Domestic airlines are beginning to find operating flights on leased aircraft a tad worrisome as a weak rupee has made rentals the fastest-growing expense item for them.
Among listed airlines, Jet Airways? lease rentals grew nearly 32% to R364.48 crore in the first quarter of fiscal 2013-14 even as all other expenses, apart from employee costs, came down. Low-cost competitor SpiceJet, which recently embarked on a sale-and-lease back model, also faced a 12% increase in lease rentals during the quarter and ended up paying R219.79 crore compared to R196.25 crore in the same quarter last year.
Sources in the aircraft-leasing industry say that for unlisted airlines such as IndiGo and GoAir, the increase in lease rentals is anywhere between 15% and 20%. ?Aircraft lease rentals are typically paid in US dollars, so with the rupee falling, the overall outgo for the airlines is increasing,? said a senior official from a US-based aircraft lessor. ?The whole notion that sale and leaseback model leads to profitable operations is no longer the case because of the weak rupee. When operating on a sale and leaseback model, an airline needs strict control over costs, but with fuel still hovering at around 45% of Indian airlines’ operating costs, sale and leaseback is becoming difficult to manage.?
Aircraft lease rentals, which were only about 6% of Jet Airways’ total expenses in the first quarter of fiscal 2012-13, have risen to nearly 10% in the first quarter of fiscal 2013-14. For SpiceJet, aircraft lease rentals are nearly 15% of the total expenses compared to 12% in the same quarter last year.
Out of the 343 planes of scheduled passenger carriers in the country, 212 are being operated on lease. IndiGo, for example, operates completely on a sale and leaseback model wherein it sells-off the aircraft to lessors and immediately leases them back. Wadia-group promoted GoAir follows a similar model and Jet Airways started its sale and lease back programme a couple of years ago to bring in funds and reduce the high cost of debt.
Due to spiralling lease costs, officials in the aircraft leasing industry and consultants say that some domestic airlines may soon change their business model and focus on owning aircraft.
?Till date, IndiGo has inducted the vast majority of its fleet through sale-and-leaseback transactions. However, going forward we expect that the carrier will purchase an increasing proportion of its aircraft,? said aviation consultancy firm Centre for Asia Pacific Aviation in a report. ?IndiGo is reportedly seeking financing for close to 25 of 180 A320/320 neos ordered in 2011 and may need to increase its equity base in order to support this.?
Lessors say Jet Airways may also halt its sale and leaseback programme. ?Jet started the sale and leaseback of its planes to generate cash from its assets and pay off the high cost debt,? the official from the US-based lessor quoted above said. ?But since its deal with Etihad will give it access to low-cost debt and additional fund infusion, Jet could stop the practice of sale and leaseback and go for complete ownership of the aircraft it purchases next.?
Earlier this year, AirAsia’s group chief executive Tony Fernandes also criticised the sale and leaseback model adopted by domestic airlines. ?There is no way in hell that sale and leaseback helps you save costs,? said Fernandes when he was in India in July. ?The notion that sale and leaseback saves costs is just rubbish. Sale and leaseback is only a costly way of raising funds.?