Indian Economy News

Indian airlines set to post an operating profit of Rs8,100 crore: Crisil

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  • December 31, 2014

Mumbai: Indian airlines are expected to collectively post an operating profit of Rs.8,100 crore in fiscal year 2016 compared to a Rs.1,500 crore loss in the fiscal year 2014, according to ratings firm Crisil Ltd.

However, Air India Ltd, Jet Airways (India) Ltd and SpiceJet Ltd will still report losses unless there is a re-capitalisation of as much as Rs.35,000 crore, Crisil Research said.

Crisil Research, a unit of the ratings firm, said in its report that the past few months have seen tailwinds converging for India’s airlines, such as improvement in demand and passenger load factors (PLFs), a largely stable rupee to dollar exchange rate and, most importantly, a steep fall in crude oil prices.

“That would mean airlines are set to post their best operational performance in the last five years. That translates into a spectacular 14 percentage point improvement in operating profit margin to around 11% in fiscal 2016,” the report said.

Crisil Research expects about 25% lower jet fuel prices for 2015-16 compared with 2013-14, said Prasad Koparkar, senior director, industry and customised research.

“More importantly, the fall is accompanied by an improving demand scenario, unlike fiscal 2010 when the players were unable to benefit significantly due to weak demand,” Koparkar said. “We expect average passenger traffic growth to be about 10-12% over the next couple of years.

Over the last seven years, Indian airlines have lost about $10.6 billion, according to Centre for Asia Pacific Aviation, or Capa. These years also saw the closure of Kingfisher Airlines Ltd, Air Deccan (which had merged with Kingfisher), Deccan 360, MDLR Airlines, Paramount Airways, Air Mantra and Indus Air. Vijay Mallya-promoted Kingfisher Airlines was grounded in October 2012 amid employee unrest over unpaid salaries. The airline had accumulated losses of Rs.16,023.46 crore as of 31 March 2013 and its net worth was a negative Rs.12,919.82 crore. Launched in 2005, the airline never made a profit. SpiceJet had briefly ground its fleet for than 10 hours in mid-December owing to financial crisis.

Airlines had blamed high jet fuel prices, high airport charges, other taxes and policy issues as reasons for this downfall.

Jet fuel costs account for approximately 45% to 55% of the revenue of domestic airlines. Typically, a 4% reduction in the fuel cost may potentially add around 2% to the operating margin, according to India Ratings and Research Pvt Ltd. On 1 December, Deep Narayan Mukherjee, senior director (corporates) at India Ratings, said despite lower jet fuel prices, given the competitive intensity among existing airlines, with new airlines coming in or expanding their scope, it is possible another wave of price war starts, in which case airlines’ balance sheet will continue to bleed unabated.

But Crisil Research is optimistic citing lower fuel prices. Crisil expects a 2-4% increase in average realisations of airlines due to lower discounts on jet fuel being offered.

“There’s more tailwind. Despite the entry of new players in the domestic market, competition is expected to be moderate. Existing airlines will go slow with domestic capacity additions due to the existing financial stress—in fact, SpiceJet has reduced its fleet size from 58 to 37 aircraft in the current year—while capacity addition by new entrants such as AirAsia Indian and Vistara is expected to be gradual,” Crisil argued.

Vistara, the new full service airline promoted by Tata SIA Airlines Ltd, starts operations on 9 January.

Crisil believes that seat occupancy of airlines will improve 300-400 basis points over the next couple of years.

The path to profitability for the industry will be another story, especially for three carriers—Jet Airways, Air India and SpiceJet—which account for about 75% of the commercial aircraft fleet in India but over 93% of the sector’s debt of Rs.70,500 crore as of March 2014, the report noted.

“We believe reducing losses will be a function of sorting out their capital structures. Today about 15% of their revenues are used to pay interest on debt. Till there is recapitalisation, the sector is unlikely to fly to a net profit at an aggregate level any time soon, though airlines with lower debt burden will turn profitable. To do so, interest expenses will have to halve. This, in turn, will mean a recapitalisation of around Rs.35,000 crore—primarily for the three carriers,” said Rahul Prithiani, director (industry research) at Crisil Research.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.