ICRA maintains a stable outlook on the Indian aviation industry due to the rapid rebound in domestic passenger traffic during FY2023, which is anticipated to persist in FY2024. The sector has experienced enhanced pricing capabilities, resulting in improved yields and a positive revenue per available seat kilometer – cost per available seat kilometer (RASK-CASK) spread for airlines. This positive trend is expected to continue as the industry recovers pricing discipline, benefiting from consecutive declines in aviation turbine fuel (ATF) prices over the past five months and relatively stable foreign exchange rates.
Official data from the Directorate General of Civil Aviation (DGCA) released on Thursday reveals that domestic air passenger traffic in the country surged by 18.78% in June, reaching approximately 12.5 million compared to the same period last year. In June 2023, the estimated domestic air passenger traffic reached approximately 125.2 lakh, showing a slight decline of about 5% compared to May 2023’s 132.1 lakh. It experienced a year-on-year growth of around 19% compared to June 2022’s 105 lakh and was 4% higher than pre-Covid levels in June 2019, which stood at around 120 lakh.
IndiGo, Air India, Vistara, AirAsia India, and Akasa Air experienced an expansion in their market shares during June, benefiting from the grounding of budget carrier Go First. However, SpiceJet’s market share continued its decline, dropping to 4.4% last month from 7.3% recorded in January of this year.
Tata Group airlines, including Air India and AirAsia India (now rebranded as AIX Connect), witnessed strong passenger numbers in June. Air India carried 1.237 million passengers, while AirAsia India served 1.04 million passengers. Air India captured a market share of 9.7%, while AirAsia India held an 8% share. Vistara, a Tata-Singapore Airlines joint venture, recorded a market share of 8.1% with 1.011 million passengers. Akasa Air, launched in August last year, achieved a market share of 4.9% by flying 618,000 passengers. Meanwhile, SpiceJet carried 555,000 passengers, experiencing a market share decline to 4.4% and facing increased surveillance by the DGCA.
Suprio Banerjee, Vice President & Sector Head – Corporate Ratings, ICRA Limited, said “during the first quarter of fiscal year 2024 (April-June 2023), domestic air passenger traffic reached approximately 385.68 lakh, reflecting a year-on-year growth of 19% compared to Q1 FY2023 (April-June 2022) when the traffic stood at 324.24 lakh. It was also approximately 10% higher than the pre-Covid levels of April-June 2019, which recorded 351.08 lakh.”
“In June 2023, airlines deployed a capacity that was around 1% higher than June 2022. However, it remained 4.8% lower than the pre-Covid levels of June 2019. The domestic aviation industry achieved a passenger load factor (PLF) of approximately 93% in June 2023, surpassing June 2022’s 79% and June 2019’s (pre-Covid) 89%,” Banerjee added.
ATF challenges
Despite a strong recovery in air passenger traffic, the Indian domestic aviation industry faces ongoing challenges due to the sequential growth in aviation turbine fuel (ATF) prices and the depreciation of the Indian Rupee against the US Dollar compared to pre-Covid levels. These factors significantly impact the cost structure of airlines. In FY2023, the average ATF prices were Rs. 121,013/Kl, and in Q1 FY2024, they were Rs. 95,646/KL, compared to Rs. 64,715/Kl in FY2020. Fuel costs constitute approximately 30-40% of airlines’ expenses, while 35-50% of their operating expenses, including aircraft lease payments, fuel expenses, and a substantial portion of aircraft and engine maintenance expenses, are denominated in US dollars. Additionally, some airlines have foreign currency debt. While domestic airlines have a partial natural hedge through earnings from international operations, their net payables are primarily in foreign currency. The ability of airlines to implement fare increases in line with rising input costs will be crucial to expanding their profitability margins. Furthermore, the competitive landscape of the domestic aviation industry is expected to change with the entry of new players and the consolidation of Air India, Air Asia India, and Vistara.
Earnings recovery
The earnings recovery in the Indian aviation industry is expected to be gradual due to its high fixed-cost nature. In FY2023, the industry is estimated to have incurred a net loss of approximately Rs. 110-130 billion, primarily due to elevated ATF prices and the depreciation of the Indian Rupee against the US Dollar. However, this net loss is significantly lower than the net loss of around Rs. 235 billion in FY2022 and ICRA’s previous estimated net loss of Rs. 150-170 billion in FY2023. The improvement can be attributed to airlines’ enhanced ability to increase their yields without negatively impacting demand. Looking ahead, the net loss is projected to decrease further to Rs. 50-70 billion in FY2024 as airlines continue to experience robust passenger traffic growth and enhance their RASK-CASK spread through better pricing discipline.
Airlines face financial distress
While certain airlines have sufficient liquidity or strong financial support from their parent companies to weather the near-term challenges, others continue to face financial distress and stretched liquidity issues, albeit in a better position compared to previous years. The aviation industry is grappling with supply-chain difficulties, leading to the grounding of specific aircraft by certain airlines. Go Airlines (India) Limited, for instance, had to ground half of its fleet due to faulty engines supplied by Pratt & Whitney. As a result, the company began defaulting on payments to vendors and aircraft lessors, receiving notices from lessors seeking payment. Additionally, it defaulted on interest payments to financial creditors as of May 4, 2023. Consequently, the company filed for voluntary insolvency with the National Company Law Tribunal (NCLT), which resulted in a moratorium on the airline’s assets and prevented lessors from repossessing their aircraft. However, the lessors contested the NCLT order and appealed to the National Company Law Appellate Tribunal (NCLAT). On May 22, 2023, the NCLAT upheld the NCLT order and directed the lessors to file an appeal against the moratorium before the NCLT. Recently, the Delhi High Court allowed leasing companies to inspect and maintain the aircraft.
Moreover, airlines have recently faced supply-chain challenges, including issues related to spare parts and engines, which have resulted in grounding certain aircraft and subsequently impacting their overall capacities. These challenges also have a negative impact on cash flow generation, given the high fixed-cost nature of the aviation business.
