Analysis: Stabilizing Rupee will help quell financial woes of Indian aviation
by Vinay Bhaskara Are India's airlines poised for recovery? - Image Credit: Devesh Agarwal, BangaloreAviation.com When the Federal Reser...
https://basevida.blogspot.com/2013/10/analysis-stabilizing-rupee-will-help.html
by Vinay Bhaskara
When the Federal Reserve Bank of the United States decided on 18th September not to taper (reduce) its purchases of bonds in the so-called Quantitative Easing program until the US economy recovered further, it lit a fire underneath the much maligned Indian rupee, as it did under most emerging market currencies. The Indian Rupee's exchange had fallen this summer to a low point of more than 68.85 Rupees per US Dollar on pressures from a current account deficit, heavy trade imbalance, and weakening macro-economic fundamentals.
But there was some evidence that investors had almost overreacted to the poor economic news. All emerging market currencies had taken a valuation hit earlier this summer as fears of a Fed taper mounted. But the Rupee lost an additional 7-10% of its valuation against the dollar, even as India's economic fundamentals were no worse contextually than say Indonesia or the Philippines - two peer nations who saw much narrower declines in their currency. Moreover, much of the decline in the past three months had been tied to fears of a tapering of bond purchases from the Federal Reserve. Essentially, the Fed's actions
Meanwhile, India's current account deficit and trade imbalance closed to some degree, and the Indian Rupee has pretty much recovered the 10% deficit it had relative to other emerging market currencies, recovering over the course of September to 62.46 Rupees per US Dollar as of press time. Most financial analysts, including India Ratings & Research, a division of the Fitch Group, expect the Rupee to retain these gains.
But the problems do not stop there. Aircraft leases, and/or financing is mostly provided in terms of Dollars or other Western currencies, and so the real cost of aircraft financing in Rupees increases when the currency depreciates. A significant portion of maintenance costs (mainly parts expense) is in Dollars, as are sales/operations in Western nations (which only applies to Air India and Jet Airways).
So the recovery in the Rupee will provide Crores worth of savings for Indian carriers, narrowing losses for full service carriers Jet Airways and Air India, and increased profits for low cost carriers SpiceJet, IndiGo, and GoAir. The net effect on IndiGo might be more mixed, since the depreciation of the Rupee might have increased its nominal profitability on its sale-leaseback of Airbus A320 aircraft, but even so, the cost savings should more than even out.
The other factor to consider is whether Indian carriers can make the latest round of fare increases stick. Essentially, at the beginning of September, India's airlines, led by Air India and Jet Airways each hiked fares by 20-25%, citing the tumbling Rupee as rationale. Now that the Rupee has recovered, if India's airlines can hold the line and keep fares at present levels, it would be a huge boost to profit margins, perhaps even pushing Jet Airways to break-even. In the short term (essentially until the flood of new entrants such as Air Asia India, the Singapore Airlines/Tata JV, and Air Costa enter the market), this could be a major financial boost for India's struggling airlines.
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| Are India's airlines poised for recovery? - Image Credit: Devesh Agarwal, BangaloreAviation.com |
When the Federal Reserve Bank of the United States decided on 18th September not to taper (reduce) its purchases of bonds in the so-called Quantitative Easing program until the US economy recovered further, it lit a fire underneath the much maligned Indian rupee, as it did under most emerging market currencies. The Indian Rupee's exchange had fallen this summer to a low point of more than 68.85 Rupees per US Dollar on pressures from a current account deficit, heavy trade imbalance, and weakening macro-economic fundamentals.
But there was some evidence that investors had almost overreacted to the poor economic news. All emerging market currencies had taken a valuation hit earlier this summer as fears of a Fed taper mounted. But the Rupee lost an additional 7-10% of its valuation against the dollar, even as India's economic fundamentals were no worse contextually than say Indonesia or the Philippines - two peer nations who saw much narrower declines in their currency. Moreover, much of the decline in the past three months had been tied to fears of a tapering of bond purchases from the Federal Reserve. Essentially, the Fed's actions
Meanwhile, India's current account deficit and trade imbalance closed to some degree, and the Indian Rupee has pretty much recovered the 10% deficit it had relative to other emerging market currencies, recovering over the course of September to 62.46 Rupees per US Dollar as of press time. Most financial analysts, including India Ratings & Research, a division of the Fitch Group, expect the Rupee to retain these gains.
Notwithstanding the likelihood of US Fed reversing the QE (quantitative easing) programme... expect rupee to appreciate in the range of 8-11 per cent from its August-end 2013 levelThis is a boon for India's airlines to say the least. The declining Rupee was responsible for nearly a third of Jet Airways' net loss in Q1 of FY 2013-14, and similar effects were seen for India's other airlines. Basically, the problem for India's airlines is that several of the costs that they bear are either directly paid in US Dollars, or are priced responsively to changes in the Dollar - Rupee exchange rate, while their revenues are almost entirely in Rupees. Take fuel prices for example. While there is sometimes a time lag in price increases for domestic consumer goods in India when the currency depreciates, because aviation turbine fuel (ATF) is almost entirely imported, its pricing evolves in real time, with the Rupee denominated price rising quickly to match currency depreciation. Given that fuel is the single largest cost for India's airlines, representing close to 40% of operating costs for Indian carriers, this has had a massive impact.
But the problems do not stop there. Aircraft leases, and/or financing is mostly provided in terms of Dollars or other Western currencies, and so the real cost of aircraft financing in Rupees increases when the currency depreciates. A significant portion of maintenance costs (mainly parts expense) is in Dollars, as are sales/operations in Western nations (which only applies to Air India and Jet Airways).
So the recovery in the Rupee will provide Crores worth of savings for Indian carriers, narrowing losses for full service carriers Jet Airways and Air India, and increased profits for low cost carriers SpiceJet, IndiGo, and GoAir. The net effect on IndiGo might be more mixed, since the depreciation of the Rupee might have increased its nominal profitability on its sale-leaseback of Airbus A320 aircraft, but even so, the cost savings should more than even out.
The other factor to consider is whether Indian carriers can make the latest round of fare increases stick. Essentially, at the beginning of September, India's airlines, led by Air India and Jet Airways each hiked fares by 20-25%, citing the tumbling Rupee as rationale. Now that the Rupee has recovered, if India's airlines can hold the line and keep fares at present levels, it would be a huge boost to profit margins, perhaps even pushing Jet Airways to break-even. In the short term (essentially until the flood of new entrants such as Air Asia India, the Singapore Airlines/Tata JV, and Air Costa enter the market), this could be a major financial boost for India's struggling airlines.
