WHY ARE AIRLINE COMPANIES MAKING LOSSES?
By Ruma Dubey
It is Quixotic – apart from Indigo, all airlines are bleeding, consistently making losses. We are not even talking about Kingfisher Airlines (KFA) in this story. But one would have thought that after one airline less, the remaining would be making merry. Yet, the airlines are all (not Indigo) streaked in deep red. But still, Etihad is buying into Jet, Spice is ready to sell stake, Air Asia is taking to Indian skies soon. If this entire sector is loss making, then why this interest?
Today, Jet Airways is the top loser on the BSE and Spicejet was down over 5%. And both are down on the back of their dismal numbers for Q4FY13.
Jet Airways posted a net loss of Rs.495 crore compared to a net profit of Rs.85 crore in Q3FY13 and much higher that the net loss of Rs.298 crore for Q4FY12. Sequentially, income from operations were down 2.5% and this affected the bototmline. Yet, what is interesting to note is that fuel expense, which eats away 43% of the income, was down 2% (QoQ). Its other income of Rs.346 crore ( aircraft lease income and incentive under Served from India Scheme) helped cut down some losses but that was nullified by interest outgo and other exceptional expenses. The consolidated loss for FY13 stood at Rs.779 crore v/s net loss of Rs.1420 crore in FY12.
Spicejet also slipped into the red after it posted a net loss of Rs.186 crore but lower than the loss of Rs.249 crore for Q4FY12. This was despite the fact that its revenue rose 31% (YoY) at Rs.1456 crore. Its average passenger yield was up 8% at Rs.3739 crore. Load factor during the March, 2013 quarter was 76% from 74% during the same period last year. Its market share in March 2013 increased to 20.4% from 17.1% in March 2012. For FY13, the company’s net loss stood at Rs 191 crore against a net loss of Rs 606 crore in the prior year.
The company has blamed it all on rupee depreciation, high fuel prices and major airport tax outgo is what pulled down the company into losses, like always. Though the company had hiked its fares, it was still unable to absorb the cost of operations. The various Govt taxes is also one of the reasons why the sector is mired in red.
In Q4FY13, 54% of the net sales of Spicejet was eaten up by fuel charges, aircraft lease rentals ate away another 14%, airport charges were at 7%, up 43% on YoY. Aircraft maintenance charges are also pretty steep at 17% of net sales.
Running an airline company in India is not easy, rather mostly unprofitable and that is thanks to the high fuel costs and the various state taxes which makes it all the more unviable. A break-up of the air fare shows that the base fare is Re.1 and then there are top ups like passenger service fare, airport fee, service tax and fuel surcharge. The cheapest ticket of Rs.2035 has a fuel surcharge of Rs.1175 and then the next biggest charge is the airport fee. So we are all paying the price for swanky new airports and more importantly, because the Govt is taking a high percentage when it comes to revenue sharing from these User Development Fees. Govt gets around 36% of revenue earned from UDF charges from Delhi airport and 39% from Mumbai airport and AAI’s revenues have increased 100% over the past five years, thanks to these UDFs.
Aviation fuel is probably the highest in India when compared with Dubai and Singapore. We import the bulk of our oil and hence any rupee depreciation affects us badly. Moreover, oil is also taxed. Thus given the runup on the rupee, scaling to Rs.56/US$, this quarter too we could se some turbulence in the performances of the airlines companies.
For the situation to improve, either oil has to cool off considerably or rupee has to strengthen. Taxes also need to be cut. But given the fiscal challenges of India, this is unlikely to happen any time soon. Those in the sector say that India’s navigation service quality also needs to be upgraded. Like Delhi can handle 90 landings and takeoffs per hour but does only 50-60 and Mumbai does 30-35 on its single runway but Gatwick, due to its efficiency does more than double. Lack of proper training is blamed for this low productivity.
Also airlines have grown throwing all logic to wind and the money being deployed is also not done prudently. Indigo also operates in the same tax regime and buys fuel at the same rate but it has been able to make profits because it runs a no-frill, on-time operation with a good network. So if Indigo can make profits and others cannot, obviously there is something wrong in the way they run their business.
Yes, today more Indians than ever before are flying and ideally, all airlines should be making profits. But improper fiscal management, mindless fleet expansion, large debts have kept them perennially in the red.
The potential of India is tremendous and the others are flocking here to get a slice of this juicy pie. Air Asia is stated to run a tight ship. Let us see if it also manages to make profits; that will be a serious wake-up call for the rest who should stop blaming the losses on external macro factors and look inwards or take a tip or two from Indigo.