Despite High Oil Prices, Airlines in India Could be Profitable

KPMG in India in its analysis of the aviation sector believes that India’s airlines can achieve break even and become profitable despite rising fuel, as long as they focus on improving airline efficiencies, improve processes, switch to leaner business models and cost optimize their business operations.

The point of view released by KPMG in India titled, “Indian Aviation: Flying Through Turbulence” cites that air traffic in India is no longer a mere statistic but a phenomena that is based on the fact that people from every walk of life, demographic, ethnicity and culture have opted to travel because not only is the world increasingly getting closer, but quality of time and the productivity is increasingly becoming the focus.

Responding to reports of a likely slowdown in the aviation sector in India, the point of view states that the growth in air travel globally and in India will be adversely influenced by epidemic outbreaks, economic recession, terrorism, shifts in policy and regulations and competitive markets but not by oil prices.

Although ATF price hikes is having its toll on the airlines profitability, the KPMG analysis believes that it is currently not possible for any airline in India to make profits within three years of starting operations as average airline break even based on prevalent capital expenditure typically occurs in a minimum of five to seven years of operations.

While ATF presently accounts for 30 ~ 35 percent of airline operating costs, it is also relevant to note that an airline would only spend on ATF when it operates a scheduled flight and coincidentally enough, that is also when it generates revenue. Hence, airline’s expenditure on fuel is directly proportionate to occupancy and load.

Through this document, we attempt to explain and present a view on some of the recent issues faced by the airlines emanating from the rising aviation fuel prices and its impact on the airline profitability and demand for air travel in general.

Commenting on the release of the Point of View report, Mr. Raajeev B Batra, Executive Director KPMG in India said, “The airline business today is one of the most complex industries. Its profitability, revenue and yield are predominately driven by economic and external factors and this makes it most vulnerable to even the slightest variation in economic growth rates, national disasters, epidemic outbreaks, terrorism, war, currency fluctuations and most importantly oil prices”.

During the period April – March (2007-08), both domestic and international passenger traffic in India registered a noteworthy increase. While the international passenger traffic grew at a rate of 15 percent, the domestic air traffic grew at 23.8 percent during the same period which led to aircraft movement also showing an upward trend.

The strikingly rapid rise in domestic and international traffic can be attributed to increased capacity at airports and greater air connectivity across destinations. While oil prices across the globe have risen sharply, in-turn raising airfare prices up notch, the increase in traffic from tier II and tier III cities in India has sent a very clear message that air travel included with fuel surcharges to offset high ATF rates is increasingly becoming the primary travel medium and consumers are no longer associating air travel as a luxury but as a sound and highly bankable mode of transportation.

Source India PRwire

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