The domestic air passenger traffic was estimated at ~124.8 lakh, ~3.2% higher than ~121.0 lakh in July 2023. Further, it witnessed a YoY growth of ~23%. Domestic passenger traffic in August 2023 was also higher by ~6% compared to the pre-Covid levels (i.e. August 2019). Domestic air passenger traffic in 5M FY2024 (April-August 2023) was 631.77 lakh, a YoY growth of 20% and ~7% higher than pre-Covid levels (i.e. April-August 2019). The airlines’ capacity deployment in August 2023 was higher by ~10% than that of August 2022 and lower by 1% in comparison to the pre-Covid levels (August 2019). Further, for 4M FY2024, the international passenger traffic for Indian carriers stood at ~92.5 lakh, a YoY growth of 32%, and higher than the pre-Covid (April-July 2019) levels of ~72.4 lakh by 28%.
– Stable outlook on the Indian aviation industry – ICRA’s outlook on the Indian aviation industry is Stable on the back of the fast-paced recovery in domestic passenger traffic in FY2023 and expectations of the trend continuing in FY2024. Moreover, the industry witnessed improved pricing power, reflected in the improved yields and thus the revenue per available seat kilometre – cost per available seat kilometre (RASK-CASK) spread of the airlines. The same is expected to continue with a YoY decline in aviation turbine fuel (ATF) prices since April 2023 and the relatively stable foreign exchange rates.
– Sequential increase in ATF prices; remain at elevated levels vis-a-vis pre-Covid levels – Despite a healthy recovery in air passenger traffic, the domestic aviation industry continues to face challenges on account of elevated ATF prices and depreciation of the INR vis-à-vis the US$ compared to the pre-Covid levels, both of which have a major bearing on the airlines’ cost structure. The average ATF prices stood at Rs. 121,013/KL in FY2023 and Rs. 98,892/KL in 6M FY2024 compared to Rs. 64,715/ KL in FY2020. Fuel cost accounts for ~30-40% of the airlines’ expenses, while ~45-60% of the airlines’ operating expenses – including aircraft lease payments, fuel expenses and a significant portion of aircraft and engine maintenance expenses – are denominated in US$ terms. Further, some airlines have foreign currency debt. While domestic airlines have a partial natural hedge to the extent of earnings from their international operations, overall, their net payables are in foreign currency. The airlines’ efforts to ensure fare hikes, proportionate to their input cost increases, will be the key to expand their profitability margins.
– Gradual pace of recovery in earnings – The pace of recovery in industry earnings is likely to be gradual owing to the high fixed-cost nature of the business. The industry is estimated to have reported a net loss of ~Rs. 170-175 billion in FY2023 due to elevated ATF prices twined with the depreciation of the INR against the US$. However, it is much lower than the net loss of ~Rs. 217 billion in FY2022, primarily driven by the airlines’ improved ability to shore up their yields without impacting the demand. The net loss is further expected to reduce significantly to Rs. 30-50 billion in FY2024 as airlines continue to witness healthy passenger traffic growth and maintain pricing discipline, post the ongoing consolidation in the industry.
– Select airlines face financial distress, stretched liquidity issues – While some airlines have adequate liquidity and/or financial support from a strong parent, supporting their credit profile, the credit metrics and liquidity profile of the others will remain under stress over the near term, notwithstanding some improvement relative to the last few years. Aircraft manufacturers are facing supply-chain challenges, resulting in the grounding of certain aircraft by some airlines. Go Airlines (India) Limited was forced to ground half of its fleet owing to the faulty engines supplied by Pratt & Whitney. Consequently, it started defaulting in its payments to vendors, aircraft lessors and received notices seeking payment. It also defaulted in paying the interest dues of the financial creditors as on May 4, 2023. The company had filed for voluntary insolvency with the National Company Law Tribunal (NCLT). The admission of the bankruptcy plea led to a moratorium on the airline’s assets, also prohibiting the lessors to repossess their aircraft. However, the lessors appealed to the NCLAT, challenging the NCLT order. On May 22, 2023, the NCLAT upheld the order passed by NCLT. Further, on July 5, 2023, the Delhi High Court allowed leasing companies to inspect the aircrafts and carry out maintenance work on their fleets. Go Air had filed an appeal against the same with the Supreme Court. However, the Supreme Court dismissed Go First’s plea and ordered in favour of the leasing companies. Go First has now lost its airline code ‘G8’ assigned by the International Air Transport Association (IATA) for being non-operational since May 2023.