By Shamsher Dewan & Suprio Banerjee
The domestic aviation industry is facing heightened challenges since the onset of the Covid-19 pandemic in 2020 and the subsequent second wave in the early part of 2021. Rising aviation turbine fuel (ATF) prices, coupled with restrictions on travel by the regulatory authorities — number of flights, passenger traffic, ban on international flights — and cap on ticket pricing have all added to the woes of the industry, which is unlikely to recover any time soon. This is not just limited to India, globally too the industry has been grappling with demand reduction, lay-offs, fleet reduction and even closure due to the aforesaid reasons. And the spillover effects on industries dependent on the aviation industry is also enormous.
The single largest impact on the revenues and profitability of the domestic players is that of ATF’s rising prices, which constitute 30-40% of airline total costs, and are linked to movement in crude oil prices, which have been gradually rising. After touching a low of $19/barrel in April 2019 (the sharpest decline since Q4 CY2018), crude oil prices have been gradually going up and currently range around $ 74/barrel. This has led to a rise in ATF prices, thereby hitting the aviation industry hard. The prices have sequentially been increasing since July FY2020, which has continued in FY2021, with the exception in April’21, September’21 and December’21, when it partially declined on a sequential basis. Further, until February 2021, the ATF prices were still lower on a Y-o-Y basis — in March 2021, April 2021, May 2021, June 2021, July 2021, August 2021, September 2021, October 2021 and November 2021, the prices were higher by 3.0%, 59.8%, 103.4%, 86.3%, 59.7%, 55.3%, 54.6%, 78.6% and 94.4%, respectively, on a y-o-y basis. In December 2021, the prices were higher by 67.3 % on a y-o-y basis, attributed to the low base of December 2020, when the prices declined y-o-y by 27.0 % due to the impact of the pandemic.
Talking about domestic passenger traffic growth, it is estimated at ~ 104-105 lakhs for November 2021, having grown ~15-16% over October 2021, and a y-o-y growth of ~64%. Airlines’ capacity deployment for November 2021 was around 49% higher than November 2020. On a sequential basis, the number of departures in November 2021 were higher by ~12%, as Covid-19 infections demonstrated a downward trajectory. The ministry of civil aviation (MoCA) initially imposed tough restrictions on passenger load factor (PLF), but through steady increases over months has finally permitted 100% capacity deployment on domestic routes with effect from October 18, 2021 which should benefit the industry going forward. This is assuming no third wave of the pandemic and re-imposition of restrictions on air travel.
Nonetheless, given the gradual decline in Covid-19 cases from June 2021 onwards and lifting of restrictions, the domestic passenger traffic has continued to grow sequentially, with a growth of 61% in July 2021, 34% in August 2021, ~5% in September 2021, ~27 % in October 2021 and ~15-16% in November 2021. However, the same continues to remain lower than the pre-Covid levels with domestic passenger traffic in 8M FY2022, remaining 51% lower than 8M FY2020. The recovery in domestic air passenger traffic is contingent on four key factors — accelerated coverage of the vaccine, willingness of consumers to undertake leisure/business travel without hesitancy and fear of restrictions, recovery in macro-economic growth and no further lockdowns or restrictions due to any new variants. These factors in turn impact consumer sentiments and ability to travel.
As the demand recovery will be delayed for FY2022, and reverting to pre-Covid status is likely only in FY2024, the industry players would need more funds to support operational costs. Consequently, debt levels, expected to be at around Rs 1,200 billion (including lease liabilities) for FY2022, is likely to remain high, with industry likely to resort for an additional funding support of Rs 450-470 billion over FY2022 to FY2024. While some airlines with strong parents will be able to tide over the liquidity crunch and sustain over the challenging period, others are likely to face significant stress. Almost all key airlines have announced fund-infusion plans either from the parent or through the QIP/IPO route. Most airlines have also undertaken several cost-rationalisation measures to ease liquidity pressures including salary cuts for their employees, leave-without-pay options and laying off pilots and crew members to cut costs. Some have also sought deferment in their lease rental payments. Others have also entered into sale and leaseback transactions to shore up liquidity in the near term.
Coming to earnings, the industry will be adversely impacted in FY2022 due to lower revenues and higher ATF costs, more so demand recovery is likely to be delayed. The bearing on international travel will be more profound and long lasting, compared to domestic travel. The recovery in international travel is also contingent on the opening up of scheduled international operations by the Government of India, the macroeconomic shock to the global economy and the government-mandated travel restrictions and quarantine norms of various countries. Also, the recent threat of the new variant, which has pushed the resumption of scheduled international operations (earlier announced from December 15, 2021 onwards), has the potential to derail the domestic recovery too, if it becomes a source of fresh round of lockdowns/restrictions in the near term. The Indian aviation industry is estimated to report a net loss of ~Rs 250-260 billion in FY2022, due to elevated ATF prices and inability of the airlines to completely pass on the same to the passengers, thereby resulting in reduced RASK-CASK spreads.
Shamsher Dewan is vice-president & group head – corporate sector ratings, ICRA
Suprio Banerjee is vice-president & sector head – corporate ratings, ICRA