Aviation turbine fuel: Dollar hits where it hurts the most

The recent rise of the US dollar against the rupee has triggered a rather sharp rise in the price of aviation turbine fuel, or ATF. In the past one month, ATF prices across the four metros have surged 5.8% on average, thanks to the stronger greenback, which made the import of crude oil expensive.

This spike in ATF prices will be a double whammy for domestic airlines, which were battling low passenger traffic for the five months ended May. In Mumbai, ATF price rose 5.8% to Rs 68,147 per kilolitre in a month. Passenger traffic grew only about 1% in the five months ended May. With clear indications that revenue growth will be subdued in the quarter to June 2013, the rise in ATF prices will further squeeze aviation companies’ margins.

Typically, a rising US dollar is a worry for airlines as a large chunk of their expenditure is in US dollars, with salaries to pilots, leasing charges, engine and aircraft maintenance charges, all paid in the foreign currency.


The costs can be in the range of 50-70% of an airline’s total expenditure. Jet Airways India, which has significant international operations, also does its costing in the foreign currency.

These costs could be close to 60% of the total. However, Jet Airways derives around 56% of consolidated revenues from international operations, which will partially compensate for the hike in expenditure due to the US dollar’s rise.

SpiceJet has close to 50% of its fuel expenses in dollars. It is also highly dependent on domestic markets, where growth in passenger traffic is weakening.

On the valuation front, Jet is trading cheaper with an enterprise value-to-sales ratio of 0.7, which is very cheap compared with its three-year average EV/Sales ratio of 0.89. SpiceJet is trading at an EV/Sales ratio of 0.49, marginally cheaper than its three-year average EV/Sales ratio of 0.50.