The path to net profit for the industry will not be possible for Jet Airways, Air India and Spice Jet, which account for 75% of the commercial aircraft fleet and over 93% of the sector’s debt
Domestic airlines are expected to post an operating profit of Rs 8,100 crore in the financial year FY16, from a Rs 1,500-crore loss in FY14, on the back of an improvement in passenger demand and subsequently passenger load factors (PLFs), a stable rupee-dollar exchange rate and a fall in the crude oil prices, a research report by Crisil Research released on Tuesday said.
The report states the domestic air traffic, which has remained almost flat at about 6-crore passengers over the past couple of years, is expected to reach 7.4 crore by FY16, helped by economic recovery, relatively smaller price hikes and increased connectivity.
In the same period, air ticket prices are expected to see a modest growth as crude oil prices decline and the rupee stays largely stable. These developments along with the launch of new routes and direct connectivity between smaller towns will help passenger traffic growth.
The report added air turbine fuel (ATF) prices during FY16 will remain 25% lower than the FY14 price level.
“We expect average passenger traffic growth to be about 10-12% over the next couple of years,” Prasad Koparkar, a senior director, industry and customised research, Crisil Research, said. “Falling crude prices is a big positive. We expect about 25% lower air turbine fuel prices for FY16 compared with FY14. The fall is accompanied by an improving demand scenario, unlike FY10 when the players were unable to benefit significantly due to a weak demand,” Koparkar added.
The report said that despite the entry of new players in the domestic market, competition is expected to be moderate. The passenger load factor (PLF), across airlines, which stood at 73% in FY14 will see a huge jump by FY16 to 78%, as more people opt for air travel, said the report.
The report, however, adds that despite the sector’s losses in FY16, airlines with stronger capital structure would turn profitable. But the path to net profit for the industry will not be possible for three carriers — Jet Airways, Air India and Spice Jet — which account for about 75% of the commercial aircraft fleet in India and over 93% of the sector’s debt of Rs 70,500 crore as of March 2014.
“About 15% of their revenues are used to pay interest on debt. Till there is a recapitalisation, the sector is unlikely to fly to a net profit at an aggregate level any time soon. Airlines with lower debt will turn profitable,” Rahul Prithiani, director, Industry Research, Crisil Research, said.