ICRA, in its views on the monthly domestic passenger traffic data for the aviation industry for August 2023, has said that its outlook on the Indian aviation is Stable and cited the rapid recovery in the domestic passenger traffic in the financial year 2023 and an expectation of the trend carrying on in the financial year 2024.
In its report, ICRA said that in August 2023, the domestic air passenger traffic was estimated at approximately 124.8 lakh, a jump of nearly 3.2% from about 121 lakh recorded in July 2023. The year-on-year growth stood at approximately 23%.
When compared with pre-COVID-19 levels (August 2019), the domestic passenger traffi in August 2023 was higher by 6%. The period from April to August 2023 saw a domestic air passenger traffic of 631.77 lakh, a growth of 20% year-on-year and 7% higher than what was recorded during the same period in 2019.
In August 2023, the airlines’ capacity was nearly 10% higher than that of August 2022 and 1% lower than the pre-COVID levels (August 2019). The Indian carriers saw the international passenger traffic surge to 92.5 lakh in the April-July period, a 32% growth year-on-year, and 28% higher than the pre-COVID levels of 72.4 lakh.
ICRA’s Stable outlook
As mentioned above, ICRA gave the Indian aviation industry a Stable outlook. It said that the industry observed an improved pricing power, as evidenced by improved yields and consequently, the revenue per available seat-kilometer minus cost per available seat-kilometer (RASK-CASK) margin of the airline companies. This trend is anticipated to persist due to a year-on-year decrease in aviation turbine fuel (ATF) costs since April 2023 and the relatively stability of foreign exchange rates.
Sequential increase in ATF prices
Even as the air passenger traffic saw a healthy recovery, the domestic aviation sector continues to box with challenges stemming from elevated aviation turbine fuel (ATF) prices and the depreciation of the INR against the US dollar compared to pre-Covid levels. Both these factors significantly impact the cost structure of airlines. In FY2023, average ATF prices reached Rs. 121,013 per kiloliter, rising from Rs. 64,715 per kiloliter in FY2020, and in the first six months of FY2024, they were at Rs. 98,892 per kiloliter.
Of the airlines’ expenses, fuel cost constitute around 30-40%, while approximately 45-60% of their operational costs, including aircraft lease payments, fuel expenses and a significant portion of aircraft and engine maintenance expenses are denominated in US dollars. Additionally, some airlines have foreign currency-denominated debt. Although domestic airlines have a partial natural hedge due to their international operations, the majority of their financial obligations are in foreign currency. The airlines’ efforts to ensure fare hikes, proportionate to their input cost increases, will be the key to expand their profitability margins.
Gradual pace of recovery in earnings
The recovery in industry earnings is expected to have a gradual pace, largely owing to the business’ high fixed-cost nature. A net loss of Rs 170-175 billion was estimated to have been reported by the industry due to elevated ATF prices and the depreciation of the INR against the US dollar in FY2023. However, this figure is significantly lower than the roughly Rs 217 billion net loss experienced in FY2022, primarily due to airlines’ improved ability to enhance their yields without impacting the demand. Furthermore, the net loss is expected to reduce to Rs 30-50 billion in GT2024 as airlines bathe in healthy passenger traffic growth and maintain pricing discipline, post the ongoing consolidation in the industry.
Financial distress and liquidity issues
While some airlines have sufficient liquidity and/or financial support from a strong parent firm, others will continue to face strained credit metrics and liquidity profiles in the near term, notwithstanding some improvement relative to recent years. Aircraft manufacturers are facing challenges in the supply-chain arena and resultantly some airlines have had to ground aircraft. The report cited GoFirst having to ground half of its fleet owing to faulty engines from Pratt and Whitney.