Jet, Kingfisher margins likely to crash on falling rupee

A falling rupee against the dollar has proved to be a double edged sword for ailing airlines struggling to fly in the black.

The aviation sector has already seen its operating cost go up significantly for the three months to September quarter as airline companies incur 30% expenses in dollar denomination. Secondly, the weak rupee could compress EBITDA margins to 3% from 12.3% Y-o-Y due to the weak rupee, say analysts

After falling to Rs 50 to a greenback few days back, the rupee is now at Rs 48.86 sending shockwaves to airline operators who are already reeling under losses for the past two quarters. While country’s largest private carrier Jet Airways had posted a net loss of Rs 123 crore for Q1, Kingfisher too posted a net loss of RS 263 crore on high fuel bills.

Jet Airways and Kingfisher Airlines officials with whom moneycontrol.com talked to have said that their Q2 topline has been dented as the rupee started to depreciate against the greenback by almost 12% when compared with the three months to June quarter.

“A sharp fall in the value of the rupee pushed up our external borrowing cost, lease rentals and salaries to expat staff. A falling rupee has bloated out operational cost by around 10% for the September quarter,” says an official from a full service carrier.

Sample this:

Jet incurred Rs 361 crore towards employee salaries, Rs 207 crore on lease rentals and Rs 214 crore on interest payments on loans taken domestically and in dollar denominations when the rupee stood at Rs 45 against the greenback during Q1 of FY12. Now, with the rupee inching towards Rs 50 against the dollar, airlines will have a tough time maintaining costs, say analysts.

Also, while Jet has dollar denominated loans of around Rs 9,000 crore, its rival Kingfisher has a debt of around Rs 6,000 crore of which a significant amount is in dollar denomination. Fall in rupee will also increase the principal amount of loans for these companies.

Sharan Lilaney from Angel Broking explains, “Airlines are already making losses for the past two quarters and with lower purchasing value of the rupee, airlines are likely to report more losses this quarter.” He further adds that though Jet Airways and Kingfisher Airlines receive revenues from international operations in dollar terms, the impact will be offset by other larger expenses which they incur in dollar currency.

Though crude prices have slipped to $109.45  from $113 a barrel Q-o-Q, the weakening rupee has toned down the impact, say experts.

-Riken Mehta & Shaheen Mansuri

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