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Thursday, 19 July, 2018, 10 : 00 AM [IST]

ICRA: Aggregate industry loss of INR 24-25 bn in FY2018 to magnify to INR 36 bn in FY2019

The domestic air passenger traffic slowed down from Q4 FY2017 onwards, after reporting a robust Y-o-Y growth above 20% for eight quarters. The primary reasons for moderation in growth were slowdown in capacity addition by key players due to technical glitches faced by some of the airlines, efforts at improving yields by the airlines as well as high base effect.

Additionally, some of the smaller players had been wiped out during the period, moderating the growth marginally. The saving grace, however, was the robust passenger load factors (PLFs) registered on the back of adequate demand which supported the performance.

Explaining the causes further, Anand Kulkarni, Assistant Vice President & Associate Head - Corporate Sector Ratings, ICRA Ltd, says, “Industry dynamics turned benign during H1 FY2018, supported by a decline in aviation turbine fuel (ATF) prices during April-August 2017, and moderation in capacity addition due to technical issues with aircraft orders placed by various airlines, resulting in reduced competitive pressures and thus increased ability of the airlines to improve their yields. However, the ATF prices witnessed an increase of 27.0% between August 2017 and March 2018. Despite this increase in ATF prices and an increase in the domestic industry PLF to 87.0% during FY2018, most airlines have witnessed a decline in their yields during H2 FY2018. This has resulted in a higher than estimated aggregate loss for the Indian aviation industry to INR. 24-25 billion in FY2018.”

As per ICRA note, over FY2016 and FY2017, the industry available seat kilometer (ASKM) growth was primarily driven by the market leader, Indigo, which had a 41% of the industry capacity share. However, domestic ASKM growth of Indigo slowed down considerably to 10.3% in FY2018 from 28.1% in FY2017 due to delays in aircraft deliveries on account of technical glitches with engines as well as its increased focus on international operations. This was the key factor that resulted in a lower domestic ASKM growth of 15.1% in FY2018, as against 19.6% in FY2017.

As for the PLFs in the domestic aviation industry, it has been on an uptrend starting from FY2015 and the same continued during FY2018. The average PLF of the domestic airlines for the domestic operations during FY2018 was superlative at 87.0%, which is a Y-o-Y improvement of 270 bps, that to on a high base.

The ATF prices witnessed 35.4% increase as on March 2017 vis-à-vis March 2016, impacting the financial performance of the airlines during the year due to their inability to pass on the increased cost to the customers. While the same declined by ~8.0% to INR 51,640/ KL as on September 2017, partly on account of the appreciation of the Rupee against the US Dollar, it witnessed a significant Y-o-Y increase of 12.6% to INR 63,162/ KL as on March 2018. Overall, the average ATF prices during FY2018 were higher by 10.4% Y-o-Y. This is evident from the increase in fuel cost/ ASKM for the three listed airlines during FY2018.

Nevertheless, ICRA expects the domestic passenger traffic to continue to grow at a healthy pace of 15% per annum) over the medium-term due to conducive factors like relatively low penetration levels, favourable macro-economic environment, support from regulatory environment (i.e. regional connectivity scheme) and development of new airports. The growth will also be supported by phase-wise capacity addition by airlines as reflected by their large order book. However, airport infrastructure continues to remain a key bottleneck for the industry’s growth potential.

The ASKM growth in FY2019 is estimated to be 15-17%. The key driver for the industry capacity growth continues to be the sizeable order backlog of the industry. As on date, approximately 1,033 aircraft of various sizes and configurations, are on order by Indian airlines.

As for industry financials, Kinjal Shah, Vice President & Co-Head - Corporate Sector Ratings, ICRA Ltd, adds, “While growth prospects remain favourable, sharp rise in crude oil price and rupee depreciation are likely to exert pressure on operating profitability of airlines in the near-term, resulting in higher net loss of INR 36 billion in FY2019. While the strong passenger traffic growth will allow airlines to improve yields to offset cost pressures to some extent, the increase may not be adequate. Thus, the revenue per available seat kilometer (RASK) – cost per available seat kilometer (CASK) spread is expected to get squeezed. Furthermore, some of the airlines have large capacity expansion plans, which may be either owned (through debt funding) or on operating lease. Thus, the aggregate industry debt level is expected to increase to INR 665 billion by March 2019.”
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