ICRA indicates a negative business outlook towards Indian aviation

Indian airlines

Commenting on the monthly aviation industry’s monthly domestic passenger data for the month of September 2022, the aviation rating agency ICRA has indicated a negative business outlook while mentioning that rising prices of aviation turbine fuel (ATF) and the general inflationary environment continue to stifle the industry earnings.

ATF prices in October are currently higher by about 60% on a YoY basis. However, the same declined by 4.5% sequentially. While airlines have been increasing yields, the same has not been adequate to offset the impact of the rising ATF prices, in ICRA’s view.

The outlook reflects ICRA’s view that the financial performance of Indian airlines is likely to remain under pressure in the near term, even as recovery in domestic passenger traffic has been healthy. Elevated ATF prices will continue to pose a major threat to earnings and the liquidity profile of the airlines in the near to medium term.

ICRA indicates a negative business outlook towards Indian aviation

Also, the depreciation of the INR against the USD (which adversely impacts lease rentals, maintenance costs and other overheads) will have a major bearing on the airlines’ cost structure. This apart, likely 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.

The airlines’ efforts to maintain and/or grow their market share will limit their ability to expand margins in an elevated fuel cost environment.

While some airlines have adequate liquidity and/or financial support from a strong parent, which is likely to help them sustain over the near term, for others, the credit metrics and liquidity profile have been under significant stress over the past few years.

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Some airlines have also sought a deferment in their lease rental payments to improve their liquidity positions.

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To ease liquidity pressures, most airlines had undertaken several cost rationalisation measures, including salary cuts for their employees, leave-without-pay options and laying off pilots and crew members to cut costs during the pandemic. Some airlines have also sought a deferment in their lease rental payments to improve their liquidity positions.

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“The domestic aviation industry continues to witness recovery. Domestic passenger traffic for September 2022 is estimated at 103 lakhs, 2% higher compared to 101 lakhs in August 2022 and 46% higher in comparison to the domestic passenger traffic in September 2021. Though it fell short by 10%, compared to pre-Covid levels i.e., September 2019. For H1 FY2023 (April-September 2022), domestic passenger traffic is estimated at 627 lakhs, a YoY growth of 111%, and lower by 11% compared to April-September 2019 (pre-Covid levels).”

Suprio Banerjee, Vice President & Sector Head – Corporate Ratings, ICRA Limited

Others have also entered sale and lease-back transactions to shore up liquidity in the near term. However, until the RASK-CASK spread improves, airlines will require funding support to meet expenses.

ICRA expects a fast-paced recovery in domestic passenger traffic in FY2023, aided by normalcy in operations and widening vaccination coverage.

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