Fuel prices play a vital role in any countries economy especially when imported from another country. In the current scenario the price of the oil is increasing and at the same time the value of the rupee is depreciated when compared to dollar. This importing of Brent crude oil from other countries can result to become expensive in the coming days. It is also estimated that if the price of the oil slips below $60 then there are chances that no gain would be earned by airlines.
The domestic airlines, who gained handsome profits due to low oil prices, now could face slight crises in the same. The cost of the barrel nearly touched the cost $48.28 per barrel on this last Friday, which results in an increment of the oil prices of about 36%. On a year-on-year basis the fuel prices are still are 14% lower when compared to domestic fuel prices which have gradually increased by 7%.
The depreciating rate of the INR against dollar which is 5% has impacted the airlines as majority of the expenses shall increase by 30-40%, where it includes lease rents, expatriate staff salaries, maintenance costs, and interest on foreign borrowings, among others. All these shall soon to become expensive if the rupee continues to depreciate in the coming days. The non-fuel cost, one-off spike in maintenance expense that of Indigo rose by 28 % while that of the SpiceJet rose by 86% in the fourth quarter of FY16 on a y-o-y basis.
Domestic airlines mainly SpiceJet have benefited and gained profits from three consecutive quarters, which was because of lower fuel price. In the increase of the profit rate of the domestic airlines passenger demand also played an important part as the prices of the fare where quite low to attract more customers. Well, talking about the current situation, the losses cannot be compensated by increasing the fare price it shall affect the demand by the passengers. If the value of the rupee continues to depreciate this shall directly throw an impact on the country’s economy.
Amber Dubey, partner and head (aerospace and defence) at global consultancy KPMG, says- “The whole idea is to keep non-fuel unit costs low by way of constant monitoring and innovation. Keeping aircraft turnaround time low and enhancing aircraft utilization per day is critical for spreading the fixed costs over a wider passenger base. The other thing to focus on is ancillary revenues”.
On the other hand, Anurag Jain aviation consultant said- “Growth in India will be now driven by additional capacity and low fares. Fares appear to have bottomed out and from now, they are expected to rise. The only silver lining is that the crude prices are still forecast to be in ‘manageable’ region over the next two years. Margins will erode to some extent, but airlines will remain in the black”.
Verdict: The rupee depreciation against dollar is going to result high oil prices as we import the same from other countries. That shall not only affect the economy of India but shall affect other non-fuel costs of the airlines due to which the colour of profit may fade from the pockets. We hope that, the position of the rupee gets stronger and no crises are seen in the domestic airline sector.