Airlines may report operating losses in FY19

Sharp price hikes unlikely given the impact on passenger growth, loads

Aviation stocks bucked the bearish trend in the markets, gaining 5-11 per cent on expectations of a hike in fares, lower aviation turbine fuel charges, and deferral of charges and penalties related to cancellation and poor services.

Analysts, however, believe aviation firms will continue to face pressure from the twin impact of rise in crude oil prices, as well as depreciation of the rupee.

While fuel cost is the single largest cost head for airlines, a weaker rupee will translate to higher maintenance outgo, increase in lease costs, as well as interest payment on foreign currency denominated loans. These costs account for over twothirds of sales.

What is compounding their woes is competitive pricing, which is impacting ticket revenues. This, coupled with rising costs, is a double whammy for the sector.

Analysts believe that in order to pass on the 7-10 per cent increase in cost of fuel and rupee over the last three months, companies will have to take sharp price hikes.

Hetal Gandhi, director at CRISIL Research, believes airlines will have to increase prices by 29 per cent to match the operating profit margins achieved in FY18.

“This steep hike will not be possible, as fares in the first half of the fiscal year have already come down by 4-6 per cent, which means hikes in the second half will have to be over 30 per cent.”

CRISIL Research believes that despite a rise in fares, the sector could report a loss at the operating level as compared to 9-10 per cent in FY18.

Analysts believe that a 1 per cent change in fuel cost impacts operating profit margins by 40-50 basis points, while a similar depreciation in the rupee (excluding fuel costs) will impact margins by 60 basis points.

The other worry for airlines is that fare hikes could impact the strong passenger growth numbers that the sector has recorded over the last couple of years.

While passenger traffic for August was up 17 per cent year-on-year, growth for the year-to-date period continues to be at a robust 20 per cent. The bigger airlines have reported load factors in the range of 84-94 per cent.

However, despite the recent rally, investors should avoid the stocks as fundamentals for the sector continue to be weak.