Depreciating rupee, imported inflation pinch revenues of Indian airlines

The country’s aviation industry is one sector that has been impacted the most by a depreciating rupee and imported inflation ever since the beginning of the Russian military action in Ukraine in February.

“Currency movements are more gradual and the reversal of the same takes longer period, unlike crude where the fluctuations can be quite significant in a short duration," observed director & practice leader, transport & logistics at CRISIL Infrastructure Advisory, Jagannarayan Padmanabhan, adding, “A depreciating rupee has a greater impact on the airlines as many of the services are dollar-denominated.”

The elevated crude prices with a depreciating rupee can further amplify the impact of fuel on the total cost structure. Today, fuel accounts for approximately 50 per cent of the operational expenditure of an airline in India.

These services include overseas payments made for aviation turbine fuel (ATF), the impact of landing, parking and housing charges, maintenance, repair & overhaul (MRO) services and sourcing of spare parts and other routine items. Here, it is the cost of getting a substantial part of their fleets serviced from overseas MRO hubs like Singapore, Hong Kong, Malaysia, Indonesia and Australia that is expected to hit the Indian carriers the hardest.

So, other than high ATF prices, rupee depreciation will hit operating margins on such unhedged costs.

Further strain on financials

In addition, industry experts like the managing partner at the Gurugram-based law firm KLA Legal, Ajay Kumar, have warned that a depreciating currency may put further strain on the financials of Indian carriers.

“Due to this uncertainty and ever-rising fuel prices, coupled with a declining Indian rupee, airlines are struggling to pay the lease rentals and maintenance reserves to overseas lessors as such payments are made in USD,” said Kumar.

And this may impact Indian carriers’ relationship with their suppliers and lessors.

“We have seen many airlines seeking waiver or deferral of lease rental payments with the lessors. One should not be surprised if airlines start defaulting in their contractual obligations with OEMs when it comes to accepting deliveries of aircraft, orders for which were placed in the past,” added Kumar.

But that is not all. “If the airlines have taken any USD-denominated funding, then the cost of servicing such loans also increases,” pointed out Padmanabhan.

“Fares on international routes may be increased by most Indian airliners to recoup a part of the increased costs. It is also a well-known fact that air travel is a price-sensitive industry, and the outcome of that could be there to be seen in next quarter results,” cautioned partner at Deloitte, Sumit Singhania.

Aviation growth story intact

But is the scenario entirely gloomy the sector? That is highly unlikely as passenger traffic –- both domestic and international –- at airports touched 93 per cent of the pre-Covid-19 levels, in May. According to an update of the International Air Transport Association (IATA), India is expected to overtake the UK by next year as the third-largest aviation market globally.

“The silver lining of course is that for any foreign tourist it becomes a lot more attractive to travel to India and hence can boost inbound traffic,” averred CRISIL’s Padmanabhan.

Similarly, this may be a good time to develop a robust MRO infrastructure in India to serve domestic as well as regional carriers.

“This presents a massive opportunity for existing as well as possibly new players or OEMs looking to tap the opportunity to gain a lion’s share of the MRO market currently serviced from outside India, over a period of two-three years,” emphasised Singhania.

Thus, the long-term growth story for Indian aviation remains intact.

“Airlines will essentially seek to tide over these difficult times by focusing on controlling operating costs and catering to growing travel demand, opined Singhania.

Among other alternatives, Indian carriers may also look at the International Financial Services Centre (IFSC) at Gujarat International Finance Tec (GIFT)-City for leasing aircraft to manage their forex risks more effectively.

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