New Delhi: Good times are ahead for the domestic airline industry as it will see operating profits rise more than 20% next fiscal, after a near-tripling this fiscal, fuelled by a strong recovery in passenger traffic, the ability to pass on volatile fuel prices to flyers, and reduced fluctuation in foreign exchange rates, according to a CRISIL Ratings report released on Tuesday.
This will support their credit metrics despite a significant increase in debt (including lease liabilities) expected through this and the next fiscals to fund fleet additions. An analysis of three airlines, which account for two-thirds of India’s air traffic, indicates as much, the report adds.
Passenger traffic should ascend 18-20% this fiscal (on-year), comfortably surpassing the pre-pandemic level, with business and leisure travel soaring. This trajectory is expected to sustain next fiscal, too, given economic growth. The rise in passenger traffic has strengthened the ability of airlines to pass on fuel costs (comprising 40-50% of the total cost) to flyers. This is reflected in the gross margin, which remained stable despite fuel prices more than doubling in the last three fiscals.
Another factor supporting improvement in profitability is lower foreign exchange (forex) losses compared with last fiscal, driven by a relatively steady exchange rate. Forex volatility impacts the profitability of airlines as two-thirds of their total debt (including lease liabilities) and about a third of their total costs are denominated in foreign currency.
Says Mohit Makhija, Senior Director, CRISIL Ratings, “Next fiscal, operating profit growth is expected to be in the vicinity of 20% from Rs 18,000-20,000 crore estimated this fiscal, even as technical issues in some engine types could ground some aircraft and limit the increase in operational fleets. The impetus to passenger traffic growth should continue next fiscal, though growth in operating profits will normalise given high base of this fiscal.”
The calculus assumes steady forex movement next fiscal, just the way it has been this fiscal. A convergence of the favourable factors and healthy profit potential, presents a case for fleet additions. Domestic airlines have placed large purchase orders in the past few years. Net fleet additions by airlines in our sample set are likely to be 80-85 this fiscal and may remain at similar levels next fiscal. Around two-thirds of the capital outlay towards these fleet additions will be funded through debt (including lease liabilities) and the remaining through internal accruals and equity infusion.
Says Snehil Shukla, Associate Director, CRISIL Ratings, “While net debt (including lease liabilities) will double to Rs 1 lakh crore by the end of next fiscal over fiscal 2023, credit metrics will strengthen supported by strong operating performance and equity infusion. The net debt (including lease liabilities) to Ebitdar ratio is projected to improve to less than five times over this fiscal and the next, compared with 8.6 times in fiscal 2023 and well below the pre-pandemic level as well”.
That being said, timely infusion of equity, lower-than-anticipated operational fleets due to technical issues and any adverse movement in the exchange rate will be monitorable.
Read More
- IndiGo commences operations from Ayodhya, its 86th domestic destination
- DGCA move towards safer sky, implements norms regarding air traffic controllers at 57 airports
