Why ATF prices no longer fuel airfares

Riken Mehta, Shaheen Mansuri & Sagar Salvi
Moneycontrol.com

Cash-strapped airlines will now be breathing easy, after a 4.3% cut in aviation turbine fuel (ATF) prices, the steepest decline in three-and-a-half months. However, the jury is still out whether this would translate into cheaper air fares.

Airlines and even travel agents don’t see fares easing. According to industry watchers, ATF price movement no longer dictates fares. In fact, airline representatives on several occasions have made it clear during media interactions that airfares will be market-driven and not by volatile ATF prices. They also say that due to a very high tax structure, ATF is almost 70% costlier in India than what airlines pay globally. Therefore, even if fuel prices decline, airlines can’t pass on the benefit to consumers.

Sample this: Fuel expense was approximately over Rs 6,000 crore for major full service airlines in FY11-12, up 40% (YoY), thereby making up a third of the total operating cost. As a result, even if fuel cost comes down by a percent or so, as it happened recently, airlines do not react due to the already existing fuel cost pressure on them. But they also say that they can bring down fares only if the ATF price falls continuously.

Meanwhile, data collected from several online travel portals and travel agents suggest that fares have not reacted to the movement in ATF prices. In fact, it is market dynamics that drive fare pricing. For instance, fare on the Mumbai-Delhi sector which averaged at Rs 23,000 in the first week of October last year due to the F1 races when ATF cost was 20% lower than what it is today. Interestingly, the average fare is around Rs 10,000-15,000 these days. Around that time even Kingfisher had started shrinking capacity due to financial stress and frequent pilots strike. Air India too had curtailed flight operation during the month due to a section of pilot not resuming work. So, one may not track ATF prices and hope for revision in airfares.

Chart of the day: Why IndiGo succeeds where Kingfisher fails

Riken Mehta, Shaheen Mansuri, Sagar Salvi
Moneycontrol.com

As Kingfisher Airlines ' troubles mount, its rivals have a cause to cheer as they begin to gain market share. The airline, which is now operating only a fourth of its 64-aircraft fleet, has allowed domestic carriers like IndiGo to gain maximum, contrary to the market belief that Jet Airways will gain maximum from KFA's debacle which started late last year.

Even as the rest of the sector fights the battle for survival, low cost carrier IndiGo Airlines improved its market share to 24.9% in the month of May.

The aviation industry is facing a loss of around Rs.7,700 crore in the year ending March, as per the consulting firm Centre for Asia Pacific Aviation (CAPA).

IndiGo started life as a low-cost carrier and has stayed there firmly, sticking to its business model even in the worst economic crises, a move that has paid off very well.

Problems at Kingfisher Airlines and Air India too have contributed to its expanded market share. Combined market share of Jet and its subsidiary JetLite has been steady at slightly around 28% in the past one year. AI's share has risen slightly to 16%, as have been those of low fare warriors SpiceJet and GoAir.

Why IndiGo succeeds where others fail

*IndiGo utilizes its aircraft for 16 hours in a day which is considered the highest in the industry, hence can ferry more passengers (on an average its passenger loads have been around  90% in the past one year.)

*Being no-frills is an added advantage for the airline as it takes lesser turn-around time then full service carriers which cater food on-board.

*Highest on-time performance in the past one year with no record of either pilot strike or flight cancellations, it now commands strong passenger loyalty.

Jet, Kingfisher margins likely to crash on falling rupee

A falling rupee against the dollar has proved to be a double edged sword for ailing airlines struggling to fly in the black.

The aviation sector has already seen its operating cost go up significantly for the three months to September quarter as airline companies incur 30% expenses in dollar denomination. Secondly, the weak rupee could compress EBITDA margins to 3% from 12.3% Y-o-Y due to the weak rupee, say analysts

After falling to Rs 50 to a greenback few days back, the rupee is now at Rs 48.86 sending shockwaves to airline operators who are already reeling under losses for the past two quarters. While country’s largest private carrier Jet Airways had posted a net loss of Rs 123 crore for Q1, Kingfisher too posted a net loss of RS 263 crore on high fuel bills.

Jet Airways and Kingfisher Airlines officials with whom moneycontrol.com talked to have said that their Q2 topline has been dented as the rupee started to depreciate against the greenback by almost 12% when compared with the three months to June quarter.

"A sharp fall in the value of the rupee pushed up our external borrowing cost, lease rentals and salaries to expat staff. A falling rupee has bloated out operational cost by around 10% for the September quarter," says an official from a full service carrier.

Sample this:

Jet incurred Rs 361 crore towards employee salaries, Rs 207 crore on lease rentals and Rs 214 crore on interest payments on loans taken domestically and in dollar denominations when the rupee stood at Rs 45 against the greenback during Q1 of FY12. Now, with the rupee inching towards Rs 50 against the dollar, airlines will have a tough time maintaining costs, say analysts.

Also, while Jet has dollar denominated loans of around Rs 9,000 crore, its rival Kingfisher has a debt of around Rs 6,000 crore of which a significant amount is in dollar denomination. Fall in rupee will also increase the principal amount of loans for these companies.

Sharan Lilaney from Angel Broking explains, “Airlines are already making losses for the past two quarters and with lower purchasing value of the rupee, airlines are likely to report more losses this quarter.” He further adds that though Jet Airways and Kingfisher Airlines receive revenues from international operations in dollar terms, the impact will be offset by other larger expenses which they incur in dollar currency.

Though crude prices have slipped to $109.45  from $113 a barrel Q-o-Q, the weakening rupee has toned down the impact, say experts.

-Riken Mehta & Shaheen Mansuri