Air India and Vistara Enter Interline Partnership

India Domestic aviation witnesses demand recovery in FY2023; however, cost pressures constrain earnings: ICRA

Industry is expected to report net loss of Rs. 150-170 billion in FY2023; domestic passenger traffic to reach pre- Covid levels by FY2024

Elevated ATF prices, INR depreciation and intense competition pose a threat to the recovery process for domestic carriers

New Delhi, India: The domestic passenger traffic for Indian carriers reported a healthy year-on-year (YoY) growth of 57.7% to 84.2 million in FY2022 on the back of the fast pace of vaccination, and lower incidence of fresh Covid infections, coupled with the declining intensity of the infection. On a YoY basis, in Q1 FY2023, the domestic passenger traffic was higher by 2.04 times at 32.5 million while it was short by 7% compared to the pre-Covid level (Q1 FY2020). With the back-to-normalcy in the operating environment driven by the waning effect of the pandemic, domestic passenger traffic is expected to witness YoY growth of 52-54% in FY2023.

Commenting further, Mr. Suprio Banerjee, Vice President & Sector Head, ICRA, said, “A fast-paced recovery in domestic passenger traffic is expected in FY2023 aided by improving demand in both leisure and business travel segments. This is attributable to the receding infection level and consequent normalcy in the operating environment. Despite an expected improvement in passenger traffic, the industry is estimated to report a net loss of Rs. 150-170 billion in FY2023 (as against an estimated net loss of Rs. 230 billion in FY2022), due to elevated aviation turbine fuel (ATF) prices and the recent depreciation of INR vis-à-vis the US$, both of which have a major bearing on the cost structure of airlines.

In FY2023, the cost headwinds resulted in an increase in air fares, with domestic yields in Q1 FY2023 expected to have increased by 25-30% over pre-Covid levels. While the Ministry of Civil Aviation (MoCA) has discontinued the fare restrictions with effect from August 31, 2022, a sharp hike in airfares will be deterred by the intense competition and airlines’ endeavours to maintain and/or expand their market shares. With the decline in the industry debt levels towards the end of FY2022 on account of the notable reduction in debt of Air India Limited before its sale, the interest burden in FY2023 is expected to be lower. The debt levels for the industry are expected to be at around Rs. 1,000 billion (including lease liabilities) as on March 31, 2023.”

ICRA expects the recovery in domestic passenger traffic to pre-Covid levels by FY2024. Further, with the resumption of scheduled international air operations for Indian carriers since March 27, 2022, and the reversion to bilaterally agreed capacity entitlements, the international passenger traffic for Indian carriers is on a strong growth trajectory (YoY growth of 4.03 times in Q1 FY2023) due to pent up demand and is expected to reach or marginally surpass pre-Covid levels in FY2023.

An area of concern is the elevated ATF prices, which are currently at Rs. 124,400/KL compared to an average of Rs. 74,171/KL in FY2022, which is a direct result of the increase in crude oil prices due to the ongoing geo-political issues (the Russian invasion of Ukraine). This apart, the recent depreciation of the INR vis-à-vis the US$ will have a major bearing on the cost structure of airlines since 35–50% of the airlines’ operating expenses – including operating lease payments, fuel expenses, and a significant portion of the aircraft and engine maintenance expenses – are denominated in US$. This aside, some airlines also have foreign currency debts. Despite the significant improvement in passenger traffic, the revenue per available seat kilometre–cost per available seat kilometre (RASK- CASK) spread for the Indian carriers in FY2023 is expected to be unfavourable, owing to the significant surge in costs and the limited ability of the airlines to pass on the same to the customers.

On an aggregate basis, a return to normalcy will lead to a recovery in passenger load factors, which in turn will aid revenues; however, elevated ATF prices and INR depreciation will continue to weigh on the earnings of Indian carriers in FY2023. This apart, the expected re-launch of Jet Airways and the entry of a low-cost carrier, Akasa Air, are expected to intensify the competition for Indian carriers.