India’s aviation sector is heading for a turbulent year

India’s aviation sector is heading for a turbulent year

The increasing number of flyers in India does not sound good to domestic airlines who will have their yields under pressure in FY18. Profitability of Indian aviation industry is expected to decline in FY18 as airlines plan on improving capacity addition to its domestic flights, credit ratings agency, ICRA said today.

“The capacity addition is likely to keep yields of the airlines under pressure. Therefore, revenue per ASKM (RASK) for the airlines is expected to remain subdued in the near term,” ICRA said. Assuming that domestic passenger traffic would continue to grow at 15-17% in FY18; the financial performance of airlines would be brought under pressure on the back of rising ATF prices, and high competitive intensity.

“With expected FY2018 capacity addition, the downward pressure on yields is expected to continue, while the costs are not expected to decline, keeping the cost per ASKM (CASK) high. As the RASK-CASK spread gets squeezed further, the industry net loss is expected to increase to ~Rs 12.5 billion (Rs 1250 crore) in FY2018,” Anand Kulkarni, Assistant Vice President & Associate Head – Corporate Sector Ratings, ICRA said.

In the past year the airlines were able to add ‘sizeable capacity,’ as per ICRA analysts who pointed out 19.6% year-on-year growth in domestic available seat kilometers (ASKM). This the agency said was on account of robust travel by Indians and huge discounts. Domestic passenger growth was at 21.8% during FY17, ICRA said, while the international passenger traffic growth was at 8.4% and domestic traffic was at 11.8%.

Revenue Passenger Kilometer (RPKs) have increased for the domestic airlines in FY17 as reported by Motilal Oswal analysts in a report dated May 22. IndiGo’s RPK grew 18.6% YoY with the highest market share of 42.9% in April 2017; while SpiceJet’s domestic RPK grew 20.1% YoY. GoAir’s domestic RPK grew 6.6% YoY and Jet’s RPK growth stood at 10% YoY, followed by Air India. Robust capacity addition by airlines will continue in FY18 as airlines have had a sizeable order backlog of new aircraft, ICRA said.

“The industry, at present, has sizeable order backlog of new aircrafts, which is 1.78 times the current fleet size of the industry. Hence, going forward, the capacity addition is likely to continue at a healthy pace. ICRA expects ~17-20% growth in industry ASKMs during FY2018 backed by planned fleet addition of majority of the incumbents as well as new entrants, predominantly led by Indigo,” ICRA said. Domestic carriers have been facing severe financial stress, which ICRA pinned down to weak operating performance and high investment requirements which is estimated to lead to a net loss of Rs 950 crore in FY17.

“The aggregate industry debt reduced to ~Rs 650 billion (Rs 65,000 crore) as of March 2016. However, the weakened performance of the airlines in FY2017 has resulted in an increase in the estimated aggregate debt level for the industry to ~Rs 750 billion (Rs 75,000 crore) as on March 2017,” ICRA said. The aggregate debt levels in the industry remain high and would require equity infusion to bring the same to reasonable levels.

“While most airlines are still expected to report profits in FY2018, the quantum would be lower than the previous levels. In addition, some of the airlines have large capacity expansion plans. Thus, overall the industry would continue to face short-term liquidity problems,” Kinjal Shah, Assistant Vice President & Co-Head – Corporate Sector Ratings, ICRA said.

 

News Source: www.zeebiz.com

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