Despite a strong revival seen in the Indian aviation sector after the pandemic-related turbulence, the margins of airline companies will likely take a hit in Q2 on the back of rising fuel prices and a depreciating Indian rupee.
In the first quarter of FY23, three major airline companies, including Interglobe Aviation, Jet Airways, and Spice Jet, posted a net loss of Rs.1,065.4, Rs.390.1, and Rs.788.8 crore, respectively. Despite increasing revenue, companies posted a loss due to excessive expenses.
ATF prices touched a record high in June this year after the OMCs announced a 16% hike. However, due to a drop in oil prices, the ATF fuel price was reduced by ₹5,521.17, or 4.5%, to ₹115,520.27 per kl last month.
The increase in jet fuel prices will raise the operating costs for airlines, as ATF makes up 40% of an airline's operating costs. ATF prices are revised on the 1st and 16th of every month based on the average of benchmark international rates.
Further, a fall in the value of the rupee leads to a rise in the operational costs for airlines, eroding margins and impacting profitability as ATF prices and other costs are priced in dollars.
Currently, domestic carriers are in the process of adding new capacity to cater to the rising demand for air travel with Covid-led restrictions gone. If costs rise around this time, the only choice for them would be to raise fares and postpone aircraft purchases, both having downsides beyond a point, Financial Express reported, quoting analysts.
A report from Edelweiss said airlines are expected to report a loss before tax amounting to $1.4-1.6 billion (in FY23), primarily due to high ATF prices, a weak rupee and a lack of full cost pass-through. The brokerage firm, however, believes that airfares will rise in the coming festive season, which would narrow airlines' overall losses.
According to data from the Directorate General of Civil Aviation (DGCA), since March of this year, all of the months—aside from July—have recorded more than 10 million passengers per month.
Meanwhile, the airline industry took on a lot of debt to try to weather COVID-19, and recently the finance ministry modified the emergency credit line guarantee scheme (ECLGS) by raising the loan limit to ₹1,500 crore from ₹400 crore. The ECLGS was announced in May 2020 in the wake of the outbreak of COVID-19 to help various sectors, especially in the MSME segment.
With the recent sell-off, airlines including Interglobe Aviation, Jet Airways, and Spice Jet are trading at levels similar to where their stocks were in March 2020.
In a bid to reduce expenses, Spice Jet placed 80 pilots on three-month leaves of absence without pay. Shares of Spice Jet stood as the top laggard in the last year by eroding nearly 47% of investors' wealth. Meanwhile, the low-cost carrier experienced seven emergency landings between June and July.
As crude oil prices have fallen in recent months, global brokerage firm Goldman Sachs has upgraded Interglobe Aviation to 'buy' and raised the stock's target price to ₹2,210 from ₹1,990 previously. However, the brokerage firm sees a foreign currency impact and a rise in fuel prices as key risks in the near term.
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