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Airlines likely to post huge FY20 losses amid low fares, high costs

Indian carriers are likely to end this fiscal year through March with huge losses, hampered by their ability to raise fares even during the traditionally strong October-December quarter because of cut-throat competition, said three airline officials, requesting anonymity.

The collapse of Jet Airways (India) Ltd in April because of a severe cash crunch and a large debt pile has failed to lift industry fares as other airlines jumped to add capacity.

The over-eagerness resulted in other airlines adding capacity lost due to Jet’s grounding, forcing carriers to offer incentives to lure customers.

“We are all held captive to the actions of the stupidest competitors, whoever they may be on a given day. They set the price and other airlines have no option but to follow,” said a senior airline executive on condition of anonymity. “This has been causing a lot of financial distress in the sector.”

“All it takes is one discount, and the entire pricing discipline collapses like a pack of cards,” the executive said. “And of late, the pricing discipline closer to the date of departure (0-7 day window and 0-15 day window) has vanished.”

The country’s sluggish economic growth has added to demand pressures, forcing airlines to offer lower fares, said the second airline official mentioned above. “This is not a feasible model. Casualties in terms of closure of airlines are bound to happen,” the official said.

High oil prices that have been hovering in a band of $66-67 a barrel have also added to cost pressures, given jet fuel makes up about a third of a carrier’s expenses.

“If the oil prices hit over $70 a barrel, I will not be surprised if one or two airlines find it an up hill struggle to continue their operations,” the second official added.

Brent crude prices have risen by more than 30% in the last one year, while the Indian rupee has slipped against the dollar, which has further fuelled cost pressure given India is dependent on fuel imports. Taxes on aviation fuel in India continue to be one of the highest in the world.

“Most Indian airlines are comfortable when oil price stays at about $60-65 a barrel, and rupee at 60-65 per dollar. When the rupee or oil prices breach this mark, airlines find it difficult to control costs,” said the third airline official.

Indian airlines are expected to lose over $600 million ( 4,273 crore) in FY 2019-20 as compared to a previous estimate of full-year profit of $500 million to $700 million ( 3,561 crore to 4,985 crore), aviation consultancy Capa India said in a recent report.

“The cash position of the industry remains under pressure, with corresponding risks. Most carriers other than IndiGo continue to be precariously placed, with cash balances available—in some cases—to cover only a few days or weeks of expenses,” it added.

The situation is grim and airlines with financially strong promoters, who have the ability to infuse cash from time to time, will survive, while weaker airlines may shut shop in the near future, said the second official.

Expenses have also mounted due to grounding of Boeing 737 MAX aircraft globally, delaying further deliveries to SpiceJet. Snags in Pratt and Whitney engines mounted on Airbus 320neo planes, which are with IndiGo and GoAir, have also added to costs.

Rating agency Icra expects a muted domestic capacity growth, and domestic passenger traffic to grow under 4.5% during 2019-20, after five years of double digit growth.

“Despite the expected passenger growth over the medium term and the ongoing cost rationalisation initiatives of airlines, the financial health of the industry will continue to deteriorate,” said Kinjal Shah, vice-president and co-head of corporate sector ratings, Icra Ltd.

Source: Livemint