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Indian airlines profitability may be affected in FY17

Airlines in India are likely to face headwinds in profitability in 2016-17 in the face of rising risks from increasing capacity, pricing pressure and possible cost increases, according to a sector outlook statement released on Thursday by consultancy firm Capa India. Though the aviation firms will be largely profitable, the pressure on yields is expected to be over 5 per cent for 2016-17 and is likely to impact profitability, the report said.

While flagging of risks, the report said that airlines have been benefitting on the back of declining jet fuel prices and strong passenger growth. For the year ending 31 March, 2016, the aviation firms are expected to post a combined loss of $350 million, down from $500-550 million forecast in October, Capa had said in its January report. The estimate assumes that oil prices will remain low and that the currency will remain stable.

In 2015, the price of benchmark Brent crude oil fell 35 per cent, while in 2014, it fell 48.3 per cent. In India, fuel costs account for about 45-55 per cent of the revenue of domestic airlines, and a 4 per cent drop in fuel cost adds around two percentage points to the operating margin of airlines. However, on 20 January, Brent crude hit a more than 12-year-low of $27.1 a barrel, but since then jumped over 30.33 per cent. Capa estimates significant capacity expansion with the country’s largest airline IndiGo (run by InterGlobe Aviation Ltd) and low-fare airline GoAir adding 30 new Airbus A320neos, while other airlines adding another 20 to 30 planes.