Aviation sector continues to face challenges as it goes in 2022

Turbulent times for the Indian aviation industry continued in 2021 with the sector expected to report a net loss of ₹25,000–26,000 crore for the fiscal, says Suprio Banerjee, Vice President & Sector Head at ratings agency ICRA Limited. While the long term growth prospect for the sector remains intact, the temporary turbulence is expected to continue for at least another 18 months. The threat of Omicron delaying recoveries cannot be ruled out either. In an interview with BusinesssLine , Banerjee lists out the immediate challenges for the aviation industry, the outlook and recovery details. Excerpts:

How did you arrive at the loss that the sector is expected to end FY22 with?

This is based on air passenger traffic, which continues to be lower than pre-Covid levels. Scheduled international operations continue to remain suspended, which will lead to further delay in recoveries.

Moreover, the single biggest challenge for airlines is rising ATF or air turbine fuel. Year-on-year (from December 2020 to December 2021) ATF prices are up 67 per cent. The ATF accounts for 35–40 per cent cost of airlines and is a determining factor towards carriers’ profitability metrics.

In short, the sector continues to face challenges even as it goes into 2022. And recovery is work-in-progress.

So what’s the trend on ATF price movement?

The ATF is directly linked to crude price movements.

After touching a low of $19 per barrel in April 2019 (the sharpest decline since Q4 CY2018), crude oil prices have been gradually going up and currently range around $78 per barrel. This has led to a rise in ATF prices, thereby hitting the aviation industry hard. The prices have sequentially been increasing since July FY20 and continued in FY21 with the exception of April, September and December 2021, when it partially declined on a sequential basis.

On a y-o-y bases, prices were higher from March to November 2021, with March witnessing the lowest hike at 3 per cent. Year-on-year growth in April was 59.8 per cent; in May, 103.4 per cent; in June, 86.3 per cent; July, 59.7 per cent; August, 55.3 per cent; September, 54.6 per cent; October, 78.6 per cent; and November, 94.4 per cent.

For 2022, it is difficult to predict a trend given its linkage to several factors. But for airlines, the ATF will continue to be something they need to watch out for.

Are you expecting the Centre to step-in?

For petrol and diesel, the Centre and State governments have both announced cuts in excise and VAT. So, one needs to watch out on the ATF front too — what kind of relaxations, if any, are laid down by the government. Some States have already announced concessions in ATF tax. For instance, Tripura announced collecting ATF tax of just 1 per cent, down from the previous 16 per cent. So some movement is there.

What is the outlook on passenger traffic movement?

Domestic passenger traffic growth in December is estimated to be in the range of 111 lakh, signaling a sequential or month-on-month improvement of 6 per cent. November traffic was around 105 lakh, a 17 per cent growth over October 2021 and a y-o-y growth of 65 per cent. Airlines’ capacity deployment for November was around 49 per cent higher year-on-year. On a sequential basis, departures in November were higher by 12 per cent, as Covid-19 infections demonstrated a downward trajectory.

So, if we look at the trends, a decline in Covid-19 cases from June onwards and lifting of restrictions aided the domestic passenger traffic growth sequentially, with a growth of 61 per cent in July, 34 per cent in August, 5 per cent in September and 27 per cent in October. However, the same (domestic passenger growth) continues to remain lower than the pre-Covid levels, estimated at around 51 per cent .

So will Omicron and rising Covid cases slow down the passenger numbers?

A sequential look at numbers show passenger growth for December has slowed vis-à-vis November. But whether that can be directly linked to Omicron or not is something that we cannot say. There is a high base effect (month-on-month) that comes into play because of the continuing festive season.

State governments are announcing curbs and restrictions in view of rising Covid cases. So we would now need to watch to see the impact of the virus on forward bookings. If there are lockdowns and restrictions for long, it will definitely derail domestic passenger traffic recovery; and international travel already remains suspended.

What is the outlook on recovery then?

As demand recovery will be gradual, passenger traffic will likely not revert to pre-Covid status before FY24. The recovery in domestic air passenger traffic depends on accelerated coverage of the vaccine, demand for leisure or business travel without fear of restrictions, recovery in macro-economic growth, and no further lockdowns or restrictions due to any new variants.

Bearing on international travel will be more profound. Opening up of scheduled international operations by the Centre, macroeconomic shock to the global economy and government-mandated travel restrictions and quarantine norms of various countries will have to be factored in there.

So does this impact capex plans? Or will carriers’ delay expansion and fund raising?

As of now, none of the major players have announced deferment of capex plans or fund raising plans. However, industry players would need more funds to support operational costs. Debt levels, expected to be at around ₹120,000 crore (including lease liabilities) for FY22, is likely to remain high, with industry likely to resort for an additional funding support of ₹45,000–47,000 crore over FY22 to FY24.

While some airlines with strong parents will be able to tide over the liquidity crunch and sustain over the challenging period, others are likely to face significant stress. Almost all key airlines have announced fund-infusion plans either from the parent or through the QIP/IPO route. Most airlines have also undertaken several cost-rationalisation measures to ease liquidity pressures. Others have also entered into sale and leaseback transactions to shore up liquidity in the near term.

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