According to ICRA’s latest report, the Indian aviation sector is expected to enjoy a more favorable financial trajectory over the next few decades. Despite persistent challenges, the industry’s losses are expected to remain within a range between INR 20-30 billion and INR 30-40 for FY2025-2026, down from previous estimates of INR 30-40 billion.ICRA has adjusted their growth forecast for the domestic air passenger traffic of FY2025.
They have lowered it to a 7-10% year-onyear (YoY), due to the high baseline of FY2024 as well as disruptions caused by extreme conditions in Q1 FY2025. This revised outlook translates into an expected domestic passenger traffic between 164-170 millions in FY2025. However, the international segment should see a healthier growth with air passenger traffic projected to increase by 15-20% for Indian carriers.
Improvements in the Industry Despite Pressures
The aviation sector has demonstrated a strong pricing discipline. This is reflected in the increase between revenue per seat kilometer and cost per seat kilometer. This improved pricing ability has led ICRA, in light of the continued growth both domestically and internationally and the relatively stable cost environment, to maintain a positive outlook for the aviation industry.Suprio Banerjee, Vice President & Sector Head – Corporate Ratings at ICRA, commented: “While the industry is expected to report net losses of INR 20-30 billion in FY2025 and FY2026, this is a marked improvement from earlier projections due to better pricing practices and a stable cost structure.
The yields are still under pressure as airlines try to maintain adequate PLFs (passenger load factors) despite rising prices for aviation turbine fuel. ICRA’s research shows that ATF costs, which historically accounted for between 30-40% of airlines’ operating costs, have increased by 4% YoY in the five months leading up to FY2025. The average ATF prices for the period were INR 99,468/kiloliter. That’s up from INR 94,906/kiloliter of FY2024.
Supply Chain Problems and Grounded Aircraft
Despite an increase of 10 per cent in FY2024 in terms of capacity, the number operational aircraft in India fell to 664 in March 2024 as a result supply chain problems and engine failures. This represents a significant decrease from the 725 operating aircraft as of March 20,23. As of June 2024 approximately 134 aircraft or 15-17% of the total fleet remained grounded, further straining industry capacity.
Demand for international travel grew by a solid 10.1% year-on-year. Capacity grew by 10.5%. The international load factor decreased slightly to 85.9%, a decrease of 0.3 percentage points. Asia-Pacific Airlines led the surge in demand with a remarkable 19,1 per cent growth, driven by a recovery of regional markets. They also increased capacity by 20,3 per cent. European carriers also performed well with an 8.3 percent increase in demand and an 87.5 percent load factor.
The report also highlights supply chain disruptions that have affected the availability of aircraft parts and engines, causing delays in deliveries and limiting the industry’s capacity to increase. This has resulted in increased operational costs, such as higher lease rentals of older, less-fuel-efficient aircraft, which are being used to make up for grounded planes.Banerjee said, “The current challenges in the supply chain, combined with the availability for pilots and cabin staff at select airlines will likely result in continued capacity restrictions and higher operating costs over the near term.”
Capacity Expansion Forecast
Despite the large aircraft orders placed by the industry, and the 1,660 pending aircraft delivery, the pace at which capacity expansion will occur is expected remain slow due to the challenges of the global supply chains. These orders are primarily intended to replace older aircraft models with newer, fuel-efficient ones.ICRA expects that the debt metrics for the aviation industry will remain at the improved levels seen in FY2024. The total debt to operating profit before depreciation and interest, taxes, amortization (OPBDITA ratio) is expected to remain in the 6-6.5x range with interest coverage at 22.5x.
ICRA’s most recent report indicates that, despite the challenges the Indian aviation sector continues to face, including rising fuel costs and disruptions in the supply chain, the sector is heading towards clearer skies. In the next few years, improved pricing discipline, a slow recovery in international traffic, as well as a relatively stable cost climate, are expected to help airlines maintain losses within a reasonable range. The recovery trajectory of the sector may be affected by supply chain issues and capacity constraints in the short term.
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