Despite increasing passenger traffic and an overall improvement in load factors, airlines operating in India are likely to suffer heavy losses this season, owing to low fares and high fuel prices.

Analysts believe the yields will continue to be low this year, putting immense pressure on margins.

“While growth prospects remain favourable, a sharp rise in crude oil price and rupee depreciation are likely to exert pressure on the operating profitability of airlines in the near term, resulting in higher net loss of about ₹3,600 crore in FY19,” said Kinjal Shah, Vice-President and Co-Head - Corporate Sector Ratings, ICRA Ltd.

While the strong passenger traffic growth will allow airlines to improve yields to offset cost pressures to some extent, the increase may not be adequate, ICRA said. This in turn will squeeze the RASK-to-CASK spread. (While RASK stands for revenue per available seat km, CASK is cost per available seat km).

Improved PLF

“Also, some of the airlines have large capacity expansion plans, which may be either owned (through debt funding) or on operating lease. Thus, the aggregate industry debt level is expected to increase to about ₹66,500 crore by March 2019,” Shah said.

Monsoon is typically an off-peak season for the aviation industry. However, demand continued to increase this year as more people started taking flights for the first time, driven by several new airports that have started operations over the past year. Although this helped improve the passenger load factor (PLF) for all the major airlines, higher fuel costs coupled with aggressive price wars dampened the impact.

Indigo, the largest domestic airline with over an 41 per cent marketshare, began to offer fares from ₹1,999 onwards on select routes while full-fare carrier Jet Airways cut fares by 25-30 per cent. The discounts are expected to hit the profitability of both the airlines.

“The aviation market is growing rapidly. So, despite increased costs, airlines are willing to take a hit on their margins for long-term growth,” said Aditya Aggarwal, Head of Corporate Strategies at Cleartrip. “We have not seen airlines passing on the fuel price increase to customers.”

Analysts are, however, hopeful that a further increase in PLF will help contain airlines’ losses.

Capacity addition

ICRA expects domestic passenger traffic to continue to grow at a healthy pace of about 15 per cent per annum over the medium term, thanks to factors such as relatively low penetration levels, favourable macroeconomic environment, regulatory support (like regional connectivity scheme UDAN) and the development of new airports. The growth will also be supported by phase-wise capacity addition by airlines as reflected by their large order book. However, airport infrastructure continues to remain a key bottleneck.

The key driver for capacity growth continues to be the sizeable order backlog of the industry. As on date, approximately 1,033 aircraft of various sizes and configurations are on order by Indian airlines.

“Crude oil prices are expected to hover around $70 a barrel in FY19, compared to $55 in FY18. Crisil Research expects the industry’s operating margins to come down to 4-6 per cent in FY19, against an estimated 8-10 per cent in FY18, as the fares are expected to increase by 3-5 per cent during the fiscal. However, a rise in PLFs is expected to arrest the fall in margins,” said Hetal Gandhi, Director, Crisil Research.

For Q1 of FY19, Crisil Research expects the operating margins of listed players (Indigo, Jet Airways and SpiceJet) to hover around 4 per cent. Their revenues are expected to increase about 16 per cent YoY led by a 18-20 per cent rise in domestic passenger traffic and a marginal rise in domestic realisations.

On the international front, while the listed players are likely to see a 12-13 per cent growth in passenger traffic, fares are expected to be under pressure.

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