Amid decreasing ATF prices and increasing earnings, Indian airlines will witness growth in the short term, with credit rating agency ICRA maintaining a stable outlook for the aviation industry.

The agency said that due to a swift rebound in domestic passenger traffic throughout FY23 and the first nine months of FY24, with expectations of this trend persisting for the remaining part of the fiscal, the aviation industry has experienced a significant recovery. 

ICRA added that airlines have been able to command better pricing power, leading to increased yields surpassing pre-Covid levels, leading to “the revenue per available seat kilometre – cost per available seat kilometre (RASK-CASK) spread of the airlines. The momentum in air passenger traffic, witnessed in the current fiscal, is expected to continue in FY25, though further expansion in yields from the current levels may be limited”.

Despite a strong recovery in air passenger traffic and improved yields, monitoring yield movement is crucial due to high aviation turbine fuel (ATF) prices and the depreciation of the INR against the US dollar, both impacting airline costs. In FY23, average ATF price was ₹121,013/KL and ₹103,660/KL in 10 months of FY24, compared to ₹65,368/KL in pre-Covid FY20. Although ATF prices were sequentially lower since April 2023, they increased 1.3 per cent year-on-year in October 2023, before declining again from November 2023. In January 2024, ATF prices at 103,593/KL were 3.6 per cent lower sequentially and 6.4 per cent y-o-y.

However, “fuel cost accounts for 30-40 per cent of the airlines’ expenses, while 45-60 per cent of the operating expenses, including aircraft lease payments, fuel expenses and a significant portion of aircraft and engine maintenance expenses, are denominated in dollar terms. Further, some airlines have foreign currency debt. While domestic airlines have a partial natural hedge to the extent of their earnings from 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”, said ICRA.

Earnings recovery

Meanwhile, industry earnings recovery will be gradual due to high fixed costs. In FY23, the industry reported a net loss of ₹17,000 crore to ₹17,500 crore, an improvement from ₹21,700 crore in FY22. This was driven by better yield management, despite challenges like high ATF prices and INR depreciation. The net loss is expected to decrease to ₹3,000 crore to ₹5,000 crore in FY24 and FY25, thanks to healthy passenger traffic growth and continued pricing discipline amid industry consolidation, it said.