Aviation sector going through tough times: ICRA

Severely mauled by the twin blows of a significant increase in aviation turbine fuel (ATF) prices and the depreciation of the Rupee against the US Dollars, the Indian aviation industry continues to grapple tough times in the current fiscal.

On top of that, low pricing power of the industry and inability to raise fares has resulted in mounting losses for the airlines, according to rating agency ICRA.

“The industry’s financial health has nosedived, with the three listed airlines having reported a combined net loss of Rs. 36.4 billion in H1 FY2019. That means the three listed airlines together have lost around Rs. 20 crore per day during H1 FY2019," Kinjal Shah, Vice President and Co-Head, Corporate Sector Ratings, ICRA.

“The overall debt levels in the industry remain high and would require equity infusion to bring the same to reasonable levels. ICRA believes an equity infusion of around Rs. 350 billion would be needed over the next 3-4 years," she added.

While the average ATF prices have witnessed a year over year increase of around 35% during April-November 2018, the average Rupee depreciated by 7.8% against US Dollars during this period, an ICRA press statement said.

This has resulted in an increase in the CASK of the airlines, not buttressed by an increase in yields. In fact, yields have declined for most airlines despite the surging costs. This is due to the price-sensitive nature of the industry which is plagued by rising capacities, with India’s aviation sector likely to have significant over-capacity in the next two-three years.

ICRA noted that while the domestic passenger growth continues to be robust, supported by an underpenetrated aviation market, growing economy and rising population, the challenges are equally confounding as airlines resort to predatory pricing so as to maintain their passenger load factors (PLFs) in an environment of increasing capacities. This has resulted in deterioration in the industry economics, and thus, financial stress.

Over the last two years, four airlines (Air Carnival, Air Costa, Air Pegasus, Zoom Air) have already suspended their operations.

In order to contain further losses, the domestic airlines have resorted to several measures, which include among others, rationalisation of non-fuel costs, network review, rationalisation of routes, and manpower reduction. Airlines are also inducting fuel-efficient aircraft in their fleet. Some airlines have also sought approval for deferment of payments to the vendors and lessors, and are also delaying on payment of salaries to employees, so as to tide over their short-term cash flow mismatches.

Airlines are also focussing on increasing their ancillary revenues, which currently contribute to less than 10% of the revenues of domestic airlines, as against much higher share of revenues (10-20%) in developed markets. However, these measures are not adequate to compensate for the large hike in ATF prices and the increase in costs due to the Rupee depreciation.