Headwinds for Domestic Airlines

Issue: 01-2020

Brent crude oil price surged four percent on January 03 this year, following tension between Iran and the US. Domestic carriers are facing pressure with the increase in crude oil prices and low demand that has restricted hike in air fares to a single digit. State oil marketing companies had raised the price of jet fuel by 2.6 percent from January 1, 2019. A kilolitre of jet fuel now costs 64,423 and on a year-on-year (YoY) basis, it amounts to a 10 percent price hike. Prices are expected to stay at elevated levels due to production cuts by oil producing countries as also expectation of a trade deal between China and the US. Airlines, however, have been not been able to pass on the price increase to customers due to the soft demand. Fuel accounts for around 35 to 40 percent of the operating costs for Indian carriers. Additionally, 20 to 30 percent of the liabilities are dollar denominated.

Domestic air traffic rose 3.8 per cent between January and November last year with only November showing double digit growth on the back of lower fares. On an average, fares during the April-December period have been eight percent higher. Typically, $1 increase in crude oil prices will increase operating costs of airlines by 50 to 60 basis points. And, depreciation of every rupee will result in cost escalation of 900 to1000 basis points,” said Hetal Gandhi, Director, CRISIL Research. “This has drawn the entire industry into deep discounting. We expect the pressure on airfares to continue in the near term,” said Kinjal Shah, Vice President and Co-head of Corporate Sector Ratings, ICRA.