Sept. 12--NEW DELHI -- Air India Ltd may miss its target of returning to cash profits by 2018 after the local currency weakened sharply against the dollar, increasing the state-run airline's expenditure on jet fuel, overseas borrowings and aircraft leases.
Air India's turnaround plan was made in 2011 when the rupee was trading at 45 against U.S currency. The Indian currency has since weakened to 63.37 per dollar, increasing the airline's expenditure by Rs.2,600 crore in just the current fiscal year, said an Air India official who declined to be named.
The rupee had touched a lifetime low of 68.85 a dollar on Aug. 28, before recovering partially.
"It's a huge hit considering what's happening in the market," the official said, referring to increased competition from Eithad PJSC's investment in Jet Airways India Ltd. Etihad plans to buy 24 percent in Jet Airways and offer other sops to the airline in a deal valued at $900 million.
A second person with the knowledge of the matter confirmed that the airline will spend significantly more to buy fuel, on interest costs and for lease payments for airlines.
The Foreign Investment Promotion Board approved the Jet-Etihad transaction on 29 July even though Air India had opposed the investment. A final approval from the Cabinet is pending.
Further exacerbating the situation, rising crude oil prices because of the uncertainty over Syria have added to the operating costs of the airline.
Indian Oil Corp. Ltd, the nation's largest jet fuel supplier, is charging Rs.75,031 per kilolitre for the fuel compared with Rs.71,028.26 per kilolitre it charged in 2008 when Brent crude oil was trading at about $140 per barrel.
Air India had expected jet fuel to be available at an average of Rs.35,000 per kilolitre, when it prepared the turnaround plan.
Air India is slated to get $6.5 billion in equity infusion till 2021 from the government that is subject to the airline meeting the targets set in its turnaround plan. It is not clear whether more funds will now be needed to revive the airline.
Air India spokesman did not offer any immediate comment.
In 2008-09, the Indian airline industry posted a combined loss of Rs.9,071.6 crore because of high jet fuel costs.
The current scenario may force weaker airlines to shut operations, Kapil Kaul, South Asia chief executive for consulting firm CAPA, said last month. "If the current cost and pricing environment continues with no significant funding in sight, we may see some airlines closer to this reality," said Kaul.
Private airlines, which do not have overseas operations, are likely to be hit harder by the depreciating rupee.
Air India and Jet Airways gets more than half of their revenue from international operations, partially offsetting the increase in costs because of the weakening rupee.
The fleet of some Indian airlines entirely consist of leased aircraft, adding to the cost of operating them.
Air India's performance has improved over the past year and is in line with target set in the turnaround plan but restructuring the tax policy is required to enable the carrier to be cost competitive with foreign carriers, said Debayan Sen, India practice head for US-based consulting firm Landrum and Brown Worldwide Services.
"It is not realistic to assume that the government can bail the airline out till the end of time," Sen said. "With the rupee devaluation and political factors hurting oil prices, hedging fuel is the best move Air India can make right now. It helps safeguard the airline from cost over-runs to an extent."
Low-cost carriers in Europe such as Ryanair Ltd and Easyjet have been very successful with their fuel hedging plans and have been profitable as a result.
With a 125 aircraft fleet, Air India is planning to start flights to Milan, Rome, Moscow and is already operating flights to Sydney and Melbourne on Boeing 787 Dreamliners.
The fiscal second quarter is traditionally a lean period for airlines because of the monsoon and the third and fourth quarters are the strongest because of festivals and holidays.
Indian carriers are offering low fares for travelers flying to popular destinations like Singapore and Dubai in a bid to win competition from budget airlines in East Asia, news reports said Saturday.
Private airlines will no longer be able to manage their ground handling work.
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