While traffic trends are encouraging in India, the latest estimates by corporate rating firm ICRA suggest that airlines will continue to remain under financial stress. Several challenges, including fuel prices and weakening currency, will likely offset any revenue growth coming from increasing passenger numbers.
Not there yet
There are apparent signs of aviation recovery in India. Airlines have begun hiring aggressively, passenger footfall in many airports is approaching or even crossed the pre-pandemic mark, and even the aviation regulator is planning to hire more staff to keep up with the growing fleet.
In August, more than 10 million passengers took to the skies, filling up an average of 75% of airplane seats on offer. In September, airlines deployed almost 27% higher capacity than in the same period last year. The load factors for most airlines are also hovering in the 80% region.
But according to the independent credit rating agency ICRA, all these indications are not likely to translate into profits for Indian carriers.
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Airlines in the country continue to face several challenges affecting their overall financial health. Fuel price remains a constant hurdle, with Suprio Banerjee, Vice President & Sector Head – Corporate Ratings at ICRA, adding that the airlines’ efforts to maintain and/or grow their market share will hamper their ability to increase margins with such fuel prices.
The weakening of the Indian rupee against the US dollar is also burdening the airlines and adding to their operational costs. The Indian rupee has slumped to a record low in recent times, with a dollar now amounting to more than ₹80.
The entry of Akasa Air and the soon-to-be-launched Jet Airways will further intensify competition in the country. We’ve already seen fares getting super competitive on routes where Akasa is flying, and for airlines, which already operate on razor-thin margins, a price war is the last thing they need.
ICRA mentioned in its report,
“A quick recovery in the domestic passenger traffic is expected in FY2023, aided by normalcy in operations and a waning pandemic. However, the earnings recovery for domestic airlines will be slow-paced due to elevated ATF prices in addition to the rupee depreciation against the US dollar amid a heightened competitive environment.”
Cash reserves are a problem, too
Aviation firm CAPA also estimates that domestic airlines in India could face losses of around $1.4-1.7 billion. It highlighted that carriers in the country operate with very low cash reserves and that policies need to be in place to change this.
Kapil Kaul, CEO for South Asia at CAPA, noted that even before the pandemic, all Indian airlines except one had cash reserves for just 15 days of operations. He stressed that globally, most airlines are required to have cash reserves of at least 4 to 6 months, with their AOP renewed every year. In India, airlines get their AOP renewed every five years.
Kaul warned that “the more we celebrate profit-less growth, the more we will be away from the kind of reforms the sector requires. We continue to play around at the edges, not looking deep enough to change the sector.”
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Source: PTI via Business Standard, IANS via Business Standard