NEW DELHI :
The crash in oil prices may provide a welcome reprieve to India's cash-strapped airlines, which are staring at a potential collapse of the sector amid an air travel ban, industry experts told Mint.
Currently, the entire fleet is grounded amid the nationwide lockdown to contain covid. But even when curbs are eased, carriers will have to offer cheap tickets, where the oil price drop would provide a huge relief.
Fuel alone accounts for 40% of Indian airlines total costs due to the high tax structure in the country. In comparison, fuel constitutes about 20%-25% of costs of prominent American and European airlines, where taxes on aviation fuel is much lower.
Indian airlines will not gain from the oil price decline in the short term since their operations are grounded, said Nripendra Singh, industry principal, aerospace, defense ad security practice at Frost & Sullivan.
"However, once operational, airlines will see upto 1.5% reduction in operational expenses for 8% reduction in oil prices," Singh said.
Singh added that Indian airlines, which rely largely on domestic traffic, could see see a swifter resumption of services, as the Indian government is likely to restart domestic and cargo operations before giving green signal to international operations.
"Airlines in North America, South America (Brazil), India and China rely get 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.
The price of brent crude stood at $21.25 per barrel on Tuesday, down from $71.79 per barrel during the year ago period. The price on the futures contract for West Texas crude that is due to expire Tuesday fell into negative territory -- minus $37.63 a barrel, Bloomberg reported.
This means that crude prices are expected to decline further in the coming months due to an erosion in demand as a result of restrictions imposed worldwide to contain the outspread of covid-19.
"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 scheduled 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 the resumption of flight services.
The revenue loss of the aviation industry spread across airlines, airports and retail is estimated to be $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 added.
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, battered by the pandemic, is also expected to see sharp declines in both domestic and international passenger traffic, once flight 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 Matin, chief executive of aviation consultancy Matin 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 added.
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