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Business EconomyPosted at: Jul 18 2018 6:59PM


Domestic air passenger traffic slows down due to lower capacity addition

Bengaluru, Jul 18 (UNI) The Indian aviation industry witnessed a higher than estimate aggregate loss of around Rs 25 billion in fiscal 2018 due to a slow down in air passenger traffic from the fourth quarter of fiscal 2017.
The primary reason for this, despite a Year-on-Year growth of 20 per cent over the previous eight quarters, was said to be the lower capacity addition by key players due to technical glitches. High base effect and efforts at improving yields by the airlines were also the reasons for a moderation in the growth, rating agency ICRA reported on Wednesday.
Additionally, some of the smaller players had been wiped out during the period, moderating the growth marginally. The saving grace, however, was the robust passenger load factors (PLFs) registered on the back of adequate demand which supported the performance.
Mr M Anandnd Kulkarni, Assistant Vice President & Associate Head - Corporate Sector Ratings, ICRA Ltd, says, “Industry dynamics turned benign during H1 FY2018, supported by a decline in aviation turbine fuel (ATF) prices during April-August 2017, and moderation in capacity addition due to technical issues with aircraft orders placed by various airlines, resulting in reduced competitive pressures and thus increased ability of the airlines to improve their yields. However, the ATF prices witnessed an increase of 27.0% between August 2017 and March 2018. Despite this increase in ATF prices and an increase in the domestic industry PLF to 87.0% during FY2018, most airlines have witnessed a decline in their yields during H2 FY2018. This has resulted in a higher than estimated aggregate loss for the Indian aviation industry to ~Rs. 24-25 billion in FY2018.”
As per ICRA note, over FY2016 and FY2017, the industry available seat kilometer (ASKM) growth was primarily driven by the market leader, Indigo, which had a over 41 per cent of the industry capacity share. However, domestic ASKM growth of Indigo slowed down considerably to 10.3 per cent in FY2018 from 28.1 per cent in FY2017 due to delays in aircraft deliveries on account of technical glitches with engines as well as its increased focus on international operations. This was the key factor that resulted in a lower domestic ASKM growth of 15.1 per cent in FY2018, as against 19.6 per cent in FY2017.
As for the PLFs in the domestic aviation industry, it has been on an uptrend starting from FY2015 and the same continued during FY2018. The average PLF of the domestic airlines for the domestic operations during FY2018 was superlative at 87.0%, which is a Y-o-Y improvement of 270 basis points, that too on a high base.
The ATF prices witnessed 35.4 per cent increase as on March 2017 as against March 2016, impacting the financial performance of the airlines during the year due to their inability to pass on the increased cost to the customers. While the same declined by 8 per cent to Rs. 51,640/ KL as on September 2017, partly on account of the appreciation of the Rupee against the US Dollar, it witnessed a significant Y-o-Y increase of 12.6 per cent to Rs. 63,162/ KL as on March 2018. Overall, the average ATF prices during FY2018 were higher by 10.4 per cent Y-o-Y. This is evident from the increase in fuel cost/ ASKM for the three listed airlines during FY2018.
ICRA expected the domestic passenger traffic to continue to grow at a healthy pace of 15 per cent per annum over the medium-term due to conducive factors like relatively low penetration levels, favourable macro-economic environment, support from regulatory environment (i.e. regional connectivity scheme) and development of new airports. The growth will also be supported by phase-wise capacity addition by airlines as reflected by their large order book. However, airport infrastructure continues to remain a key bottleneck for the industry’s growth potential.
The ASKM growth in FY2019 is estimated to be around 15-17 per cent. The key driver for the industry capacity growth continues to be the sizeable order backlog of the industry. As on date, approximately 1,033 aircraft of various sizes and configurations, are on order by Indian airlines.
As for industry financials, Ms. Kinjal Shah, Vice President & Co-Head - Corporate Sector Ratings, ICRA Ltd, adds, “While growth prospects remain favourable, sharp rise in crude oil price and rupee depreciation are likely to exert pressure on operating profitability of airlines in the near-term, resulting in higher net loss of Rs. 36 billion in FY2019. While the strong passenger traffic growth will allow airlines to improve yields to offset cost pressures to some extent, the increase may not be adequate. Thus, the revenue per available seat kilometer (RASK) – cost per available seat kilometer (CASK) spread is expected to get squeezed. Furthermore, some of the airlines have large capacity expansion plans, which may be either owned (through debt funding) or on operating lease. Thus, the aggregate industry debt level is expected to increase to Rs. 665 billion by March 2019.”
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