With the aviation turbine fuel (ATF) prices touching an all-time high on Monday, the aviation sector has the option to hike airfares. However, the excess capacity witnessed by carriers will make it tough to raise prices to recover costs. SL Narayanan, group chief financial officer of Sun Group (which owns SpiceJet) feels the company’s margins may be strained in the current quarter with higher fuel prices and low demand.
Meanwhile, he also clarifies on that the Aviation Authority of India (AAI) has not placed it on a cash and carry basis. "All issues with AAI have been sorted', he adds.
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Below is the edited transcript of his interview to CNBC-TV18.
Q: The steep hike in jet fuel (ATF) prices must be uncomfortable. Will all the recovery be done just through higher ticket prices?
A: You have hit the nail on the head. At this time, there is a sense of aggravation and prices have to go up. But it has also happened at a time when the demand is extremely lukewarm. Given the kind of excess capacity that almost all carriers are having now, there are certain limits to raising prices to recover the cost of increasing cost.
Q: When will you begin importing ATF directly? Once you do that, how much will it help cut your operating costs?
A: We have done all the basic ground work for imports. Currently, the extreme uncertainty is making us not pressing ahead with that plan. We have all the approvals in place. But I don't see this thing happening in a hurry as we are still waiting and watching.
Q: You came into the black last quarter with a profit of Rs 50 crore. Will that be under pressure in the current quarter given the ATF prices and the seat situation?
A: Certainly. In this industry, we make all the money in December and June. The quarters ended September 30 and March 31 are characterized by extremely low occupancy ratios and falling fares. So it is just that we need to grit our teeth and hang in there and hope that we recover by December.
Q: In that context is Airports Authority of India (AAI) putting you on cash and carry. Will it add to your interest burden? Can you give us some idea of how much that might increase interest burden?
A: That was unfortunately blown out of context. We do have bank guarantees furnished with the AAI. So, up to that limit, we do enjoy credit terms. We did have some reconciliation issues which have been sorted out. We are not on cash and carry at this moment.
Q: So it is not correct that your dues were not cleared?
A: There is a certain limit collateralized by bank guarantees which are executed in favour of airports authority. Up to that limit, we can keep running up our account. So we had some issues on reconciliation of the debits and credits, which is since been sorted out and at this time we are not on cash and carry.
Q: Can you give us some exact numbers on what that limit is? What are the dues that you have currently?
A: This is a running account. I won't be able to give you any kind of specific numbers.
Q: Some analysts believe that you will have to undertake a ticket price hike, not just you the entire industry will have to undertake around 25-30 percent hike to make up for this rise in operating costs. Given a situation in the industry itself can you cough up that much? Will it be much less than that in terms of a quantum?
A: I think prices have to go up by at least that much. I do believe that there is a core demand for air travel which will happen irrespective of the prices because people have to go from point A to point B.
As long as that happens, we should be able to raise prices. But when is that going to happen is something that I won't be able to speculate at this time.
Q: Any chance that you will be able to get some equity money, can you update us on anyone buying stake and thereby even improving your financial situation?
A: As you know we have been infusing equity from time to time. In the last two years we have had three tranches of equity infusion. As and when we need liquidity to be enhanced in the company we will certainly bring in additional equity.
Q: Will you be bringing in equity within this calendar year? Can we rule out the possibility of import of ATF in this calendar year as that is something you have promised for a long time?
A: The equity infusions for the current year have already been done. As you know under the Securities and Exchange Board of India (SEBI) guidelines, the acquisition limit is capped at five percent for every financial year. So I don't think we will be able to bring in equity this year, but there could be other ways of bringing in money should the business require it. But on ATF; nothing is carved in stone. We could see something changing very abruptly so I won't rule it out.
Q: There is some talk that you have evaluated selling some stake to a European airline as well. Is there any truth to that?
A: This is something which keeps me on my toes, every now and then there is something or the other which keeps coming out of the wood work. At this time, we certainly don't have anybody in the European continent talking, that much I can assure you.