The Indian civil aviation industry (Air India, IndiGo, Jet Airways, SpiceJet) is likely to report an aggregate loss of about Rs 88 billion in FY2019. And during FY2019-21, the industry is expected to require a capital infusion of Rs 200 billion.
The domestic airlines industry, despite strong traction on growth, is facing challenging times. The industry is facing a double whammy with the increasing aviation turbine fuel (ATF) prices and the depreciation of the rupee against the dollar. Coupled with pressure on yields, this has aggravated the turbulence in the industry.
The domestic air passenger traffic has grown at a healthy compounded annual growth rate (CAGR) of 20.9% over FY2015-18. The growth trajectory has continued in the current year as well, with a robust year-on-year growth of 20.3% during 4M-FY2019. A healthy capacity addition of 16.9% during the period supported the growth to a large extent. With relatively low penetration levels, a favourable macroeconomic environment, support from the regulatory environment—i.e. the Regional Connectivity Scheme, or UDAN-RCS (Ude Desh ka Aam Naagrik)—and the development of new airports, ICRA expects that the domestic passenger traffic will continue to grow at a healthy pace (i.e. 15.5-16.5% per annum) over the medium term.
The industry’s capacity addition during FY2018 (available seat kilometres, or ASKM) was impacted by delays in aircraft deliveries on account of technical glitches with engines for the domestic market leader. The resolution of some of these technical problems has boosted the domestic capacity growth during the current year. ICRA estimates the domestic ASKM growth at about 18% in FY2019. The key drivers for the industry capacity growth continue to be the sizeable order book of airlines, which is in excess of 1,000 aircraft at present. Additional capacity deployment is also expected due to start of regional operations by IndiGo, Jet Airways and SpiceJet, as well as other regional carriers under the RCS phase I and II.
The passenger load factors (PLFs) for the domestic aviation industry have been on an uptrend, starting from FY2015, and the same continued during FY2018, with a superlative 87%, a year-on-year improvement of 270bps, and that too on a high base. The improved PLF, however, has been accompanied by lower yields, reflecting weak pricing power. The healthy capacity addition and demand underscored by low yields has resulted in continued improvement in PLF for the industry to 87.3% in 4M-FY2019.
ATF represents the single-largest cost element for airlines, accounting for 30-40% of the total operating expenses. As such, the profitability of airlines is significantly impacted by ATF prices, which have been subject to high volatility. Post the 10.4% increase in the average ATF prices in FY2018, they have further witnessed a year-on-year increase of 33.6% during April-September 2018. This is the combined impact of an increase in the US Gulf Coast jet fuel price and 6.3% depreciation of the rupee against the dollar during this period. Sequentially, ATF prices have increased by 12.3% in August 2018 over March 2018.
This has resulted in a notable increase in fuel cost per ASKM for the three listed airlines during Q1-FY2019. IndiGo, Jet Airways and SpiceJet witnessed an increase in fuel cost per ASKM to 1.52, 1.6 and 1.56 in Q1-FY2019, from 1.22, 1.27 and 1.25, respectively, during FY2018. However, despite this increase in ATF prices, most airlines have witnessed a pressure on their yields owing to increased competitive intensity fuelled by the capacity growth. The revenue per available seat kilometre (RASK) of Jet Airways thus declined to 4.1 during Q1-FY2019 from 4.21 during FY2018, while that of IndiGo and SpiceJet improved only marginally to 3.7 and 4.36, respectively, in Q1-FY2019, from 3.64 and 4.07, respectively, in FY2018.
Furthermore, 35-50% of the airlines’ operating expenses—including financial/operating lease payments, fuel expenses and a significant portion of aircraft and engine maintenance expenses—are denominated in the dollar. In addition, some airlines also have foreign currency debt. While the domestic airlines have a partial natural hedge to the extent of earnings from their international operations, overall they have net payables in foreign currency. The recent significant plunge in the value of the rupee has resulted in substantial increase in operating expenses, including mark-to-market losses on foreign currency debt and other payables.
The above two factors—the sharp rise in ATF prices and the depreciation of the rupee—have exerted significant pressure on operating profitability of airlines. As ATF prices have increased further during Q2-FY2019 and the rupee has depreciated even more, the RASK-CASK (cost per available seat kilometre) spread is expected to get squeezed further. While the airlines have resorted to rationalisation of non-fuel costs, these are not adequate to compensate the large hike in ATF prices.
The Indian aviation industry (consolidation of Air India, IndiGo, Jet Airways and SpiceJet) is, therefore, likely to report an aggregate loss of about Rs 88 billion in FY2019. Furthermore, some of the airlines have large capacity expansion plans, which may be either owned (through debt funding) or on operating lease. The industry is expected to require a capital infusion of about Rs 200 billion over FY2019-FY2021.
-Subrata Ray is Senior group vice-president, Corporate Sector Ratings, ICRA Ltd