INSUBCONTINENT EXCLUSIVE:
recent fall in the international crude oil prices may not be sufficient to boost profits.
Even though international oil prices have fallen
by over 5 per cent over the past week, they are still 45 per cent higher than the year-ago level
In addition, weaker rupee and the diminishing ability of airlines to increase passenger fares due to intense competition will weigh on
profitability in the coming quarters.
After gaining 3-20 per cent on Monday, stocks of InterGlobe Aviation, Jet Airways, and SpiceJet fell
by 0.2-3.5 per cent on Tuesday.
Fuel expenses form 35-45 per cent of total expenses of airlines
Rising trend in crude oil price is seen as a negative since it also raises the price of aviation turbine fuel among other fuels.
It is
observed that every 10 per cent rise in crude oil price results in a fall of 4 per cent in the operating margin before depreciation (EBIDTA
Considering the significant year-on-year increase in crude oil price, its current weakness may not reduce the pressure on profitability in a
meaningful way.
Analysts believe that oil prices will hover at $70-80 per barrel due to geopolitical concerns
Rising competition among airlines will limit the ability of airlines to pass on higher fuel prices to passengers
Falling trend in yield or revenue per kilometre per passenger reflects the competitive intensity
The yield fell by 3-5 per cent year-on-year for the sector in the March 2018 quarter
Add to this, the expected capacity addition
The airlines are expected to increase the existing capacity by 20 per cent in a year, which may further put pressure on the yield.
Besides,
the strengthening dollar against the rupee is another concern
Since costs related to lease rentals, maintenance and pilot salaries are in dollars, appreciating dollar tends to increase the cost burden
profits may fall by 30-35 per cent in the current fiscal
Given these factors, aviation companies may continue to report pressure on profits and profitability in the current fiscal.
