ICRA’s outlook on the Indian aviation industry has been revised to Stable from Negative
In its monthly report on the aviation industry in India, ICRA has revealed that for May 2023, domestic air passenger traffic was estimated at ~131.8 lakh, ~2.3% higher than ~128.9 lakh in April 2023. Further, it witnessed a YoY growth of ~15%, compared to May 2022. Domestic passenger traffic in May 2023 was higher by ~8% compared to the pre-Covid levels (i.e. May 2019). The airlines’ capacity deployment in May 2023 was higher by ~1.4% than that of May 2022, reaching the pre-Covid levels (May 2019).
For FY2023, international passenger traffic for Indian carriers stood at ~239.4 lakh, thereby improving from the pre-Covid (FY2020) levels of ~227.2 lakh, although 8% lower than the peak levels of ~259.0 lakh of FY2019. Further, for April 2023, international passenger traffic for Indian carriers stood at ~21.8 lakh, higher than the pre-Covid (April 2019) levels of ~18.3 lakh by 20%.
Stable outlook on the Indian aviation industry – ICRA’s outlook on the Indian aviation industry has been revised to Stable from Negative in the recent past, on the back of fast-paced recovery in domestic passenger traffic in FY2023 and expected continuation of the same in FY2024. Moreover, the industry witnessed improved pricing power, as reflected in the improved yields and thus the revenue per available seat kilometre – cost per available seat kilometre (RASK-CASK) spread of the airlines. The same is expected to continue as the industry regains some pricing discipline, coupled with the sequential decline in aviation turbine fuel (ATF) prices as witnessed over the last five months and relatively stable foreign exchange rates.
Sequential decline in ATF prices; however, they still remain at elevated levels than pre-Covid era – Despite healthy recovery in passenger traffic, the domestic aviation industry continues to face challenges on account of elevated ATF prices and depreciation of the INR vis-à-vis the US$ compared to pre-Covid era, both of which have a major bearing on the airlines’ cost structure. The average ATF prices stood at Rs. 121,013/Kl in FY2023 and Rs. 90,431/KL in June 2023 compared to Rs. 64,715/ Kl in FY2020. Fuel cost accounts for ~30-40% of the airlines’ expenses, while ~35-50% of the airlines’ operating expenses – including aircraft lease payments, fuel expenses and a significant portion of aircraft and engine maintenance expenses – are denominated in US$ terms.
Furthermore, some airlines also have foreign currency debt. While domestic airlines also have a partial natural hedge to the extent of earnings from their international operations, overall, their net payables are in foreign currency. The airlines’ efforts to ensure fare hikes, proportional to their input cost increases, will be the key to expanding their profitability margins. This apart, the competitive landscape in the domestic aviation industry is set to change with the foray of new entrants and consolidation of Air India, Air Asia India and Vistara.
Gradual pace of recovery in earnings – The pace of recovery in industry earnings will be gradual owing to the high fixed-cost nature of the business. The industry is estimated to have reported a net loss of ~Rs. 110-130 billion in FY2023 due to elevated ATF prices twined with the depreciation of the INR against the US$. However, the same is much lower than the net loss of ~Rs. 235 billion in FY2022 and ICRA’s earlier estimated net loss of Rs. 150-170 billion in FY2023, primarily driven by improved ability of the airlines to shore up their yields without impacting demand. The net loss is further expected to reduce to Rs. 50-70 billion in FY2024 as airlines continue to witness healthy passenger traffic growth and improve their RASK-CASK spread through better pricing discipline
Select airlines face financial distress, stretched liquidity issues – While some airlines have adequate liquidity and/or financial support from a strong parent, which can help them sustain over the near term, for others, the credit metrics and liquidity profile will remain under stress over the near term, though better than over the past few years. The aircraft manufacturers are facing supply-chain challenges, resulting in the grounding of certain aircraft for some of the airlines. Following the challenges with respect to engines from Pratt & Whitney, Go Airlines (India) Limited has been forced to ground half of its fleet owing to faulty engines. Consequently, it started defaulting toward payments to vendors, aircraft lessors and received notices from the lessors seeking payment.
It also defaulted towards interest dues of the financial creditors as on May 4, 2023. The company has filed for voluntary insolvency before the National Company Law Tribunal (NCLT). The admission of the bankruptcy plea led to a moratorium on the airline’s assets, also prohibiting the lessor to repossess their aircraft. However, the lessors have appealed to the NCLAT challenging the NCLT order.
Mr. Suprio Banerjee, Vice President & Sector Head – Corporate Ratings, ICRA Limited said, “The domestic air passenger traffic for May 2023 is estimated at ~131.8 lakh, marginally higher by ~2.3% in comparison to ~128.9 lakh in April 2023. Further, it witnessed a YoY growth of ~15% in comparison to ~115 lakh in May 2022 and 8% higher than pre-Covid levels of ~122 lakh in May 2019. The airlines’ capacity deployment in May 2023 was higher by ~1.4% than in May 2022, thus reaching the pre-Covid levels of May 2019. It is estimated that the domestic aviation industry operated at a passenger load factor (PLF) of ~94% in May 2023, against ~83% in May 2022 and ~90% in May 2019 (pre-Covid levels).”
Banerjee added, “Despite a healthy recovery in passenger traffic, the domestic aviation industry continues to face challenges on account of elevated ATF prices and depreciation of the INR vis-à-vis the US$ compared to the pre-Covid era, both of which have a major bearing on the airlines’ cost structure. While the ATF prices have witnessed a sequential decline over the past five months, with June 2023 witnessing a sequential and a YoY decline of 7% and 27%, respectively, they still remain at elevated levels when compared to the pre-Covid era.
The airlines’ efforts to ensure fare hikes proportionate to their input cost increases, will be key to expanding their profitability margins. In addition, supply-chain challenges being faced by airlines, which include the availability of spare parts and engine issues have recently plagued the sector, resulting in the grounding of certain aircraft for some airlines, thus impacting their overall capacities. This also negatively impacts the cash flow generation of the airlines, given the high fixed-cost nature of the business.”