Improved operating performance along with reduced losses, primarily due to reduced jet fuel prices, is estimated to have reduced the industry debt to ~Rs. 580-600 billion as of March 2016 from ~Rs. 700 billion as of March 2016. This has also been supported by the ~Rs. 12-billion initial public offering of Indigo, which has pared the debt levels. However, overall, the cash reserves of the airlines have dwindled and raising equity capital and re-financing debt obligations have become difficult for some carriers. Among airlines, full service carriers (FSCs) have been impacted the most, owing to their aggressive debt-funded capacity expansion plans, in-organic investments and higher fixed costs.
ICRA expects passenger growth to continue to remain robust at ~20-25% in FY2017, even if the PLFs are maintained at the current levels. The domestic airlines are likely to add ~55 new aircraft during FY2017 as against ~33 added during FY2016. The addition of aircraft in the fleet, coupled with improved network planning and operational efficiencies, are likely to boost overall industry capacity, with the industry ASKMs expected to report strong double digit growth during FY2017.
While ICRA expects the domestic airlines to continue to sustain the improved performance in FY2017, on account of favourable jet fuel pricing environment and the improving growth in passenger traffic, the Indian aviation industry is still subject to ongoing structural challenges and intense competition is placing pressure on yields. The Indian carriers have been under severe financial stress due to a combination of weak past operating performance and high investment requirements. ICRA estimates that despite improved operating performance, the Indian aviation industry would continue to have significant funding requirements in the near term until the carriers are able to significantly reduce their debt levels through a combination of improving their operating performance and / or an equity infusion.
According to Subrata Ray, Sr.Vp, Co-head Corporate Sector Ratings, ‘’Overall, the prospects of the Indian aviation industry in the near to medium term are largely dependent on the movement in the crude oil prices and foreign exchange, in addition to reform measures. However, underpinned by the improving operating performance, the balance sheets of Indian carriers are expected to improve in FY2017.’’
Currently, the airlines are providing deep discounts, by utilising the buffer provided by lower fuel prices, and maintaining healthy PLFs. The current scenario of comparatively steady yields and lower costs has given rise to some improvement in revenue per available seat kilometre (RASK)-cost per available seat kilometer (CASK) spread. Despite the benefits of low fuel price, which is unlikely to change anytime soon, ICRA believes that sustainable improvement in the cost structures and the underlying demand, backed by recovery in business and tourism, remain critical points for long term sustainability of domestic airlines.
Further, with rising competition, ICRA believe a strategy revisit by the airlines is necessary to maintain market position, possibly by offering differentiated services, better connectivity and competitive pricing.
Improving credit profile of Indian airlines; however, sustainability hinges on the airlines’ ability to effect a substantial debt reduction either through improvement in operating performance or by way of equity infusion
With new carriers expected to enter the runway, ICRA expects rigorous cost rationalisation measures, right from phasing out loss-making routes, to renegotiation of maintenance contracts, and rationalisation of manpower should help domestic airlines improve their operating performance to some extent; however, the jet fuel prices and the movement of the rupee against the US dollar would play a critical role in facilitating the same. Further, regulatory policy changes like possible cut in ATF taxes and lifting of the ‘5 Years/20 Aircraft’ rule2, will significantly address the profitability pressures faced by domestic airlines. The companies need to ensure adequate liquidity position to protect themselves from unforeseen shocks such as slowdown in air travel or sudden spikes in jet fuel prices, which can put negative pressure on operating cash flows. The challenge is maintaining a pricing discipline under competitive pressures and cost headwinds – e.g. possible fuel price rise, and staying on the path to recovery and profitability.
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