CRISIL: Fuel prices and lack of efficiencies causing airlines' losses

[K.Karthik Raja]

CRISIL: Fuel prices and lack of efficiencies causing airlines' losses

According to CRISIL Research, airline companies in India would
continue to incur losses even if crude oil prices decline
significantly if they do not quickly undertake a revenue augmentation
exercise in conjunction with cost reduction measures and efficiency
improvement initiatives.

The sharp increase in crude oil prices in the first half of 2008 has
led to a corresponding rise in the price of aviation turbine fuel
(ATF) for all airline companies, due to which they are expected to
post heavy losses. Fuel cost as a percentage of total operating costs
has increased by 300-600 basis points.

CRISIL Research has analysed the movement in breakeven ticket prices
of domestic carriers at various prices of crude oil and at varying
load factors and concluded that a structural increase in
ticket prices is required in the near term.

Mr. Sudhir Nair, Head, CRISIL Research, elaborated, "Although airlines
have gradually increased the fuel surcharge to counter the impact of
rising ATF prices, they continue to remain in the red. This incessant
increase in the price of ATF and the consequent increase in
ticket prices have led to a reduction in growth of passenger traffic,
thereby leading to a drop in passenger load factors. Even at sharply
lower crude oil prices, airlines will not break-even; a structural
increase in ticket prices is required in the near term.". This has
resulted in airlines adopting a co-operative route to profitability,
under which both, Low Cost Carriers (LCCs) and Full Service Carriers
(FSCs) have fixed the minimum base fare, fuel surcharges
and other taxes. The same needs to continue till the airlines are back
in the black.

Mr. Nair further added, "More critical for airlines is an urgent need
for efficiencies. Measures include selectively reducing capacities in
order to improve load factors and reducing dependence on leased
aircraft resulting in a lower aircraft rental outgo besides employee
productivity enhancement measures. As the fare differential between
LCCs and FSCs has decreased considerably, consolidated airlines could
also consider a single brand FSC operation. This would not only help
improve passenger load factors and reduce other operating costs, but
would also help augment revenues through superior pricing."