Airlines face crude test in India
Oil prices have risen sharply on fears the crisis in Libya could cut output
NEW DELHI/MUMBAI: India's airlines are staring at declining profits or probable losses in the Jan-March quarter as a sharp spike in crude prices, and inability to pass on high costs erode margins in a traditionally weak quarter, analysts said.
"Fuel costs above $100 a barrel is a red signal for all airlines. They will find it difficult to post a profit at EBITDA level as right now they won't be able to pass on the entire impact to the consumers as demand will get impacted," said Rashesh Shah, analyst at ICICI Securities.
To offset the cost push, airlines have raised fares by 20-25 per cent in a year, but could not keep pace with fuel costs which have jumped about 40 per cent, said Sharan Lillaney, an equity analyst with Angel Broking.
Fuel, which makes up 35-40 per cent -- higher for low-cost carriers -- of cost, forces airlines to raise fares, thereby dampening demand and hitting expansion plans.
Jet fuel prices in Singapore have risen to near $129 as of Thursday, up from a low near $83 in August.
Oil prices have risen sharply on fears the crisis in Libya could cut output and that a similar story could play out on other oil producers in North Africa and the Middle East. Brent crude rose 0.3 percent to surpass $116 on Thursday.
"Low-cost carriers may make less profit, but (full-service carriers) Jet Airways and Kingfisher, being highly leveraged, may probably report losses," Lillaney of Angel Broking said.
Jet, India's top carrier by market share, and low-cost SpiceJet reported profits in Oct-Dec, while Kingfisher narrowed its net loss during the quarter.
India's airlines, except Kingfisher and state-run Air India, recovered fairly quickly from the global downturn as economy grew at over 8 percent boosting air traffic and fuel remained benign.
India's domestic airlines carried about 19 percent more passengers in 2010 compared to the previous year.
Shares in the country's three listed airlines - Jet Airways, Kingfisher and Spicejet -- have fallen 38-51 percent this year, compared to a 10 percent fall in the benchmark index.
Global airlines' net profits will halve this year as rising costs, especially oil prices, offset increasing demand, industry body IATA said last week.
BLIP IN EXPANSION
Rising cost may curb the renewed optimism that prompted some airlines to draw up expansion plans. A volatile stock market though has already delayed fund raising plans for some.
"Higher fuel prices will hit expansion plans, mainly for companies that are highly leveraged although this would not impact short-term capacity addition in the industry," an analyst, who asked not to be named, said.
Kingfisher, whose plan for a $250-$350 million global depositary receipts issue to cut debt has been delayed, may have to shelve plans for fleet expansion, he said.
Jet Airways is still waiting for Indian authorities to clear a share placement of up to $400 million.
Among low-cost carriers, privately-held IndiGo placed a $15.6 billion order for 180 aircraft with Airbus in January, while Spicejet plans to add 13 planes in 2011.
"Low-cost carriers who follow a sale and lease back model will be less impacted," Lillaney of Angel Broking said.
Sale and lease back is a process where airlines sell aircraft to a leasing firm which then leases aircraft back to the original owner, thereby helping airlines save on capex.
"The aviation industry was out of a recession. The whole fuel thing will may be spoil it for a short while. The recovery may take a little more time than we all had expected," said Hikmat Mahawat Khan, management consultant at Netherlands-based Center of Excellence Aviation, Capgemini Consulting.
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