Rapid recovery in margins for Indian Airlines unlikely: Fitch

The rise in crude oil prices and a weakening rupee have combined to increase operating costs for Indian airlines.

Aug 21, 2018 02:08 IST India Infoline News Service

Profitability for Indian airlines is unlikely to recover materially in the near term as new aircraft deliveries will continue to exert pressure on fares, which airlines have not been able to rise to keep pace with cost increases because of fierce competition, Fitch Ratings says. However, we believe industry margins in H118 appear close to bottom as the weak financial profiles of some airlines are likely to force them to review their operating strategies.

The rise in crude oil prices and a weakening rupee have combined to increase operating costs for Indian airlines. Industry leader InterGlobe Aviation Ltd (IndiGo) reported a 42% decline in EBITDAR in the first quarter of financial year ending March 2019 (FY19), or Q218. Jet Airways Ltd, which has the second-largest domestic market share, postponed the announcement of its Q1FY19 results after reporting an EBITDA loss in Q4FY18 and Rs3100cr of long-term debt due in FY19.

India is the world's fastest-growing major aviation market in terms of domestic passenger traffic growth, with revenue passenger kilometres (RPK) growing by 21% in H118. However, capacity growth has also largely kept pace with demand with available seat kilometres (ASK) increasing by 18% in H118. Indigo is the clear market leader with around 40% share of the domestic market in terms of passengers carried in Q2FY18, with Jet Airways a distant second with around 15% share. In total, six operators have market shares in excess of 5% and competitors are focusing on improving their presence in the highly price-sensitive market. As a result, passenger yields have remained weak with Indigo's yield declining by 5% in Q2FY18, despite severe cost pressure.

The competitive position of Indigo's rivals is hampered by their debt levels and higher costs. While Indigo reported a net cash position at FYE18, peers Jet Airways and SpiceJet Ltd, which has the fourth-largest domestic market share, had net debt positions. Indigo's cost per ASK (CASK) at Rs315 in FY18 was also lower than SpiceJet's Rs378 and Rs439 for Jet Airways, which operates in both full-service and low-cost segments. Indigo benefits from a young fleet with average age of around 6 years, efficient operations and high aircraft utilisation rates. Unlisted Air India, which is state-owned and has the third-highest share in the domestic market, has been struggling with high debt levels and inefficient operations for several years.

Despite the stresses, we think margins are unlikely to rebound in the short term given projected capacity growth. Indian airlines are scheduled to take delivery of close to 100 aircraft over each of the next five years, predominantly narrow-body jets, according to industry research provider Centre for Asia Pacific Aviation. Airlines are likely to finance these aircraft deliveries through sales-and-leaseback arrangements, and this reduces the need to drastically improve their cash-flow generation. We think some airlines may scale back operations due to financial challenges, allowing others such as Indigo to consolidate their market shares.

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