Shishir Asthana
Moneycontrol News
India’s airline companies are bleeding from high oil prices and an inability to raise prices despite strong growth in passenger traffic.
The country is the fastest growing airline market in the world. Indian aviation firms transported at least 68 million passengers in the first half of 2018, up 22 percent from a year ago. The market grew by 18 percent in June 2018, the 46th month of straight double-digit growth.
But while airlines are recording strong passenger growth they are not able to capitalise on it. Almost all airline companies are either loss-making or barely registering profits. That would suggest either supply is growing faster than demand or there is enough excess supply in the market to take care of the demand.
In any other sector, such growth rates would have resulted in companies trying to increase prices and milking extraordinary profits. In the airline market, however, companies do not have pricing power despite strong growth.
It is not that airlines did not try to raise prices, but there is the fear of government intervention. In March, a Parliamentary panel proposed capping airfares saying that pricing models taken from developed nations might not be suitable for India. To the airlines' credit, they held on to their prices and worked on cutting costs even when oil prices were low.
As a result, their fortunes became directly correlated to oil prices. When oil prices fell the companies made more money. Take, for example, the earnings of SpiceJet. Its operating profit margin was around 20 percent when oil prices were around $50 a barrel, 10 percent when crude rose to $60 a barrel. The margin has fallen to around 3 percent when oil prices are at $70 a barrel.
Similarly, IndiGo which posted a 97 percent drop in its profit for the June 2018 quarter has oil prices to blame for the poor performance. Though the airline had aircraft-related issues which caused profits to drop, the steep increase in oil prices in rupee terms was the main reason for the poor performance. A depreciating rupee had made matters worse.
Jet Airways, a full-service airline, has not yet announced its result, but given the noise in media, it is unlikely to be something that the board would be proud of. The airline posted a Rs 1,000 crore loss in the March 2018 quarter, a period in which other listed airlines posted profits. That was more than the cumulative profits it had made in the previous four quarters. The high-cost structure of a full-service airline like Jet Airways makes it more vulnerable to the oil market.
There were reports in the media that the management of Jet Airways had informed its executives that it had money to fly for only 60 days and expected employees to take a cut in their salaries. However, after a meeting between the promoter and employees, a truce was reached and the company management denied the news of salary cuts.
While private sector firms are struggling to stay afloat as oil prices remain high, state-owned Air India has started defaulting again. Since the time government has been unable to find a suitor for the airline, it seems to be getting a step-motherly treatment. Reports say Air India has started defaulting on government-guaranteed loans to lenders and aircraft lessors. This is over and above the airlines' inability to service its Rs 46,669 crore debt.
The Indian airline sector is clearly flying on a wing and a prayer. If oil prices rise any further, it will have only prayers to rely on unless it gathers the courage to raise prices.
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