InvestorQ : Is it true that ICRA has projected another fiscal year of big losses for the Indian aviation sector?
Priyanka N made post

Is it true that ICRA has projected another fiscal year of big losses for the Indian aviation sector?

Neelam Naik answered.
4 weeks ago

According to the ICRA report just put out, the estimated losses of aviation companies in FY23 would be nearly 26% lower compared to FY22. However, it may be too early to celebrate because the projected net loss of aviation companies in FY23 at Rs17,000 crore would still be substantial in absolute terms. In short, airline companies would continue to bleed in FY23 also. Both the major listed companies viz. Interglobe and SpiceJet are likely to report losses due to the dual factor impact of ATF prices and the rupee weakness.

In its report on the aviation sector, ICRA has pointed to two factors driving losses in the aviation sector in India. The first is elevated prices of Aviation Turbine Fuel (ATF) and the second is the weak rupee. They have jointly created most of the problems for aviation companies in the last one year even as these airline companies have struggled to come out of the COVID syndrome. Currency movement is an important headwind as aviation has total debt of Rs1 trillion (including lease liabilities) and these are vulnerable to rupee weakness.

Why do these two factors of ATF and rupee matter is known but now the question is how much do they matter? While crude prices have come down from the March 2022 highs, it is still substantially higher than the 2021 crude price levels. ATF accounts for around 45% of the operational cost of an airline and even a marginal price hike pinches. In addition, around 35% to 50% of operating expenses like interest and leas rentals are vulnerable to the weakness of the rupee against the dollar. These 2 material factors are hitting airlines hard.

The good news is that top line has been good and supported by a surge in passenger traffic. Domestic air traffic grew 57.7% yoy to 84.2 million in FY22, helped by lower incidence of COVID infections and rapid vaccination effort. With a recovery in leisure and business travel, FY23 could eventually see passenger numbers getting back to pre-covid levels. For now, the losses in FY23 are likely to be triggered by elevated ATF prices and the recent depreciation of Indian rupee against the US dollar closer to the 80/$ mark.

Will the fall in crude prices help? To an extent yes, but compared to pre-COVID levels, the costs are still up 30%. The Ministry of Civil Aviation has discontinued fare restrictions. However, while this is meaningful on paper, in a competitive industry like airlines the fares cannot add much to the top line. The aviation spread i.e. the gap between revenue per available seat kilometre (RASK) and cost per available seat kilometre (CASK) looks like it will continue to be unfavourable in the fiscal year FY23 also.