Indian Aviation Industry Likely To Witness Up To 13% Rise In Passenger Traffic in FY24: ICRA

"It is expected to cross this level in the current fiscal, with an estimated 25 to 27 million passengers, representing a YoY growth of 7 to 12 per cent," said ICRA

The cost structure of airlines is significantly influenced by ATF prices and fluctuations in the Rs-$ exchange rate ( Image Source :Getty )

Credit rating agency ICRA forecasted on Wednesday that Indian air passenger traffic is anticipated to expand by 8 to 13 per cent in the financial year 2023-24, reaching a range of 150-155 million, surpassing the pre-Covid levels recorded at 141.2 million in FY20. ICRA maintains a stable outlook for the Indian aviation sector, attributing it to the ongoing recovery in domestic and international air passenger traffic.

ICRA forecasts that the growth trend is likely to persist into FY2025, with a comparable year-on-year (YoY) growth projection, supported by increasing demand for both leisure and business travel and enhancements in airport infrastructure. In FY2023, Indian carriers' international passenger traffic exceeded pre-Covid levels, although it fell short of the peak figures of 25.9 million observed in FY2019.

"It is expected to cross this level in the current fiscal, with an estimated 25 to 27 million passengers, representing a YoY growth of 7 to 12 per cent. The same is expected to further grow by 7 to 12 per cent to 27-29 million in FY2025," said ICRA.

Suprio Banerjee, Vice-President and Sector Head of Corporate Ratings said, "The industry has witnessed improved pricing power, as reflected in an increase in yields and thus the spread between revenue per available seat kilometre -- cost per available seat kilometre (RASK-CASK) for the airlines. The same is expected to remain favourable, aided by a decline in aviation turbine fuel (ATF) prices and the relatively stable foreign exchange rates. The industry is thus estimated to report a significantly lower net loss of about Rs 30-40 billion in FY2024 and FY2025 compared to about Rs 170-175 billion in FY2023."

The cost structure of airlines is significantly influenced by ATF prices and fluctuations in the Rs-$ exchange rate.

In the 11 months of FY2024, the average ATF price was Rs 103,547/KL, marking a YoY decrease of 15 per cent from Rs 120,978/KL in FY23. However, this was still substantially higher, showing a 60 per cent increase compared to the average of Rs 64,715/KL during FY20. Fuel typically represents around 30-40 per cent of airlines' expenses, while approximately 35-50 per cent of their operating costs, including aircraft lease payments, fuel expenses, and a significant portion of aircraft and engine maintenance expenses, are denominated in US dollars.

Moreover, some airlines have foreign currency debt, and although domestic airlines have a partial natural hedge due to earnings from international operations, they still have net liabilities in foreign currency.

Currently, the Indian aviation industry has an order book for approximately 1,700 aircraft, more than double the size of the current fleet. However, deliveries are expected to occur gradually over the next decade, influenced by ongoing supply chain challenges faced by engine and aircraft original equipment manufacturers (OEMs). Additionally, a significant portion of these orders is for replacing old aircraft with new, fuel-efficient ones.

ICRA anticipates that the demand-supply equilibrium will be maintained in the medium to long term, supported by improvements in air penetration levels. Furthermore, a considerable portion of the aircraft acquisitions by airlines will be aimed at expanding international operations.

Challenges:

Speaking on the challenges faced by the industry, Banerjee said, "More recently, the Indian aviation industry has been affected by engine failures and supply chain challenges. This has resulted in grounding of aircraft for select airlines, thus impacting overall industry capacity (as measured by available seat kilometer or ASKMs), with nearly 20-22 per cent of the total industry fleet grounded as on September 30, 2023. The recent powder-coating-related concerns in engines are expected to result in additional grounding of aircraft in Q4 FY2024, implying that about 24-26 per cent of the industry capacity will be grounded by March 31, 2024, thus affecting the industry's ASKMs."

"This will also result in higher operating expenses for the airlines with extra cost of grounding, an increase in lease rentals due to additional aircraft being taken on lease to offset the grounded capacity, along with increasing lease rates and lower fuel efficiency (as these grounded aircraft get temporarily replaced by older aircraft), thus adversely impacting the airlines' cost structure. However, healthy yields, high passenger load factor, and partial compensation available from engine OEMs would help absorb the impact to an extent," he added.