A depreciating rupee may worsen the health of domestic airlines. It may not only make external commercial borrowings (ECBs) costlier, but also increase the cost of dollar-linked operational expenses, such as fuel, lease rentals, maintenance and expat salaries.
According to industry experts, low-cost airlines, such as IndiGo, SpiceJet and GoAir, which have one-third of their quarterly cash outgo in foreign currency, with limited forex earnings, will have to shell out more for the same expenses.
For full-service carriers, such as Jet Airways and Air India, who have significant earnings in foreign exchange, the exposure to rupee fluctuations is less. However, that may not help these airlines de-risk themselves completely from the falling rupee. ?The weakening rupee is responsible for shrinking Jet Airways margins by 3-4% as it has earnings of more than 40% from international routes,? explains Rashesh Shah, research analyst, ICICI Securities.
Jet Airways more than doubled its losses at R298 crore in the fourth quarter of the fiscal compared to the corresponding period a year ago. Despite a 24% growth in revenues, rising fuel costs and a weak rupee have pushed the company deeper into red. Jet Airways CEO Nikos Kardassis said even though the crude price is getting stable, the rupee depreciation continues to be a cause of concern. SpiceJet’s net loss for the January-March quarter, too, has widened more than four-fold, but it expects lower costs once it imports jet fuel directly. SpiceJet reported a loss of R249 crore for the quarter ended March 2012.
Kingfisher Airlines posted its biggest-ever quarterly loss at R1,151 crore as huge cuts in the number of flights and high fuel prices eroded earnings. The weakening rupee has impacted margins of these airlines, reflected in bigger quarterly losses.
The rupee factor may also spoil the government’s plans to provide relief to the ailing airlines through ECBs. Carriers, such as Air India and Jet Airways, which were looking at the ECB option, may have to rethink the idea.
The government had allowed airlines to raise up to $1 billion through ECBs for their working capital loan requirement. According to the Reserve Bank of India’s guidelines, an individual airline can raise up to $300 million within 12 months and the minimum maturity period would be three years.
Most domestic carriers were looking at raising money through ECBs to repay their high-cost rupee debt. Industry officials said the falling rupee would make all the airlines rethink their ECB plans. National carrier AI has already floated its ‘invitation for offers’ plan to raise funds through ECBs to repay a part of its over R22,000-crore working capital debt.
An AI official said the impact of rupee depreciation would not be that much as about 50% of the airline’s earnings are in foreign currency, which will take care of nearly half of its dollar-linked expenses. ?Airlines which get significant revenues from international operations would not be impacted much as they earn in dollars,? said Amber Dubey, partner and head (aviation), at global consultancy firm KPMG.