Airlines may fly into losses in Q2: experts

Written by Shaheen Mansuri | Mumbai, Aug 4 | Updated: Aug 5 2008, 06:35am hrs
Against the backdrop of soaring fuel prices and capacity reduction in the aviation sector, financial planners and analysts foresee the second quarter of FY09 to be weak. The reasons cited range from high fuel costs to soaring lease rentals in the face of capacity reduction. According to experts, the sector is likely to post losses to the tune of $2 billion for fiscal of 2008-09 .

Gaurang Shah, Geojit Financial Services, said, The high rate of inflation and low consumer confidence will adversely impact air travel which is already down by 15% in June and July. Secondly, the 3% rise in aviation turbine fuel and high interest rates on lease rentals will eat into the bottomline of all airlines. Shah added that aviation sector stocks will underperform in the short-term. Still it is unclear where crude price will go up further, he added.

R Sreesankar, head, research, IL&FS Investsmart, added, On one hand, you have costs going up and on the other, you have occupancy levels plummeting all set to drive the sector into losses. He added that fixed costs like parking and landing charges remained the same even with lesser capacity and is out of the airlines hands.

Another analyst from a Mumbai-based broking firm added, Airlines have already started working on a stronger business model and balance sheets, to withstand the cyclical downturn. Without naming any airline, the analyst informed that the airlines have started focusing more on recruiting domestic pilots rather than expats. There is also a possibility of airlines not renewing contracts of existing expat pilots who have salaries that are almost double of their Indian counterparts. The focus is also shifting to expand cargo operations to save bottomlines.

Airlines are studying various international and domestic routes to enhance cargo operations. Each airline has set a target of generating at least 15% of their revenues from this venture, he said.

The analyst added that low-cost carriers and their full-service cousins have already started downsizing the number of staff in various categories. The airlines are planning to bring down their overall employee-strength by nearly 30%, he said.