Higher fuel costs, currency losses may push domestic airlines deeper into red: Crisil

Higher fuel costs and currency losses are expected to push airlines deeper into the red this fiscal, reversing a three-year trend, Crisil Rating said on Thursday.

“At an estimated ₹9,300 crore, the industry’s losses at EBIT (earnings before interest and tax) level would surpass the ₹7,348 crore reported in fiscal 2014. That was followed by three good years through fiscal 2018, when carriers reeled in aggregate profit of ₹4,000 crore on average at the EBIT level,” Crisil Rating said in a statement.

The agency has listed a number of reasons why the domestic airline industry is facing such a tough situation including the fact that with aviation turbine fuel (ATF) prices expected to average 28 per cent higher on-year compared with fiscal 2018 and fuel accounting for 35-40 per cent of the total cost of airlines, the impact will be significant. Another headwind is the significant fleet addition planned in the near-term, which will lead to capacity addition of over 20 per cent.

The agency says that while the government has taken some measures to support the industry by lowering the excise duty levied on ATF by 300 basis points to 11 per cent, this will not materially curb the losses.

What adds to the misery of the airline industry is that aircraft, engine rentals and maintenance costs, which are denominated in dollars, together account for another 30-35 per cent of the costs. The blow on this count is also expected to be severe given that the rupee has depreciated 13 per cent against the dollar since March this year.

“Almost two-thirds of an airline’s cost, and therefore profitability, is susceptible to fluctuations in forex rates and ATF prices,” said Sachin Gupta, Senior Director, Crisil Ratings. “To offset the increase in operating cost, the industry will have to raise average fares by 12 per cent — that, too, assuming there is no change in the passenger load factor (PLF). But the aggressive expansion plans of carriers and the race to maintain high PLFs will keep competitive intensity high and limit their ability to increase fares.” Despite annual capacity growth of 15 per cent in the past three fiscal, PLFs increased because passenger growth was faster at 18 per cent.

Another headwind for fare hikes is the significant fleet addition planned in the near-term, which will lead to capacity addition of over 20 per cent. Such a sharp increase in supply will keep the competitive intensity high and will constrain carriers’ ability to undertake fare hikes to pass on the increase in operating costs fully.

This was evident in the first quarter of fiscal 2019 when, despite a 12 per cent rise in ATF prices, only one of the three listed players was able to increase yields, and that by just 4 per cent. Yields are unlikely to have increased in the second quarter, which is traditionally weak.

Furthermore, the depreciation in the rupee will translate into higher debt liability for the airlines.

“Airlines have sizeable foreign currency debt, while their revenues are largely earned in rupees,” said Nitesh Jain, Director, Crisil Ratings. “With around 73 per cent of their debt denominated in foreign currency, the debt liability of the three listed airlines (aggregate market share of 71 per cent) will go up by 10 per cent this fiscal.”

The agency believes that the airlines’ credit profiles will remain under pressure over the near-to-medium term on account of significant increase in their operating costs and limited ability to pass on cost increases to customers because of intense competition. Further, full service carriers will feel a much sharper impact than low-cost carriers.

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