Airlines may post steepest losses in a decade: Crisil

By: | Published: November 2, 2018 3:16 AM

Domestic carriers are projected to post the steepest losses in a decade in the current fiscal owing to higher aviation turbine fuel (ATF) costs and falling rupee, rating agency Crisil said in a report on Thursday.

ATF accounts for 35-40% of the total cost of airlines, while aircraft, engine rentals and maintenance costs, which are denominated in dollars, together account for another 30-35% of the costs, as per the Crisil report.

Domestic carriers are projected to post the steepest losses in a decade in the current fiscal owing to higher aviation turbine fuel (ATF) costs and falling rupee, rating agency Crisil said in a report on Thursday.
While pitching for a 12% hike in airfares to offset the increased costs, the report forecast debt liability of three listed airlines to go up by 10% by FY19.
At present, full-service carriers Jet Airways and budget airlines SpiceJet and IndiGo, which are listed on bourses, account for 71% of the total passenger traffic.
ATF accounts for 35-40% of the total cost of airlines, while aircraft, engine rentals and maintenance costs, which are denominated in dollars, together account for another 30-35% of the costs, as per the Crisil report.

“At an estimated Rs 9,300 crore, the industry’s losses at the ebit (earnings before interest and tax) level would surpass the Rs 7,348-crore blow it was dealt in FY14. That was followed by three good years through FY18, when carriers reeled in an aggregate profit of `4,000 crore on average at the Ebit level,” the report said.
Noting that the ATF prices are expected to average 28% higher on-year compared with FY18, the report said such a hike will have a significant impact on the airlines’ balance sheets.

The government has taken some measures to support the industry by lowering the excise duty levied on ATF by 300 basis points to 11%, but this will not materially curb the losses, it said.
On the other side, the rupee has depreciated 13% against the dollar since March, which is expected to deal a severe blow to the domestic airlines’ financials,
Crisil said, “Almost two-thirds of an airline’s cost, and therefore, profitability, is susceptible to fluctuations in forex rates and ATF prices,” said Sachin Gupta, senior director, Crisil Ratings. He said to offset the increase in operating cost, the industry will have to hike average fares by 12%, assuming there is no change in the passenger load factor (PLF) or seat factor.
“But the aggressive expansion plans of carriers and the race to maintain high PLFs will keep competitive intensity high and limit their ability to increase fares,” he added.

Observing that the PLFs are highly sensitive to fares, the report said that in the past three fiscals, benign ATF prices helped airlines keep fares stable. “Despite an annual capacity growth of 15% in the past three fiscals, PLFs increased because passenger growth was faster at 18%,” Crisil said.
Another headwind to fare hike is the significant fleet addition planned in the near term, which will lead to capacity addition of over 20%, as per the report.
Such a sharp increase in supply will keep the competitive intensity high and will constrain the ability of carriers to undertake fare hikes to pass on the increase in operating costs fully, the report said. This was evident in the first quarter of FY19 when despite a 12% rise in ATF prices, only one of the three listed players was able to increase yields, and that, too, by just 4%, it added.

Furthermore, the depreciation in the rupee will translate into a higher debt liability. “Airlines have sizeable foreign currency debt, while their revenues are largely earned in rupees. With around 73% of their debt denominated in foreign currency, the debt liability of the three listed airlines will go up by 10% this fiscal,” said Nitesh Jain, director, Crisil. The report also said that the profiles of airlines will remain under pressure over near-to-medium term on account of significant increase in operating cost and limited ability to pass on cost increases to customers because of intense competition.

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