Icra maintains negative outlook on Indian aviation

Currently, the daily domestic air traffic is around 95% of pre-covid level.

Elevated jet fuel prices and rupee depreciation continue to post major threat to the earnings and liquidity profile of airlines, Icra said. As per the latest revision, the price of aviation turbine fuel in India has jumped over 58% in the year so far to ₹1,20,362.54 per kilolitre in Delhi. The rupee has depreciated to nearly ₹80.8 per dollar now. A depreciation in rupee means higher costs for airlines as most of their expenses related to aircraft lease rentals, maintenance, and other overheads are dollar-denominated.

“Lately, the airlines have been steadily raising air fares, however, the same has not been adequate to offset the impact of the sharp rise in ATF prices,” the agency said.

In addition, the aviation market is also expected to see intense competition among airlines to gain and retain market share with the launch of Akasa Air and potential relaunch of Jet Airways. In a hostile cost environment, this will only put more pressure on the yield or the revenue earned per paying passenger flown per km for airlines in the industry, Icra said.

For April-September of FY23, the ratings agency has estimated that domestic yields have increased by around 30-35% over the pre-Covid levels.

In addition to the surge in airfares, delays in delivery of components and spares for aircraft and engines have been lately impacting the sector, thereby leading to grounding of certain aircraft for some domestic airlines and crippling the capacity deployment, Icra said.

Airlines are in discussions with original equipment manufacturers or OEMs for easing supply issues and are also looking at leasing of aircraft, including wet lease, to counter capacity constraints during the upcoming winter holiday season, Icra added.

The agency reiterated that airlines will require funding support to meet expenses until the revenue per available seat km-cost per available seat km (RASK-CASK) spread improves.

“Some airlines have also sought a deferment in their lease rental payments to improve their liquidity positions. Others have also entered sale and lease back transactions to shore up liquidity in the near term,“ ICRA added.

For October 2022, Icra has estimated the domestic air passenger traffic at around 114 lakh passengers, a sequential growth of nearly 10%, primarily driven by pent-up demand during the festive season. However, the demand was still 8% less than pre-covid level seen in October 2019. Similarly, the capacity deployment in October was 11% lower than pre-covid level.

It expects the Indian aviation industry to report a net loss of nearly ₹150-170 billion and debt levels of around ₹1,000 billion in FY2023.

“In the near term, the credit profile of Indian carriers will remain stressed until they are able to reduce their debt burden through a combination of improvement in operating performance and / or by way of equity infusion,” the ratings agency said.