On a positive note, for the Indian aviation sector, Investment Information and Credit Rating Agency (ICRA) has lowered its forecast of major Indian airlines’ cumulative net loss for the current year (FY2024-25) and the next financial year FY2025-26 by 25-33%. This amounts to a sum total of INR 2,000-3,000 crore from its earlier estimate of INR 3,000-4,000 crore.
The reason behind this updated forecast is due to the airline’s improved pricing power and stable cost environment. This forecast comes despite ICRA’s forecast of a reduction in domestic passenger growth.
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. ICRA has maintained a stable outlook on the Indian aviation industry, amidst the continued growth in domestic and international air passenger traffic, and a relatively stable cost environment. “The industry continues to demonstrate improved pricing power, as reflected in the increased spread between revenue per available seat kilometre (and) cost per available seat kilometre (RASK-CASK) for the airlines,” the ICRA said in a note.
If we look at the domestic passenger traffic growth forecasted by ICRA in FY25, it shows a decline of about 7-10 % which is 164-170 million from its earlier forecast of 8-12%. This is due to high base of FY24 and lower-than-anticipated passenger traffic growth in April-June following the impact of severe heat waves and other weather-related disruptions. ICRA expects the international passenger traffic to show a solid growth of 15-20% in FY2025.
Some of the key reasons of ICRA pruning of net loss estimate is
- Modest increase in aviation turbine fuel (ATF) prices.
Airline’s cost like aircraft lease payments, fuel expenses, and a significant portion of aircraft and engine maintenance expenses are mostly dollar-denominated. “Further, some airlines also have foreign currency debt. While domestic airlines also have a partial natural hedge to the extent of earnings from their international operations, overall, they have net payables in foreign currency,” ICRA added in its note.
Besides, supply chain challenges and engine issues continue to grapple Indian domestic carriers with bout 134 aircraft or 15-17% of the total industry fleet in India grounded as on June 30, 2024, as per ICRA records. Global supply chain issues have affected the availability of aircraft, engine, and parts, preventing airlines from ramping up capacity.
This will result in increased operating expenses towards the cost of grounding, increased lease rentals due to additional aircraft being taken on lease to offset the grounded capacity, rising lease rates, and lower fuel efficiency (due to replacement by older aircraft taken on spot lease), which are likely to adversely impact an airline’s cost structure,” ICRA concluded.