Jet fuel prices are so low that airlines can afford to fly with empty middle seats says research report
- Indigo stock fell by 27%, SpiceJet shares declined almost 47%.
- A Credit Suisse report suggests Crude oil prices are so low that airlines can break-even even at half the revenue after they fly again.
Indian airlineswere quick to announce force majeure like furloughs and pay cuts.
AdvertisementAirlines have been grounded for over a month now, and as lockdown is here to stay, the sector has only bad news coming its way. The inkling that flying might remain affected for many months as Indians practice social distancing means — less earnings per flight.
This gap might as well be filled by lower crude oil prices. A Credit Suisse report says that crude oil prices are ‘so low’ that airlines can break-even even at half the revenue even if they fly with empty middle seats. Jet fuel constitutes a major chunk of airlines’ expenses.
As of now, Brent crude is at $19.63 per barrel and the fact that US crude futures went into the negative territory offers hope to airlines.
“Crude has lowered the variable cost of flying, implying that airlines can start to make a contribution towards covering its fixed cost at a lower load factor of 50% also. We assume prices of 10% lower than FY20E levels. Airline can thus aim to fly with even a 50% load factor and start to make a contribution towards covering its fixed costs. This also enables airlines to fly with middle seats empty. Middle seats being empty may also help to push up prices, breaking the downward spiral of prices,” cited the report.
Refunds, cash and bookings
This could come as some relief especially after industry body CAPA predicted that most airlines globally will go bankrupt by May. Even the largest airlines in the world are seeking government aid, and are worried that they will ever see the light of day again.
In India, even after lockdown lifts in a few days, a ban on flying might continue, according to analysts. The cash-crunched airlines which had bookings for the period of lockdown started converting the cancelled tickets into credit shells — that can be used for future bookings at the same cost.
But the Civil Ministry issued a directive, instructing airlines to make a full refund for tickets booked for the lockdown period, stressing their finances. Added to that, fewer people are booking and planning travel as uncertainty looms large.
“Forward sales account for 7-8% of revenues for airlines,” says JM Financial report.
Expectedly, the stocks of most airlines are on a freefall. While Indigo stock fell by 27%, SpiceJet shares declined nearly 47% since March.
AdvertisementTo rein in the cash crunch, most airlines announced furloughs and pay cuts. Spicejet on March 31 announced that it would cut 10%-30% of the salary of employees across roles. GoAir too announced that it would cut salaries across levels which said it had no other option.
Indigo earlier announced large pay cuts for its employees. Later, it changed its mind and decided to roll back the pay cuts, which were announced earlier for senior staff, for the month of April in deference to the “government’s wishes”.
It is possible that airlines in India are looking forward to a relief package, like their global counterparts. If that happens and they fly again, though they might not fly high, they can rise just enough to keep going, for the time being.
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