Indian Aviation Industry Positioned for Growth: Decreasing ATF Prices and Strong Earnings Outlook

The Indian aviation industry is set to experience a short-term surge, propelled by a combination of falling aviation turbine fuel (ATF) prices and rising earnings. Credit rating agency ICRA has maintained a stable outlook for the sector, citing a swift rebound in domestic passenger traffic throughout FY23 and the initial nine months of FY24. This positive trajectory is expected to persist, driving a significant recovery in the aviation industry.

1. Market Recovery and Revenue Enhancement:

ICRA highlights the industry’s remarkable recovery, attributing it to the rebound in domestic passenger traffic. This rebound has empowered airlines to exert better pricing power, resulting in increased yields that have surpassed pre-Covid levels. The revenue per available seat kilometre – cost per available seat kilometre (RASK-CASK) spread has widened, signifying improved financial performance for airlines.

Indian Aviation Industry

The momentum in air passenger traffic observed in the current fiscal year is anticipated to continue into FY25. However, ICRA notes that further expansion in yields from the current levels may be limited. This cautious optimism stems from the potential challenges posed by high ATF prices and the depreciation of the Indian Rupee against the US dollar, both of which impact airline costs.

2. Key Challenges: ATF Prices and Exchange Rate Dynamics

Despite the strong recovery in air passenger traffic and improved yields, monitoring yield movement remains crucial due to the significant impact of high ATF prices and the volatility in the exchange rate. In FY23, the average ATF price was ₹121,013/KL, and for the first ten months of FY24, it stood at ₹103,660/KL. This is in stark contrast to the pre-Covid FY20 levels of ₹65,368/KL.

While ATF prices have been sequentially lower since April 2023, there was a 1.3 per cent year-on-year increase in October 2023. However, the prices declined again from November 2023. As of January 2024, ATF prices at ₹103,593/KL were 3.6 per cent lower sequentially and 6.4 per cent lower year-on-year.

Fuel costs account for a substantial portion (30-40 per cent) of airlines’ expenses, and a significant proportion of operating expenses, including aircraft lease payments, fuel expenses, and a considerable portion of aircraft and engine maintenance expenses, are denominated in dollar terms. Furthermore, some airlines have foreign currency debt. Despite domestic airlines having a partial natural hedge through earnings from international operations, their net payables are primarily in foreign currency. ICRA emphasizes that the airlines’ ability to implement fare hikes proportionate to input cost increases will be crucial to expanding their profitability margins.

3. Earnings Recovery and Industry Outlook:

Earnings recovery in the industry is anticipated to be gradual due to high fixed costs. In FY23, the industry reported a net loss ranging from ₹17,000 crore to ₹17,500 crore, showcasing improvement from the ₹21,700 crore loss in FY22. This positive trend was driven by effective yield management, despite challenges such as high ATF prices and INR depreciation.

Looking ahead, ICRA forecasts a further reduction in net losses to ₹3,000 crore to ₹5,000 crore for both FY24 and FY25. This optimistic outlook is underpinned by expectations of sustained passenger traffic growth and the continuation of pricing discipline amid industry consolidation.

4. Industry Dynamics and the Path to Profitability:

ICRA underscores the industry’s need for pricing discipline, particularly in the face of challenges like fluctuating ATF prices and currency exchange rate volatility. The agency highlights that fuel costs and operating expenses denominated in dollars are significant factors influencing airlines’ financial health. Effective measures, including fare hikes commensurate with cost increases, are identified as key strategies for expanding profitability margins.

The Indian aviation industry is poised for short-term growth, buoyed by a combination of decreasing ATF prices and a rebound in domestic passenger traffic. The stable outlook maintained by ICRA reflects the industry’s resilience and ability to adapt to evolving market conditions. While challenges persist, including high fuel costs and exchange rate dynamics, strategic measures such as pricing discipline and effective yield management are expected to drive continued recovery and contribute to a positive earnings outlook for the industry in FY24 and FY25.

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