. Kingfisher’s fares were also up in the same range.

In the future, airlines are expected to post far lower losses as the domestic market looks good for the next three months. In addition to the recent sops, commencement of peak season should also improve the performance of the industry in the coming quarters.

Cost-cutting measures are likely to result in optimising airline operations. These include postponing aircraft deliveries, holding back route expansion plans and using smaller aircraft, such as ATRs, in place of wide-bodied planes on domestic routes.

And, if not retrenchment, perhaps cuts in employees’ salaries and similar measures may bring in important savings too.

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