The weakening Indian rupee is placing increasing pressure on Air India’s cost structure and profitability, particularly in its domestic operations. However, according to a senior official at the airline, the airline has a natural hedge in place through its international flights, where ticket prices are largely denominated in foreign currencies. This provides some relief as the airline navigates rising costs linked to the depreciating rupee.
In recent weeks, the Indian rupee has experienced a significant decline, reaching a record low of 86.04 against the US dollar on January 10. This depreciation has been a major concern for businesses across sectors, and airlines are no exception. For Air India, the rupee’s weakening means higher operational expenses, as many of the airline’s major costs, such as fuel, aircraft leasing, and spare parts, are paid in US dollars. These costs have become more expensive as the rupee loses value, impacting the overall financial performance of the airline.
A significant portion of Air India’s operational expenses is tied to foreign currencies, making the airline particularly vulnerable to fluctuations in exchange rates. The cost of jet fuel, one of the largest components of an airline’s operating expenses, is priced in dollars, meaning that a weaker rupee directly translates to higher fuel costs. Additionally, the airline also faces increased costs for aircraft maintenance, leasing, and international travel-related services, which are typically contracted in foreign currencies.
However, despite the rising costs, the airline has some natural protection against the rupee’s depreciation. A senior Air India official explained that the airline can leverage its international flight network, where ticket prices are generally set in foreign currencies, such as US dollars or euros. This allows Air India to adjust its fares in line with currency fluctuations, helping to offset some of the increased costs caused by a weaker rupee.
The pricing structure for international flights acts as a hedge for Air India, as international passengers pay in foreign currencies, which are stronger than the Indian rupee. This allows the airline to generate higher revenues from its international routes, which in turn helps to counterbalance the impact of the weaker rupee on its expenses. For instance, Air India can adjust its ticket prices for international flights to reflect the current exchange rates, which helps the airline maintain profitability even as costs rise in local currency terms.
This ability to charge more on international flights provides Air India with some financial flexibility in the face of rising operational costs. However, this advantage does not entirely shield the airline from the broader economic pressures posed by a depreciating rupee. The airline still faces challenges in managing its domestic operations and maintaining cost efficiency.
As the rupee continues to fluctuate, Air India will need to carefully manage its cost structure and pricing strategy to remain profitable. The airline’s ability to charge higher fares on international routes will play a critical role in helping it weather the storm of rising expenses. However, it will also need to ensure that its domestic operations remain competitive, despite the pressures from a weaker rupee.
In the long term, Air India’s recovery and growth will depend not only on its ability to manage currency fluctuations but also on broader strategies such as fleet modernization, route optimization, and improving operational efficiency. While the natural hedge from international flight revenues provides some cushion, the airline will need to remain agile in a challenging economic environment.
The falling rupee presents a significant challenge to Air India’s cost structure, especially in terms of rising expenses for fuel and foreign currency-denominated costs. However, the airline’s ability to generate higher revenues from international flights priced in foreign currencies offers a valuable hedge against these pressures. As the rupee continues to decline, Air India will need to leverage this advantage while carefully navigating the impact of a volatile currency environment on its operations.