High Oil Prices Hit India's Airlines

Rising fuel costs have grounded the high-flying ambitions of India's carriers and have sent their stocks into a tailspin

by Nandini Lakshman

India's airlines have been flying high these past years as deregulation powered a booming industry. Over the past four years, six new airlines took off from Indian tarmacs, serving 100,000 passengers a day. In 2006, India's airlines made headlines when they ordered 400 new planes—$37 billion worth of flying machines—as the industry became a magnet for pilots from all over the world.

But all these ambitious plans and dreams have of late wound down, in large part due to the rise in global oil prices. At $143 a barrel, the price of oil has affected aviation globally, and the seemingly golden Indian carriers have been hit perhaps hardest. From Air India to Jet Airways, to Kingfisher and SpiceJet, the airline industry reported losses that totaled $938 million for the fiscal year ended Mar. 31, 2008. This year, Indian aviation revenues are expected to grow a mere 9%, vs. 29% last year, and the industry will operate at a loss. Jet Airways, SpiceJet, and Air Deccan have all seen their stocks fall more than 50% over the past 12 months.

On June 24, Jet Airways, India's largest private-sector airline, and its low-cost subsidiary JetLite reported a combined loss of $152 million for the year ended Mar. 31. Jet said that it had to pay $30 million more for fuel than in the previous year, given soaring prices. Jet, which has 60 aircraft, has already cut domestic capacity by 10% and raised fares. "There's too much capacity in the market, and traffic growth has declined with [rising] inflation," says Saroj Datta, executive director of Jet Airways.

Hard Times for GoAir

One of the worst hit is GoAir, India's youngest low-cost airline set up by Jeh Wadia, scion of a textile conglomerate Bombay Dyeing. GoAir, which has been trying to sell off a 26% stake in the airline for some time now, is cutting 10% of jobs, paring short-haul flights, and putting expansion plans on the back burner.

Why is India's airline sector reeling more than those of other countries? Aviation fuel in India has tripled over the past three years and now is the most expensive in the world—80% higher than in most countries, including the U.S. and Britain. That's in large part because of high federal and state government levies, including 15% oil marketing charges charged by India's state-run oil companies. Indian carriers and foreign airlines that refuel in India must buy oil from Indian Oil, Hindustan Petroleum, and Bharat Petroleum (companyid=4481079).

New Delhi allows the oil companies to charge the airlines higher prices to make up for the fuel subsidies that the state-owned oil players are forced to offer the public for cooking oil, gasoline, and diesel. As a result, fuel accounts for nearly 50% of the operational costs of the Indian airlines, compared to a global average of 23%. Concerned by rising global crude oil prices, New Delhi raised aviation fuel prices by 18.5% in May, bringing added pain to India's carriers.

Airline Losses Could Double

There's worse news: India's aviation secretary Ashok Chawla said on June 10 that if oil prices continue to rise, airline losses this year could double, to $2 billion. India alone would then account for a third of the $6.1 billion global losses projected by the International Air Transport Assn.—the largest of any country.