Challenging times ahead for aviation sector as losses rise

It’s challenging times ahead for the Indian aviation sector. According to ratings agency ICRA, the aggregate loss of the aviation sector is expected to reach Rs 3,600 crore in 2018/19, up from around Rs 2,500 crore in 2017/18. The reasons for the higher losses include higher aviation turbine fuel (ATF) prices, slowdown in capacity addition, and lower yields.

The report, for instance, says that the market leader IndiGo, which had about 41 per cent share in industry capacity, had slowed down in the adding new capacity in 2017/18. The airline’s domestic capacity addition – available seat kilometres (ASKM) – in the last financial year stood at 10.3 per cent, far lower than the 28.1 per cent in 2016/17. IndiGo, over the past one year, has been facing delays in aircraft deliveries, particularly Airbus A320neos, due to technical glitches with engines, and an increased focus on the international operations. The total capacity of Indian carriers stood at 146.8 million in 2017/18.

ICRA estimates the sector-wide capacity additions of 15-17 per cent in 2018/19. “The key driver for the industry capacity growth continues to be the sizeable order backlog…approximately 1,033 aircraft of various sizes and configurations are on order by Indian airlines,” the report says.

The second biggest area of concern for the sector is elevated ATF prices. The ATF prices have risen from Rs 51,640 per kilolitre (KL) in September to Rs 63,162 per KL in March 2018, a rise of 22.31 per cent in about six months. Overall, the average ATF prices during 2017/18 were higher by 10.4 per cent year-on-year. The jump in ATF prices is impacting the financial performance of the airlines due to their inability to pass on the increased fuel cost to the customers.

High ATF prices and heightened levels of competition have taken a toll on the yields of the airlines. Yield, in simple terms, denotes the money that airline makes from a paid passenger on each kilometre of travel.

ICRA, however, says that there are some silver linings as well. The only saving grace for the sector is the robust passenger load factors (PLFs) registered on the back of adequate demand, the report says adding that “the domestic passenger traffic to grow at a healthy pace of about 15 per cent annually… due to conducive factors like relatively low penetration levels, favourable macro-economic environment, support from regulatory environment and development of new airports.”

Almost all domestic carriers have witnessed deterioration in their financial performance in the last financial year. An increased focus on the cost structure, as some pointed out by some airlines in the recent analyst calls, will help curtail the estimated losses.



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