Drop in demand may stall airline revenues in Q4

Sharp fall in crude oil prices, however, is a positive

Travel curbs announced by the government on Wednesday night and advisories asking people to avoid non-essential travel are expected to hit the aviation sector the hardest. Further, a profit warning by sector leader Interglobe Aviation (Indigo) further dampened Street sentiment. While the stock of Indigo fell 11.85 per cent, Spicejet cracked 19.55 per cent.

Indigo indicated it had witnessed a 15-20 per cent decline in daily bookings week-over-week. The company also said a sharp depreciation of the rupee would impact its dollar-denominated liabilities, primarily operating leases which have been capitalised.

Aircraft and engine rentals, as well as repair and maintenance, which are paid in dollars, accounted for about a fifth of the costs for the airline in the December quarter.

Further, borrowings in foreign currency (largely aircraft-related debt) will also impact aviation companies such as Spicejet. While analysts say the reported numbers will indicate the mark-to-market loss, there will not be any immediate impact on cash flows on this account.

The rupee has depreciated by 4 per cent against the greenback over the month. Though a weak rupee is an issue, an analyst at a domestic brokerage says the sharp fall in the price of crude oil more than offsets the negatives on the cost front. Crude oil prices (Brent) have corrected by over 30 per cent over the past week and have cracked by 50 per cent since the start of the calendar year.

Fuel is the single-biggest cost for airlines, accounting for just over a third of their cost base. The gains for airline companies will start to accrue from April 1, as the monthly reset of prices is already done for March, says an analyst.

On the demand front, the travel advisory on international routes would mean a fifth of the sector’s revenues will be at risk. Analysts believe that while some of the capacity is expected to be redeployed on the domestic network, the weak demand in the local markets, too, will weigh on the airline companies.

Most brokerages believe that if the situation worsens, Indigo is better placed than other aviation companies, given its market leadership, lowest cost structure, and a healthier balance sheet.