As the rupee has gone deeper into the red against the greenback, smaller domestic airlines have flown into the blues, with escalating costs scorching the gains they made from a surge in traffic in 2024-25.
The Indian currency has touched 86 to a dollar and consequently drove aircraft lease rentals, maintenance costs, and other payments made to global distribution companies upwards. "While the fall in the rupee has not been sharp and has given time for bigger airlines to prepare for the sustained depreciation, smaller domestic players like us with lower cash on our books are not in a position to recover the rise in cost through hedging," a senior executive from regional airline FLY91 told Moneycontrol.
Domestic airlines have seen a 6-8 percent rise in aircraft lease rentals, a 5 percent jump in maintenance costs, a hike in salaries paid to expatriates, higher interest cost on dollar debt, and heftier ground handling and parking charges abroad in the last few months of 2024. "Further depreciation in the rupee would be a greater cause for concern," said the FLY91 executive.
The rupee has shed about 3 percent in 2024, continuing with its long-term trend of gradually but consistently losing value against the dollar because of a strong dollar index and a rise in crude oil prices. The US dollar has risen 8 percent since the end of September 2024. Since India imports aviation turbine fuel, a weaker rupee has made the jet fuel more expensive and pushed the local airlines into rough weather.
A senior executive of JettWings Airways told Moneycontrol that the fledgling regional carrier, which is planning to start operations with two twin-class Embraer E175 aircraft and is in talks to lease Embraer E-Jet E2 planes as well, is facing a challenge while negotiating the leasing costs. "Not only have the leasing costs risen due to the falling rupee in the last year, but our plans to hire foreign pilots too looks costlier as salary payments are being made in foreign accounts," said the official.
According to the financial results of InterGloble Aviation, the parent company for India's largest carrier IndiGo, aircraft and engine rentals have risen nearly four-fold from Rs 195.6 crore in the July-September quarter of 2023-24 to Rs 763.6 crore in same period this fiscal.
While the airline has added around 70 aircraft on long-term lease during the quarter and has 20-25 aircraft on short-term lease from the secondary market to offset the impact of around 50 planes being grounded over engine related issues, lease payments of older long-term rental contracts have also played a significant role in the rising costs.
A senior IndiGo official told Moneycontrol that despite the rise in lease costs, the airline with around Rs 24,360 crore free cash on its books has taken corrective measures to prevent losses due to a depreciating currency. Both IndiGo and Air India also have a natural hedge as the two airlines have larger international operations than other carriers.
Smaller domestic players, however, do not have similar financial backing. An aircraft lessor based in the United Arab Emirates echoed their concern, stating that leasing to smaller Indian carriers has become costlier and riskier, despite the expected growth in the domestic aviation market.
He added that not only have leasing costs increased around 6-8 percent on-year, but the cost of insuring an aircraft has also risen around 10 percent due to the surging dollar. The higher cost is passed down to airlines, collectively increasing their cost of taking new aircraft on lease.
For an airline with international operations such as Air India and IndiGo, the need to translate cash flows into different currencies, and the uncertainty surrounding the level of future exchange rates, give rise to the top risk. The size of foreign exchange risk varies, depending on the nature and scope of an airline’s operations, as well as its corporate strategy.
Market experts also expect that a depreciating rupee could have a significant impact on the financial viability of newer airlines in India.
According to ICRA, the aviation industry is expected to report a net loss of Rs 20-30 billion in FY2025 and FY2026 each, although it projected a 7-10 percent year-on-year rise in domestic air traffic to 164-170 million in FY25. International traffic for Indian carriers is expected to grow even faster, with a 15-20 percent rise, reaching 34-36 million passengers by the end of FY25.
Senior vice-president at ICRA, Kinjal Shah, had last month said that the industry is expected to report a net loss but significantly lower than the losses witnessed in the past supported by improved pricing power of the airlines.
The cost dynamics are sobering. The ATF prices, accounting for 30-40 percent of expenses, eased by 6.8 percent year-on-year to Rs. 96,192 per kilolitre in FY2025 so far but remained far above pre-Covid levels. Moreover, nearly half of the airline expenses, including aircraft leases and maintenance, are dollar-denominated, leaving the carriers prone to currency fluctuations.
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