Soaring crude oil prices likely to push airlines in India further into losses

Aviation Turbine Fuel (ATF) accounts for one-third of the costs for airlines in the country, which were already struggling when oil prices were hovering at $65-66 per barrel.
Soaring crude oil prices likely to push airlines in India further into losses
Soaring crude oil prices likely to push airlines in India further into losses
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Just when there were expectations that airlines in the country would end up with decent profit figures for the current financial year, the US strike on a senior Iranian general might have jeopardized such hopes. The attack has resulted in a sudden spike in the crude oil prices, which can push the aviation turbine fuel (ATF) prices higher, reports Livemint. ATF forms a large component in the cost structure in the aviation business and even a slight variation can affect the profitability of the airlines.

There has been an increase in the prices by around 4% internationally, just soon after Iranian leader Ayatollah Ali Khamenei issuing a statement that the killing of the general will be avenged.

According to a Business Standard report, state oil marketing companies have increased prices of ATF by 2.6% from January 1. “A kilolitre of jet fuel now costs Rs 64,423 and on a year-on-year (YoY) basis, it amounts to a 10 per cent price hike,” the report states.

There was an earlier projection by CAPA South Asia, an aviation consultant, that the airline operators in India will end the year posting profits in their books to the extent of $500 million (Rs 3,561 crore) to $700 million (RS 4,985 crore). This was based on the crude prices being quoted at between $60 and $65 a barrel.

As per last reports, $70 a barrel was the price quoted in ICE Futures Europe. If the prices were to rule between $65 and $70 a barrel, for a period of time, it could then mean a loss of $600 million (Rs 4,273 crore) for the airlines in the country instead of profits. This could mean a serious development for some of them, even as bad as it happened with Jet Airways - a total shutdown of operations.

This sudden development in the Gulf region comes at a time when the two key players, Indigo and GoAir have been struggling with their Airbus A320NEO and Boeing 737 Max aircraft respectively. Indigo has received several warnings from the civil aviation regulator on replacing the faulty Pratt & Whitney aircraft engines with the modified ones. There have been issues with the Boeing 737 Max aircraft with a couple of crashes and the US’ FAA has grounded all the aircraft of this model indefinitely. The airlines have not been able to get their summer schedules approved by DGCA due to these troubles.

In the India context, the summer season is quite crucial for domestic operations. However, a threat of war would also affect international travel.

The weakening of the Indian Rupee vis-à-vis the US dollar is another factor for the companies to be worried about.

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