Fare dogfight to negate Rs 2,500 crore ATF gains for airlines

Everything seems to be going in their favour – robust demand, lower jet fuel prices, firm rupee and friendly government policies.

But local airlines may still bleed as much as last year due to unhealthy competition that is forcing them to push down fares to gain market share.

This is the projection of most industry players and the airline consultancy Centre for Asia Pacific Aviation (Capa).

Kapil Kaul, chief of Capa for South Asian region, said going by how things stand it was unlikely that they would change their annual estimate of industry loss given in April.

"As of now, I don't expect any major change in our previous estimate," he said.

Early this year, Capa had pegged the industry loss at $1.3-1.4 billion for the current fiscal compared with $1.5 billion last year.

Earlier this month, when airlines got a major relief from the 7.3% cut in aviation turbine fuel (ATF) prices by oil marketing companies (OMCs), many expected the fate of the industry would finally improve.

According to industry estimates, the ATF bill for airlines is around Rs 25,000 crore. A 10% reduction in ATF prices means a saving of around Rs 2,500 crore. Around seven states have reduced ATF tax rates to 4% or less. "This needs to be replicated by the Big 6 – Delhi, Maharashtra, Karnataka, Tamil Nadu, West Bengal and Andhra Pradesh. The Centre too needs to reduce the customs, excise and marketing margins imposed by the government owned oil companies. All this make Indian ATF one of the costliest in the world, around 60% higher than competing markets like Middle East and Asean," said Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG.

According to rough estimates, VAT on ATF fetches around Rs 4,000 crore to state governments across the country. "Customs, excise and VAT on ATF can be abolished for a period of 10 years to gradually bring it on par with global prices. This amount of Rs 4,000 crore can be reimbursed by the central government as a small investment towards building a robust aviation sector in India. This amount is roughly equal to the taxpayers money pumped into perpetually loss-making Air India every year," said Dubey.

Highlighting the issue of high competition intensity witnessed by the recent fare wars, Kaul said even though only 10% of the 20% dip in crude oil prices has been passed on to airlines, it had been negated by lower fares.

"The reduction (in jet fuel prices) is significant and there could have been some correction in the bottomlines of the airlines if they had played their fares well," he said.

The airline consultancy is now watching how the local air carriers will play their fares in the third (December) quarter, which is supposed to be a strong quarter because of festivals and long winter holidays.

What would really help airlines is price initiatives that entail fixing fares – closer to the date of flying –that directly pulled up their sagging profits.

SpiceJet CEO Sanjiv Kapoor has estimated lower fuel costs, which accounts for over 40% of the operational costs, will help his airline to save Rs 300 crore. While this may be a significant saving; any benefit from it is getting wiped out because of lower revenues that airlines are earning due to dropping air tickets.

A senior executive of an airline, who did not want to be named, said despite operational costs coming down because of cheaper fuel and favourable exchange rate – close to 70% of airline expenses are denominated in dollar – the gap become revenue and cost was widening for most airlines.

"With easing of costs and improving demand (domestic air traffic grew over 20% in September compared with same month last year), the gap between revenue and cost should have narrowed but that has not happened. It was only widened further for most airlines," he said.

According to him, to bridge the gap between revenue and costs, airlines need to improve yields. This has become difficult in the current scenario where an intense fare war had broken between airlines for higher market share.

Capa's Kaul estimated that a 10% slash in jet fuel prices translated into a 5% snip in operational costs of airlines.

"There's no way airlines can make flying affordable for a common Indian. The 60% costlier ATF in a country where per capita incomes are a fraction of that in Middle East and Asean regions, creates a classic self-goal," said Dubey of KPMG.

SpiceJet, which is a listed company, reported Rs 1,000 crore loss on a revenue of Rs 5,200 crore and operational cost of Rs 6,200 crore for the last fiscal. This shows a gap of around 16% between revenue and costs.

Experts said this may not change much in the current fiscal despite a 5% reduction in operational costs due to easing of ATF prices as revenues could fall equally due to dipping fares.

Kaul expects debts of most airlines to remain unchanged, and in some cases even go up. He does not see loss-making airlines moving into the green. This year too, IndiGo would be the only airline to report profits. Last fiscal, GoAir posted a marginal profit as it had changed its accounting policy, wherein it showed its maintenance reserve as income.