Falling Rupee May Cause Flight Tickets To Be Costly

The rate of rupee has depreciated from Rs 48 to Rs 55 in a short period of a few months. Since February, there has been a depreciation of about 11 percent in the exchange value of the rupee which has meant that all the remittances which have to be done in dollars have got more expensive. This is likely to have the ultimate impact on the prices of the flight tickets to the customers. The extent to which this depreciation will adversely affect the airline companies of India depends on two crucial factors. These are:
1. Whether the airlines has the international operations or not and if it does operate internationally, then what is the proportion of these operations to the total?
2. The extent of fixed costs which the airline incurs in dollar terms.
Let us discuss these two factors in detail.
If the airline has the international operations, as is the case with network carriers such as Jet Airways and Air India and low cost carriers such as IndiGo Airlines and Spicejet, then there are both the outflows and the inflows of money requiring the exchange rate conversion. This increases the exposure to the dollar payments but since there are dollar denominated inflows as well, the risk is covered to some extent.
For the airlines which are not having any international flights, such as the low cost carriers GoAir and Kingfisher that have business models focused on providing cheap air tickets through domestic operations, there is no scope of having the earnings in dollar. For these airlines, the extent of risk that the depreciating rupee poses depends on quantum of payments that are to be made in dollars. The payments of jet fuel and the salaries of the expat pilots are examples of two such components of costs which are to be paid in dollars by most of the airlines irrespective of whether these fly to international destinations or not. The quantum of these payments has increased in rupee terms and if the airline decides to pass this on to the customers, then the flight tickets of domestic as well international operations will increase.
The likelihood of cheap air tickets getting costly in the wake of depreciating rupee also depends on the quantum of fixed payments which the airline has to incur in dollar terms. These fixed payments are to be incurred even if the airline is operating flights only in domestic sector. Some of these types of expenses are listed below:
1. Salaries of expat pilots
2. Lease Rentals
3. Maintenance Rentals
4. Fuel Costr
The network carriers are better hedged against these risks due to their incomes from the international operations as compared with the low cost domestic carriers such as IndiGo Airlines or Spicejet which have limited international operations or Go Air and Kingfisher which do not have any international flight.