High ATF prices will slow aviation industry recovery, domestic airlines will remain under pressure

National airlines increased their yields, but that was not enough to offset the impact of higher ATF prices, according to ICRA. However, a rapid recovery in domestic passenger traffic is expected in FY23, aided by normal operations and the decline of the pandemic. “Recovery of domestic airline profits, however, will be slow due to high ATF prices in addition to the depreciation of the rupee against the US dollar amid an increased competitive environment,” ICRA said in its statement. report. The rating agency continues to maintain a negative outlook on the industry as the financial performance of Indian airlines is expected to remain under pressure in the near term, even though the recovery in domestic passenger traffic has been healthy.

India’s aviation industry continues to experience a recovery, with domestic passenger traffic for August 2022 estimated at around 102 lakh, around 5% up from 97 lakh in July and 52% up from domestic passenger traffic recorded at the same time last year. Despite the recovery, traffic has fallen by 14%, compared to pre-Covid levels recorded in August 2019. For April-August, domestic passenger traffic is estimated at around 524 lakh, or 131% annual growth. Even after an increase of more than 100% in these five months, air traffic remains 11% lower than it was before the pandemic in April-August 2019.

Rising fuel prices and profit recovery in FY23, rupiah depreciation among key headwinds

According to Suprio Banerjee, Vice President and Sector Head – Business Valuations, ICRA, a steady rise in aviation turbine fuel (ATF) prices and a general inflationary environment continue to dampen industry profits. High ATF prices are expected to pose a major threat to airlines’ earnings and liquidity profile. “Airline efforts to maintain and/or grow market share will limit their ability to increase margins in a high fuel cost environment,” ICRA noted. .

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In addition, the depreciation of the rupiah against the US dollar (which has a negative impact on rents, maintenance costs and other overheads) is also likely to have a major impact on the cost structure of airlines. That aside, the likely near-term revival of Jet Airways and the entry of low-cost domestic carrier Akasa Air will further intensify competition in the domestic aviation industry.

The pace of the sector’s earnings recovery will be slow

According to the agency’s report, while a significant improvement in passenger traffic is expected in the current fiscal year, the pace of recovery in industry profits will be slow and the industry is expected to suffer a net loss of Rs 150-170 billion due to high fuel costs. “However, this will be significantly lower than the estimated net loss for FY22, primarily due to a recovery in passenger traffic and lower interest expense, following the significant reduction in debt of Air India before the divestment by the Indian government,” he said. adding that debt levels (including lease debt) are expected to be Rs 1 trillion in FY23.

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The increase in airfares is not enough to compensate for the high prices of the ATF; limited range for new rides in the midst of intense competition

Lately, several airlines have steadily increased their airfares after the government removed the cap. However, this was not enough to offset the impact of the sharp rise in ATF prices, according to ICRA. According to ICRA, domestic yields in the first quarter of FY23 are expected to be up 25-30% from pre-Covid levels. “However, further significant airfare increases will be discouraged by intense competition and airline efforts to maintain and/or expand market share,” the agency said.

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