Domestic airlines have been increasing yields, but the same has not been adequate to offset the impact of the rising ATF prices, according to ICRA. However, a quick recovery in domestic passenger traffic is expected in FY23, helped by normalcy in operations and the waning pandemic. “The earnings recovery for domestic airlines, however, will be slow-paced due to elevated ATF prices in addition to the rupee depreciation against the US$ amid a heightened competitive environment,” ICRA said in its report. The ratings agency continues to maintain a negative outlook on the industry as the financial performance of Indian air carriers is likely to remain under pressure in the near term, even as recovery in domestic passenger traffic has been healthy.
India’s aviation industry continues to witness recovery, with domestic passenger traffic for August 2022 estimated at around 102 lakh, around 5% higher compared to 97 lakh in July and 52% higher in comparison to the domestic passenger traffic recorded in the same period last year. Despite the recovery, the traffic fell short by 14%, compared to pre-Covid levels recorded in August 2019. For April-August, domestic passenger traffic is estimated at around 524 lakh, a 131% on year-growth. Even after more than 100% surge in these five months, the air traffic remains 11% lower compared to what it was pre-pandemic in April-August 2019.
Elevated fuel price to earnings recovery in FY23, Rupee depreciation among key headwinds
According to Suprio Banerjee, Vice President & Sector Head – Corporate Ratings, ICRA, a steady rise in prices of aviation turbine fuel (ATF) and a general inflationary environment continue to dampen the industry earnings. Elevated ATF prices are expected to pose a major threat to earnings and liquidity profile of the airlines.”The airlines’ efforts to maintain and/or grow their market share will limit their ability to expand margins in an elevated fuel cost environment,” ICRA noted.
Also, the depreciation of the Rupee against the US dollar (which adversely impacts lease rentals, maintenance costs and other overheads) is also likely to have a major bearing on the cost structure of airlines. This apart, the probable near-term relaunch of Jet Airways and the entry of low-cost domestic carrier, Akasa Air, will further intensify competition in the domestic aviation industry.
Pace of recovery in industry earnings to be sluggish
According to the agency report, while a meaningful improvement in passenger traffic is expected in the current financial year, the pace of recovery in the industry earnings will be sluggish and the industry is expected to incur a net loss of Rs 150-170 billion owing to elevated fuel costs. “However, this will be notably lower compared to the estimated net loss in FY22, primarily driven by a recovery in passenger traffic and lower interest burden, following the significant reduction in Air India’s debt before the divestment by the Government of India,” it said adding that the debt levels (including lease liabilities) are expected to be Rs 1,000 billion in FY23.
Airfare hike not enough to offset high ATF prices; limited scope for further hikes amid intense competition
Lately, several airlines have been steadily increasing airfares after the government removed the cap. However, the same has not been adequate to offset the impact of the sharp rise in ATF prices, according to ICRA. The domestic yields in Q1 FY23 are expected to have increased by 25-30% over the pre-Covid levels in ICRA’s view. “However, further sharp airfare hikes will be deterred by the intense competition and endeavour of the airlines to maintain and/or expand their market shares,” the agency said.