NEW DELHI : The crash in oil prices may bring welcome relief to India’s cash-strapped airlines, who are starting at a potential collapse amid a nearly month-long ban on air travel, industry experts said.
Hundreds of aircraft are grounded as part of the nationwide lockdown to contain covid-19. But even when curbs are eased, carriers may have to offer tickets at low prices to attract travellers.
Airlines are also unlikely to be able to pass on the benefits of lower global crude oil prices because of high taxes imposed on jet fuel in India.
Fuel alone accounts for about 40% of the cost of operating an airline in India because of the high taxes. In comparison, fuel constitutes about 20-25% of costs of American and European airlines on account of lower taxes.
Indian carriers will not gain from the oil price decline in the short term since their operations are grounded, said Nripendra Singh, industry principal, aerospace, defence and security practice at Frost & Sullivan.
“However, once operational, airlines will see up to 1.5% reduction in operational expenses for 8% reduction in oil prices," Singh said.
He said also that Indian airlines, which rely largely on domestic traffic, could see a swifter resumption of services as the government is likely to first allow resumption of domestic and cargo operations before giving a green signal to restart international flights.
“Airlines in North America, South America (Brazil), India and China rely on a large chunk of their revenue from their domestic operations unlike the European airlines. So, even if international operations don’t open up soon, airlines in these countries will make do with domestic operations," Singh said.
Crude prices are expected to decline further in the coming months due to an erosion in demand as a result of worldwide restrictions.
“It will definitely help the airlines if oil prices stay low or decline further in the coming months once the government grants necessary permissions to restart fight operations," said a senior airline executive, who requested anonymity.
“However, demand is expected to remain low during the coming months, so airlines will keep their fares low to attract passengers. In this scenario, the decline of oil prices will help the stronger airlines but those with weak balance sheet will continue to struggle," the airline executive added.
All international and domestic airline operations will remain suspended till 3 May, the ministry of civil aviation said last week. Aviation minister Hardeep Singh Puri has said that the government is yet to decide on resumption.
The revenue loss to the aviation industry, spread across airlines, airports and retail, is estimated at $1-1.5 billion per month of lockdown, said Jagannarayan Padmanabhan, practice leader and director, transport and logistics at Crisil Ltd.
“About 70% of this will be borne by the airlines," Padmanabhan said.
India’s aviation industry is expected to post losses of $3-3.6 billion in the June quarter because of covid-19, with airlines sharing the bulk of the hit, aviation consultancy firm Capa India said in a recent report. The sector is also expected to see sharp declines in both domestic and international passenger traffic after services are resumed, it said.
“Right now, government is not passing benefits of low oil prices to consumers, and airlines are still paying huge taxes on jet fuel," said Mark Martin, chief executive of aviation consultancy Martin Consulting LLC.
“Airlines will actually begin benefiting from lower oil prices when their operations are regularized, which we expect earliest by later this year," Martin said.
The price of Brent crude stood at $21.25 per barrel on Tuesday, down from $71.79 per barrel a year ago. The price on the futures contract for West Texas crude that is due to expire Tuesday fell into negative territory at minus $37.63 a barrel.
