Airlines may post steepest losses in a decade in FY19: Crisil

Domestic airlines are projected to post the steepest losses in a decade in the current fiscal year owing to higher aviation fuel costs and falling rupee, rating agency Crisil said in a report Thursday. Pitching for a 12 per cent hike in airfares to offset the increased costs, the report also forecast debt liability of three listed airlines to go up by 10 per cent by FY19.

At present, full service carriers Jet Airways and budget airlines SpiceJet and IndiGo are listed on bourses. They account for 71 per cent of the total passenger traffic. Aviation turbine fuel (ATF) accounts for 35-40 per cent of the total cost of airlines, while aircraft, engine rentals and maintenance costs, which are denominated in US dollars, together account for another 30-35 per cent of the costs, as per Crisil.

"At an estimated Rs 9,300 crore, the industry's losses at EBIT (earnings before interest and tax) level would surpass the Rs 7,348 crore blow it was dealt in fiscal 2014. That was followed by three good years through fiscal 2018, when carriers reeled in aggregate profit of Rs 4,000 crore on average at the EBIT level," the report said.

Noting that the ATF prices are expected to average 28 per cent higher on-year compared with FY18, the report said such a hike will have significant impact on the airlines' balance sheets. The government has taken some measures to support the industry by lowering the excise duty levied on ATF by 300 basis points to 11 per cent, but this will not materially curb the losses, it said.

On the other side, the rupee has depreciated 13 per cent against the dollar since March, which is expected to dealt a severe blow to the domestic airlines' financials, Crisil said. "Almost two-thirds of an airline's cost, and therefore profitability, is susceptible to fluctuations in forex rates and ATF prices," said Sachin Gupta, senior director, Crisil Ratings.

He said to offset the increase in operating cost, the industry will have to hike average fares by 12 per cent, assuming there is no change in the passenger load factor (PLF) or seat factor. "But the aggressive expansion plans of carriers and the race to maintain high PLFs will keep competitive intensity high and limit their ability to increase fares," he added.

Observing that the PLFs are highly sensitive to fares, the report said that in the past three fiscals, benign ATF prices helped airlines keep fares stable. "Despite annual capacity growth of 15 per cent in the past three fiscals, PLFs increased because passenger growth was faster at 18 per cent," the agency said.

Another headwind to fare hike is the significant fleet addition planned in the near-term, which will lead to capacity addition of over 20 per cent, as per the report. Such a sharp increase in supply will keep the competitive intensity high and will constrain the ability of carriers to undertake fare hikes to pass on the increase in operating costs fully, the report said.

This was evident in the first quarter of FY19 when despite a 12 per cent rise in ATF prices, only one of the three listed players was able to increase yields, and that, too, by just 4 per cent, it added. Furthermore, the depreciation in the rupee will translate into higher debt liability.

"Airlines have sizeable foreign currency debt, while their revenues are largely earned in rupees. With around 73 per cent of their debt denominated in foreign currency, the debt liability of the three listed airlines will go up by 10 per cent this fiscal," said Nitesh Jain, director, Crisil.

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The agency in its report also said that the profiles of airlines will remain under pressure over near-to-medium term on account of significant increase in operating cost and limited ability to pass on cost increases to customers because of intense competition.