Mumbai (Maharashtra) [India], June 17 (ANI): The operating profit of domestic airlines is expected to decline 10-15 per cent in the current fiscal as elevated aviation turbine fuel (ATF) prices, airspace restrictions and rupee depreciation driven by the West Asia conflict continue to increase costs, according to a Crisil Ratings report released on Wednesday.
The report said the combined impact of higher operating costs, limited pricing power and capacity rationalisation is likely to reduce the aggregate operating profit of domestic airlines to Rs 16,000-17,000 crore this fiscal from around Rs 19,000 crore last fiscal.
According to Crisil Ratings, the West Asia conflict has led to a sharp increase in global ATF prices, which remain significantly above last fiscal’s average levels despite some recent easing.
“The surge in global fuel prices following the onset of the conflict has increased the operating cost of airlines significantly. Even with the expected moderation in fuel prices, they will remain above the levels of last fiscal,” said Manish Gupta, Deputy Chief Ratings Officer, Crisil Ratings Limited.
He added, “Coupled with currency-related pressures, this will push up the overall Cost per Available Seat Kilometre (CASK, excluding forex) to Rs 4.8-5.0 per km this fiscal from Rs 4.3 per km last fiscal, thereby weighing on overall profitability.”
The report noted that fuel accounts for 40-50 per cent of airlines’ operating costs, making the sector particularly vulnerable to movements in ATF prices. While global ATF prices have eased from about USD 145 per barrel in early June to below USD 125 currently, they remain well above the average of around USD 90 recorded last fiscal.
Crisil Ratings said airlines have responded by introducing fuel surcharges, which are expected to increase Revenue per Available seat Kilometre (RASK) to Rs 5.2-5.4 per km this fiscal from Rs 4.9 per km last fiscal. However, the report noted that the pass-through of higher costs remains partial because air travel demand is price sensitive.
The report also said airlines are rationalising routes and trimming capacity, particularly on international routes affected by airspace restrictions and longer flying times. While these measures may support margins, they are expected to moderate growth.
At the same time, domestic airlines are continuing with fleet expansion plans, which will further increase lease-related costs.
“Domestic airlines are facing cost pressures while pursuing significant fleet expansion, with 90-100 aircraft expected to be added this fiscal, partly for replacement and partly for expansion. The upshot will be a ~15% increase in rental costs to Rs 27,000-28,000 crore this fiscal,” said Gautam Shahi, Senior Director, Crisil Ratings Limited.
Shahi added, “Along with lower operating profitability, this can weaken coverage of lease service obligations.” However, he said the gap is expected to narrow gradually as operating efficiencies improve, while “strong parentage, liquidity buffers, availability of credit under ECLGS 5.0 and the recent launch of ATF price stabilisation fund by government of India should, however, help them navigate the current turbulence.”
Crisil Ratings said a faster-than-expected resolution of the West Asia conflict and a sharper decline in fuel prices could limit the pressure on profitability, while prolonged crude price strength or continued airspace disruptions could further hurt earnings. (ANI)
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