The Aviation Sector Is Facing Strong Headwinds Due To Economic Slowdown
Business Today|November 17, 2019
The aviation sector is facing strong headwinds due to economic slowdown and spike in costs.
Manu Kaushik

In just one quarter, the fortunes of the aviation sector have gone from best to worst. The second quarter earnings of India’s largest carrier, IndiGo, have come has a shock. Low-cost carrier (LCC) IndiGo, which controls 48.2 per cent of the market, posted a net loss of ₹1,062 crore in the July-to-September period, which is in sharp contrast to its record-high net profits of ₹1,203 crore in the previous quarter. The LCC blamed the falling rupee for its losses.

The second quarter results of other carriers in all likelihood are going to be equally disappointing.

The chain of events that contributed to the (now what seems like a short-lived) revival of the sector is beginning to reverse: ATF (aviation turbine fuel) prices are rising, rupee is depreciating, and benefits from Jet Airways’ grounding have stopped. As if these didn’t pose a big enough challenge, there are new reasons that the beleaguered sector has to worry about: the slowdown in the economy and the aggressive capacity additions being planned by some airlines.

Take ATF prices. Domestic ATF prices have been moving up since early this year. Between January and October, the price of ATF sold by Indian Oil Corp (IOC) in Delhi rose over 9 per cent to reach ₹ 63,295 per kilolitre. Though the prices are not yet as high as last year, the tense geopolitical situation due to deteriorating TurkeyUS relations could affect crude oil prices in the near future.

“The changes in geopolitical scenario are not good for the economy. The first casualty has always been the aviation sector,” says Mark Martin, CEO of Dubai-based Martin Consulting. ATF is 30-35 per cent of the overall cost of an airline.

The volatility in the rupee-dollar exchange rate is bad news too because it impacts crude oil prices (and thus ATF) in addition to increasing the cost of maintenance and spare parts. IndiGo, for instance, has reported a jump in maintenace costs in the September quarter to ₹ 319 crore.

The airlines have been candid about the gains from Jet’s grounding, which took place in April. IndiGo, for instance, reported positive impact on unit revenues and increase in cargo revenues in the June quarter.

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