Rupee Woes: Airlines Brace For Profit Squeeze, International Fares May Soar

Major airlines including IndiGo, Air India, SpiceJet, and the newer Akasa Air, are feeling the pinch from a 10-15% rise in lease and maintenance rentals of aircraft, over the last few months, a hike in salaries to expatriate pilots, and heftier parking and landing rates at international airports, along with inflated imported jet fuel prices — all of which are dollar-denominated costs. This means every additional rupee depreciation would exacerbate these expenses, which account for 30-50% of airlines' operational costs.

The Indian currency has shed 2.8% against the dollar in 2024 maintaining its long-term trend of 2.5-3.5% average annual depreciation, and is down 1.04% so far this year. Last week, it fell below 86 to the dollar, a new low.

To offset the impact of currency volatility, the airlines have been expanding their international operations, which act as a natural hedge. However, experts say that it may not be enough to protect margins.

"We have consciously ramped up our international operations, allowing us to earn a part of our revenue in foreign currency," Ankur Goel, chief financial officer, Akasa Air, told NDTV Profit. "This should provide a natural hedge. Additionally, we have a much higher percentage of foreign exchange-related cash flows than any player primarily due to the sale and leaseback gains generated in dollars... This helps us to deal with foreign exchange fluctuations."

Air India's Chief Commercial Officer, Nipun Aggarwal, echoed similar sentiments and outlined a similar strategy to offset rupee woes. "The more the rupee falls, the more pressure it puts on our cost structure, impacting profitability.

The Air India Group, which includes Air India, Vistara, and Air India Express, operates 1,168 daily flights, including 313 services to international routes — the highest in the industry.

Major airlines including IndiGo, Air India, SpiceJet, and the newer Akasa Air, are feeling the pinch from a 10-15% rise in lease and maintenance rentals of aircraft, over the last few months, a hike in salaries to expatriate pilots, and heftier parking and landing rates at international airports, along with inflated imported jet fuel prices — all of which are dollar-denominated costs. This means every additional rupee depreciation would exacerbate these expenses, which account for 30-50% of airlines' operational costs.

The Indian currency has shed 2.8% against the dollar in 2024 maintaining its long-term trend of 2.5-3.5% average annual depreciation, and is down 1.04% so far this year. Last week, it fell below 86 to the dollar, a new low.

To offset the impact of currency volatility, the airlines have been expanding their international operations, which act as a natural hedge. However, experts say that it may not be enough to protect margins.

"We have consciously ramped up our international operations, allowing us to earn a part of our revenue in foreign currency," Ankur Goel, chief financial officer, Akasa Air, told NDTV Profit. "This should provide a natural hedge. Additionally, we have a much higher percentage of foreign exchange-related cash flows than any player primarily due to the sale and leaseback gains generated in dollars... This helps us to deal with foreign exchange fluctuations."

Air India's Chief Commercial Officer, Nipun Aggarwal, echoed similar sentiments and outlined a similar strategy to offset rupee woes. "The more the rupee falls, the more pressure it puts on our cost structure, impacting profitability.

The Air India Group, which includes Air India, Vistara, and Air India Express, operates 1,168 daily flights, including 313 services to international routes — the highest in the industry.

Indian carriers have shown a marked increase in international air traffic, carrying 2,97,90,881 passengers between January and November 2024, a 36% jump compared to pre-pandemic levels in 2019 and 16.2% higher than the corresponding period last year, according to DGCA data.

Emails sent to SpiceJet and IndiGo didn't elicit response.

Even as the earnings from international operations can provide a "partial" hedge, Kinjal Shah, aviation analyst at credit rating agency ICRA Ltd., told NDTV Profit that overall, airlines have net payables in foreign currency, which complicates operating costs, squeezing profit margins. "In addition, some airlines also have foreign currency debt."

Experts also warn that any further aggressive depreciation in the Indian currency could be a reason for alarm for the domestic airline industry, given that there is still no clarity on when the rupee would stabilise.

"The rapidly falling rupee, more so at a time of rising oil prices, has already messed up costs, but what is even more worrying is that we don't have any visibility on when this will end," Mark Martin, founder and chief executive officer of aviation advisory firm Martin Consulting LLC, told NDTV Profit.

Martin explained that the rupee's fall aligns with the strengthening US dollar, following Donald Trump's reelection, raising concerns about geopolitical stability. This dominance of the dollar signals a tough year ahead for airlines, with a large chunk of their costs tied to the currency.

Airlines, facing higher costs, are passing on the burden to consumers. But they can only raise prices to a certain extent in a competitive market, as exorbitant fares may deter price-sensitive travelers.

"Since we charge in international currency for international flights, we are able to pass on some of that impact to our customers," the Air India COO said. "But we do have to fill the aircraft and if we had so much pricing power, the airline industry's profitability would not be what it is today. This makes it very challenging for us to operate."

Experts believe potential delays in travel plans could further constrain margins.

"Airlines don't run on charity, so they have no option," said Martin, indicating that a heftier price tag may prompt some to rethink or postpone their travel plans, putting further pressure on profit margins.

Last month, ICRA had projected the domestic aviation industry to report a net loss of up to Rs 3,000 crore this fiscal, as well as the next, as compared to a net profit of Rs 1,600 crore, primarily due to elevated aviation turbine fuel prices. The average ATF price in the first nine months of this fiscal stood at Rs 95,686 per kilolitre. Although it was lower by 7.7% over last year, the prices remained 47% higher as compared to the pre-Covid level.