Domestic air passenger traffic continued its healthy growth rate in the current fiscal, with year-on-year growth of 22.5 per cent in H1 FY2017. Addition of capacity by the new airlines and expansion of capacity by the existing ones have resulted in 20.4 per cent YoY growth in the industry available seat kilometres (ASKM) in H1 FY2017, consequently intensifying the competition. The same prompted all the airlines to resort to variety of fare promotions in order to improve their passenger load factors (PLF). Moderation of jet fuel prices in FY2016 had provided a cushion to all the carriers, thereby enabling them to reduce fares, which in turn has supported significant passenger growth. However, there has been hardening of jet fuel prices starting from March 2016, where the prices have increased by ~ 41 per cent sequentially over the last nine months, which has eroded the cushion for the airlines.
As per ICRA analysis, the industry ASKMs are slated to grow at a CAGR of 20-25 per cent over the next three to four years. Sizeable order backlog of IndiGo, Go Air, Jet Airways and SpiceJet; expected fleet expansion of Vistara and AirAsia in order to target international flying; and start of new airlines like Air Carnival and Zoom Air will continue to drive the capacity expansion in the industry.
ICRA believes that passenger growth potential in India remains high in the long-term; however, due to lack of any immediate support from the core growth drivers, the demand pull and resultantly pricing power of the airlines would remain limited in the near term, thereby impacting profitability.
During H1 FY2017, the yields for airlines continued to remain under pressure due to increasing competition as well as pressure on maintaining utilisation of the enhanced capacities. Sharp reduction in global crude oil prices starting H2 FY2015, resulting in lower jet fuel prices, altered the operating environment for the airline industry, further supported by a steady recovery in domestic passenger traffic and cost rationalisation measures undertaken by the airlines, resulting in the industry reporting robust performance in FY2016. The aggregate loss for the Indian aviation industry had thus reduced from ~INR 70-75 billion in FY2015 to ~INR 1 billion in FY2016.
During H1 FY2017, however, the industry has reported moderation in operating margins, which is an indication of structural susceptibility of airlines to fuel price risks as emphasised by ICRA in the past. However, we expect the Indian aviation industry to report net profits of ~INR 1.2-1.5 billion for FY2017.
Subrata Ray, senior VP and head – corporate sector ratings, ICRA, said, “Capacity addition by incumbents and expected launch of operations by new carriers is expected to increase the competitive intensity in the domestic aviation industry going forward, resulting in significant over-capacity in the next two-three years if the demand growth is not sustained in the event of fare hikes due to increase in fuel prices. This makes it crucial for the airlines to remain focused on strict cost controls. The companies need to ensure strengthening their liquidity position to protect from unforeseen shocks such as sudden spikes in jet fuel prices, which can put negative pressure on operating cash flows. The challenge to recovery and profitability – other than an increase in fuel prices – is a failure to maintain pricing discipline.”
Overall, the prospects of Indian aviation industry are largely dependent on the movement in the crude oil prices and foreign exchange, in addition to the reform measures. In the near term, the balance sheets of Indian carriers are expected to continue to remain stressed-though improved from the current levels, until the carriers are able to reduce their debt burden through a combination of improvement in operating performance and/or by way of equity infusion. For the industry to grow sustainably, besides economic revival and pick-up in tourism demand, the government will also need to address India’s aviation infrastructure requirements and regulatory matters, which have constrained the performance of airlines. The National Civil Aviation Policy and the Regional Connectivity Scheme are steps in that direction, promising to strengthen the foundation for growth in the coming years.
