Airfares set to rise

The domestic airline industry was barely out of red, and the surge in crude oil prices is dragging it back again.

Aviation turbine fuel (ATF) is the largest cost for any airline company, accounting for nearly 40% of operating expenses. ATF prices were higher by 30% at the end of February 2011 compared to the year-ago level. It is nearly 10% higher than the average price levels in January 2011.

I had mentioned in my earlier post that higher fuel consumption due to an increase in the scale of operations, and a rise in ATF prices, are likely to result in a sharp growth in fuel expenses. This is expected to result in losses for the industry.

Rising operating costs lead to higher requirement for working capital. Given the finances of some of the domestic airlines, particularly Air Indian and Jet Airways, banks seem wary of either lending at this juncture or increasing their exposure to this sector.

Both Kingfisher as well as Air India restructured their debt lately. However, analysts suspect that the restructuring was done considering crude oil prices at $80-85 per barrel. However, currently crude oil is trading over $105 a barrel in the international market, thereby rendering the earlier calculation invalid.

It must be noted that Kingfisher Airlines plans to raise $300 million through global depository receipts which is expected to help lower it’s cost of money.

Global growth figures revised downwards

Higher crude oil prices have led the International Air Transport Association (IATA), to downward revise its outlook for global aviation industry for 2011. It now estimates the industry to register a 46% decline in net profits to $8.6 billion in calendar year 2011 compared to the previous year. Given estimated industry revenue of $594 billion this year, the net profit margin will be 1.4%. (press release)

Given the high fuel prices as well as 10%  service tax proposed on domestic air travel in the business class, the increase is expected to be passed on to the travellers. Thus, air fares are likely to rise in the coming months.

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