“Fuel costs above $100 a barrel is a red signal for all airlines. They will find it difficult to post a profit at EBITDA level as right now they won’t be able to pass on the entire impact to the consumers as demand will get impacted,” said ICICI Securities analyst Rashesh Shah.
To offset the cost push, airlines have raised fares by 20-25 per cent in a year, but could not keep pace with fuel costs which have jumped about 40 per cent, said Angel Broking equity analyst Sharan Lillaney.
Fuel, which makes up 35-40 per cent — higher for low-cost carriers — of cost, forces airlines to raise fares, thereby dampening demand and hitting expansion plans. Oil prices have risen sharply on fears the crisis in Libya could cut output and that a similar story could play out on other oil producers in North Africa and the Middle East. Brent crude rose 0.3 percent to surpass $116 on Thursday.
“Low-cost carriers may make less profit, but (full-service carriers) Jet Airways and Kingfisher, being highly leveraged, may probably report losses,” Lillaney said. Jet Airways and low-cost SpiceJet reported profits in Oct-Dec, while Kingfisher narrowed its net loss during the quarter.
India’s airlines, except Kingfisher and Air India, recovered fairly quickly from the global downturn as economy grew at over 8 per cent boosting air traffic and fuel remained benign.
India’s domestic airlines carried about 19 per cent more passengers in 2010 compared to the previous year. Shares in the country’s three listed airlines — Jet Airways, Kingfisher and Spicejet — have fallen 38-51 per cent this year, compared to a 10 per cent fall in Sensex.
Global airlines’ net profits will halve this year as rising costs, especially oil prices, offset increasing demand, industry body IATA said last week. Rising cost may curb the renewed optimism that prompted some airlines to draw up expansion plans. A volatile stock market though has already delayed fund raising plans for some.
Kingfisher, whose plan for a $250-$350 million global depositary receipts issue to cut debt has been delayed, may have to shelve plans for fleet expansion, an anlyst said. Jet Airways is still waiting for Indian authorities to clear a share placement of up to $400 million. Among low-cost carriers, IndiGo placed a $15.6 billion order for 180 aircraft with Airbus in January, while Spicejet plans to add 13 planes in 2011.
“Low-cost carriers who follow a sale and lease back model will be less impacted,” Lillaney said. Sale and lease back is a process where airlines sell aircraft to a leasing firm which then leases aircraft back to the original owner, thereby helping airlines save on capex.