Fuel prices & lack of efficiencies causing airlines' losses

According to CRISIL Research, airline companies in India would continue to incur losses even if crude oil prices decline significantly if they do not quickly undertake a revenue augmentation exercise in conjunction with cost reduction measures and efficiency improvement initiatives.

The sharp increase in crude oil prices in the first half of 2008 has led to a corresponding rise in the price of aviation turbine fuel (ATF) for all airline companies, due to which they are expected to post heavy losses. Fuel cost as a percentage of total operating costs has increased by 300-600 basis points.

CRISIL Research has analysed the movement in breakeven ticket prices of domestic carriers at various prices of crude oil and at varying load factors and concluded that a structural increase in ticket prices is required in the near term.

Mr. Sudhir Nair, Head, CRISIL Research, elaborated, "Although airlines have gradually increased the fuel surcharge to counter the impact of rising ATF prices, they continue to remain in the red. This incessant increase in the price of ATF and the consequent increase in ticket prices have led to a reduction in growth of passenger traffic, thereby leading to a drop in passenger load factors. Even at sharply lower crude oil prices, airlines will not break-even; a structural increase in ticket prices is required in the near term.". This has resulted in airlines adopting a co-operative route to profitability, under which both, Low Cost Carriers (LCCs) and Full Service Carriers (FSCs) have fixed the minimum base fare, fuel surcharges and other taxes. The same needs to continue till the airlines are back in the black.

Mr. Nair further added, "More critical for airlines is an urgent need for efficiencies. Measures include selectively reducing capacities in order to improve load factors and reducing dependence on leased aircraft resulting in a lower aircraft rental outgo besides employee productivity enhancement measures. As the fare differential between LCCs and FSCs has decreased considerably, consolidated airlines could also consider a single brand FSC operation. This would not only help improve passenger load factors and reduce other operating costs, but would also help augment revenues through superior pricing."

Sourced From: CRISIL Limited