FLYING HIGH

It’s been a damn good year for India’s airlines

Quartz india
Quartz india

It’s turned out to be a fabulous year for India’s airline companies.

After half-a-decade of gloom, all three of India’s publicly-listed airlines—Jet Airways, IndiGo, and SpiceJet—recorded substantial profits in 2015. Another private airline, GoAir is expected to rake in over $20 million in profits during fiscal 2016. And state-owned carrier, Air India, too, is set to record operational profits for the first time in nine years.

Together, these five airlines account for 95% of domestic air travel in India, according to India’s aviation regulator, the Directorate General of Civil Aviation (DGCA).

This improved financial performance is a far cry from 2014 when just two airlines in Asia’s third largest economy made profits.

Much of the recovery over 2015 is on the back of plummeting crude oil prices, which accounts for about 50% of the operational cost of airlines in India. “The average price of Air Turbine Fuel in FY15-16 was around Rs 44.6 per litre, a 30% reduction over the Rs 63.5 per litre in FY14-15,” Amber Dubey, a partner and India head of aerospace and defence at consultancy firm KPMG, said.

“The Indian aviation industry is on a recovery mode, partly aided by the low fuel costs,” said Mahantesh Sabarad, deputy vice-president at brokerage SBICAP Securities. “Prices of tickets have come down and this has helped increase travel activity in India. The growth rate of domestic passengers in India is currently in the high 20% range.”

However, the recovery could face some turbulence in the near future as oil prices begin to recover.

On May 26, Brent crude futures inched above $50 a barrel, the first time in some seven months. While prices aren’t likely to hit the $100-a-barrel level soon, they are expected to keep rising through 2016 and 2017. That could be bad news for the airline industry.

“Upto a certain level, the oil prices can get absorbed by the airlines,”explained Sabarad. “Beyond that, it gets tough.”

“There are two factors currently playing out in the Indian aviation market. One is the impact of rising oil prices. The second is that, as companies go ahead, many of them will be looking at sizeable revenue from their international business, which gives them a natural hedge against the dollar denominated costs,” Sabarad said.

India is currently the world’s ninth largest aviation market globally. Domestic air travel is expected to grow 9.5% annually between 2011 and 2031, according to aircraft-maker Airbus. Currently, only about 2% of India’s population uses airlines, providing a massive opportunity to expand the market.

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