ICRA assigns negative outlook to domestic airline industry

Aviation
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Rating agency ICRA on Monday assigned a negative outlook to the domestic airline industry even as it expects the passenger traffic growth to remain healthy at about 15-16 per cent in the medium-term.

While the domestic air passenger traffic has consistently seen a double-digit growth for the 50th consecutive month in October, all the three listed local air carriers – Jet Airways, IndiGo and SpiceJet – are in the red.

The high growth was initially propelled by low jet fuel prices and later due to the excess capacity in the market, which have forced the airlines to keep fares low and deal with competition.

“Icra has a negative outlook on the airline industry. The strong passenger demand is offset by capacity additions leading to intense competition and continued pressure on yields,” it said.

However, the domestic passenger traffic growth is expected to remain healthy at around 15-16 per cent over the medium term, supported by low penetration levels, favourable macro environment, regulatory push towards regional connectivity and development of new airports, it added.

Kinjal Shah, vice-president and co-head for corporate sector ratings, ICRA, said while the passenger traffic growth remained strong during the previous fiscal and the first half of the current fiscal, the industry faced a double whammy with increasing jet fuel cost and rupee depreciation.

“The cost pressures are expected to continue in the balance part of FY19, resulting in further weakening of the financial health of the industry,” she added.

Noting that many industry players have weak balance sheet structure, the agency said with rising losses in the near-term, the industry would need about ₹350 billion equity infusion over the next three to four years.

Besides, rise in aviation fuel price and rupee depreciation has squeezed revenue and cost per available seat kilometre (RASK-CASK), exerting significant pressure on operating profitability of airlines, Icra said.

“This will result in significantly higher losses (at net level) in the fiscal 2018-19 as compared to the previous fiscal,” it added.

The agency also said that the airline industry maintains strong capacity addition plans, as reflected in the large order book of the domestic airlines.

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