Airlines heading for wide losses in Q2 despite recent fare hikes

Indian carriers will look to hike airfares further by another 10 to 15 per cent ahead of the festival breaks, traditionally peak season for domestic and international air travel, airline executives and travel trade experts say.

Carriers such as SpiceJet, Jet Airways, IndiGo and GoAir raised air ticket prices by at least 25 per cent earlier this week after a steep rise in aviation turbine fuel, or ATF, and the proposed hikes will come on top of that.

But the fare hikes may have come in too late with predictions of losses of at least $450 million in the July-September quarter at the airlines.

"Once [this week's] hiked fare levels get stabilised, airlines will look at another round of price hike  by 10 to 15 per cent nearing the peak travel season of Diwali and Christmas," said an official of a leading online travel company, not wanting to be identified.

Diwali falls on November 3 this year.

This month's revision of ATF prices by oil companies - a price revision is made in the beginning of every month - at 7 per cent was the highest ever. This came on the back of a weakening rupee that has depreciated almost 25 per cent against the US dollar this year, which has negatively impacted airlines' wafer thin margins.

Some 40-45 per cent of an airline's revenues in India is spent on ATF.

Low-cost airline SpiceJet was the first to move and react to the ATF hike announcing a hike in fares on Wednesday.

"The rise in our operating costs has been abrupt, serious and largely driven by the rapidly weakening rupee. About 75 per cent of the total spending is either directly or indirectly influenced by the US dollar, which has appreciated by 25 per cent in this year alone. SpiceJet is in no position to absorb the additional burden and we are compelled to put through the fare hikes to neutralise the impact of increase in costs," a spokesperson for the airline said.

Jet Airways and IndiGo chose not to comment on the issue and it is expected that national carrier Air India might announce a hike later by this evening.

According to an aviation analyst with a leading multinational equity research firm, generally a hike of 10 per cent in cost of ATF leads to a 4 to 5 per cent increase in air fares.

India's oil companies, according to aviation consultancy Centre for Aviation, have increased ATF prices by 20 per cent in the last three months. From the first quarter to now, ATF prices have increased by 36 per cent.

The airlines, however did not increase fares to reflect this. In fact, the tickets were sold at discounted rates with huge offers that were announced by all major carriers like SpiceJet, Jet Airways and also Air India.

"Looking at the current ATF price and also factoring in the depreciation impact on the non-fuel costs, a further increase of 12 per cent to 15 per cent can be expected," said an official of an online travel company.

But for some airlines, the recent fare hikes may have come in late.

According to some aviation analysts, airlines like SpiceJet and Jet Airways might pose record losses for the July-September quarter. "With the rupee depreciating 25 per cent and oil prices going up and margins close to merely four to five per cent in this business the second quarter can be a quarter of record losses for the airlines," one analyst said.

Estimates by Centre for Aviation show that ticket yields for Indian carriers are down by 30 per cent whereas their costs have risen significantly. The firm predicts a cumulative loss of $450 million for airlines in India in the quarter. It factored in a hike of 10 per cent in ATF costs for this calculation.

The macro-economic environment for airline companies is not encouraging either with reports suggesting a US-led strike on Syria. In that event, crude prices will remain volatile and likely to add to the woes of airlines in India.

The domestic traffic has remained more or less stagnant for the first half of the year despite Indian airline companies wooing passengers by lowering fares by as much as 20 per cent from the comparable period of 2012.

The recent hike in fares could dampen demand for air travel.

"These levels of fares will definitely impact the demand negatively," says an official with a travel portal. The impact on load factors, or the percentage of seats that tickets are sold for on flights, may not be significant, though, adds Kapil Kaul, CEO for South Asia and Middle East at Centre for Aviation.