At a time when domestic carriers are looking at a recovery after being battered by two years of Covid-led restrictions, the weakening rupee has come as a spoiler.  

Since, the aviation turbine fuel (ATF) prices, lease payments of aircraft, maintenance and overhaul costs, along with aircraft purchase, are all priced in dollars, depreciation in the value of rupee leads to increased operational cost for the airlines, thus eroding margins and impacting profitability, analysts said.

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Currently, domestic carriers are in the process of adding new capacity to cater to the rising demand for air travel with Covid-led restrictions gone. If costs rise around this time, the only choice for them would be to raise fares and postpone aircraft purchases, both having downsides beyond a point.  

“The dollar-rupee equation has a direct impact on airlines’ bottom line. 35-40% of our costs are attributed to fuel in addition to other significant operational costs such as leasing, maintenance and distribution that are either dollar dominated or pegged to the dollar,” said a spokesperson from Vistara, India’s second-biggest airline by August market share.

Flag carrier Air India has leased five B777 200 (LR) from Delta Airlines, which would fly the US-India route. This is in addition to 25 narrow body A320neos that have also been agreed to be taken on lease by the Tata-owned company. Air India did not respond to queries on the subject.

Troubled carrier SpiceJet is expected to tap into the increased credit limit under the Emergency Credit Line Guarantee Scheme (ECLGS) announced by the government to pay its lessors and free its inventory just in time to meet the season’s demand.  

Ameya Joshi, independent aviation analyst, said: “Aviation is impacted negatively due to the sliding rupee. Apart from the impact on oil prices, there is a direct impact on lease rentals since they are in dollar and increase the lease bill for the airline.”

Airlines are expected to report a loss before tax amounting to $1.4-1.6 billion (in FY23), primarily due to high ATF prices, a weak rupee and lack of full cost-pass-through, a report from Edelweiss said.

 Since March this year, all the months with the exception of July have clocked more than 10 million flyers in a month, as per data supplied by the Directorate General of Civil Aviation (DGCA), highlighting the sharp turnaround in demand and operations since the weakening of the pandemic.

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 “Thankfully, there is a strong rebound in demand that we are able to leverage to augment our revenue while trying to keep our non-customer facing expenses in control,” the Vistara spokesperson added.

 Given the upcoming festive season, (air travel) prices are expected to remain high and that would narrow airlines’ overall losses, the Edelweiss report added.

 At the start of the October, ATF prices were reduced by 4.5%, following dip in global crude prices. The cut in production by Opec a few days ago and the continued decline in rupee will be taken into consideration when the ATF prices will be reviewed on October 16.