India’s airlines are flying towards their steepest-ever net loss of more than Rs20,000 crore this fiscal - 44% more than the Rs13,853 crore bled last fiscal—owing to the twin headwinds of the third wave of the COVID-19 pandemic and high aviation turbine fuel (ATF) prices, says a research report.
An analysis by rating agency CRISIL on three large listed airlines, IndiGo, SpiceJet, and Air India, which have a 75% share in domestic traffic, shows that the revenue loss would push back the industry’s recovery beyond fiscal 2023.
Nitesh Jain, director of CRISIL Ratings, says, “The three large listed airlines have already reported a net loss of Rs11,323 crore in the first half of fiscal 2022. The sharp jump in domestic air traffic would have cushioned the losses in the third quarter, but the net loss will increase significantly in the fourth quarter as the third wave has brought back travel restrictions and flight cancellations. As a result, we expect Airlines to report the steepest net loss this fiscal (see chart below).”
Domestic air traffic had seen a swift recovery after the second COVID wave and reached 86% of the pre-COVID level in December 2021 compared with December 2019 (see chart below), while regular international flights were expected to start after January 2022.
However, CRISIL points out that the third wave has already caused domestic air traffic to plummet 25% in the first week of January and a similar trend was observed during the second wave in April and May 2021 when air traffic declined 25% and 66%, respectively, on a sequential basis.
During December 2021, the domestic passenger load factor (PLF), a key operating metric, improved to 80% from 50% in May 2021, driven by increasing passenger traffic. “Although PLF improved, it remained significantly lower than 88-90% in the pre-pandemic times leading to persistent operating losses. The continued suspension of scheduled international flights is further hurting the sector as international routes are generally more profitable,” the rating agency says.
Besides the decline in passenger traffic, according to CRISIL, high ATF prices (see chart below), which account for a third of the operating cost, will accentuate pressure on profitability.
ATF prices had hit an all-time high of Rs83 per litre in November 2021, rising from and the average price of Rs44 in fiscal 2021 and about Rs63 in April-June 2021. While ATF prices declined 6%-8% in December 2021 and January 2022 because of various states’ reductions in value-added tax (VAT), they remain high at Rs77-Rs78 per litre.
Rakshit Kachhal, associate director of CRISIL Ratings, says, “Persistent operating losses led to a 35% increase in debt, excluding lease liabilities, to above Rs54,000 crore from March 2020 to September 2021. Continuing net losses will keep balance sheets stretched, leading to a negative outlook on the sector.”
While the increasing COVID-19 infection will sharply impact air traffic over the next few weeks, CRISIL Ratings expects a swift recovery from March 2022 onwards.
“In the milieu, airlines are likely to continue to conserve cash, including deferring maintenance as well as major capital expenditure, while renegotiating leases of aircraft and keeping a leash on other fixed costs.
"Besides sustenance of cost control measures, a prolonged third wave, the onset of newer variants and increase in competitive intensity with the launch of new airlines are downside risks,” the report concludes.