Weak rupee and high ATF prices to erode airline margins

New Delhi, May 10 : With almost 60% of their cost in dollars, falling rupee against greenback is set to hit airlines that operate on wafer-thin margins. Weakening rupee is set to add to the woes of domestic carriers which have been reeling under high jetfuel prices. Speaking to UNI, a senior airline executive said that dollar related expenses of airlines comprise fuel, aircraft lease rentals, maintenance and part of distribution costs in case of full-service carriers. “Assuming that there is 10% depreciation in rupee, the airline’s cost would increase by 6%. In recent past rupee has depreciated by about 3%. In the airline business, the profit margin is just 2-3% so the impact is significant,” the executive elaborated. The Indian rupee hit historical low on Monday and touched 77.52 against the US Dollar before settling around 77.46 with the slide triggered by hike in interest rates by the US Federal Reserve. Russia-Ukraine war and growth concerns in China due to Covid surge have also led to depreciation of the rupee. “India has witnessed FYTD23 FPI outflow of US$5.8 billion. Led by adverse global cues, the rupee is trading shy of 77.50 — nearly 2% lower from highs of near 75.99 levels witnessed last week post the surprise rate hike by RBI. Given the uncertainty and limited RBI intervention, USDINR could trend towards 78 levels in the immediate near term. We expect the new USDINR near term range of 76.50-78 in the near term,” said Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank. The falling rupee and high prices of aviation turbine fuel (ATF) are major setbacks for airlines which were among the worst-affected by the pandemic. With ATF accounting for 40% of the total operating cost of airlines, high fuel prices would erode their profitability. It is estimated that ATF prices have surged by 89% on a year-on-year basis in May 2022 as a result of soaring global crude prices fuelled by geo-political issues arising from the Russian invasion of Ukraine. “The rising ATF prices will pose a serious threat to the industry earnings in FY2023. On an aggregate basis, return to normalcy will lead to recovery in passenger load factors, which in turn will aid revenues; however, elevated ATF prices will continue to weigh on the earnings of Indian carriers in FY2023,” rating and research firm ICRA said in a note.


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