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In India, fuel costs account for about 45-55% of the revenue of domestic airlines and a 4% drop adds around two percentage points to the airlines’ operating margin. Photo: Hindustan Times
In India, fuel costs account for about 45-55% of the revenue of domestic airlines and a 4% drop adds around two percentage points to the airlines’ operating margin. Photo: Hindustan Times

Indian airlines likely to pare debt by 14% in fiscal 2016: report

Airlines are likely to cut their combined debt to Rs58,000-60,000 crore in 2015-16 from Rs70,000 crore in 2014-15 due to lower fuel prices

Mumbai: With their sustainability at stake, India’s domestic airlines are expected to slash their combined debt to 58,000-60,000 crore in 2015-16 from 70,000 crore in 2014-15 on account of lower fuel prices, said a study by rating firm ICRA Ltd released on Wednesday.

The study cautioned that the survival of many airlines hinges on their ability to reduce debt through better operating performance or by way of equity infusion.

In financial year 2015-16, Brent crude fell 28.14%.

In India, fuel costs account for about 45-55% of the revenue of domestic airlines and a 4% drop adds around two percentage points to the operating margin of airlines.

ICRA, in its note, said a fall in debt was also supported by the 1,200-crore initial public offering (IPO) of IndiGo. In October 2015, the IPO of InterGlobe Aviation Ltd, owner of India’s largest and most profitable airline IndiGo, was subscribed 6.14 times the shares it offered investors, as financial institutions and rich individuals sought to tap the world’s fastest growing aviation market.

“Overall, the prospects of the Indian aviation industry in the near to medium term are largely dependent on the movement in the crude oil prices and foreign exchange, in addition to reform measures. However, underpinned by the improving operating performance, the balance sheets of Indian carriers are expected to improve in FY2017," said Subrata Ray, senior vice-president, co-head corporate sector ratings, ICRA.

However, the overall cash reserves of airlines have dwindled, making it difficult for them to raise equity capital and re-finance debt obligations, ICRA said.

Among airlines, full service carriers (FSCs) have been impacted the most, owing to their aggressive debt-funded capacity expansion plans, inorganic investments and higher fixed costs.

Currently, India has 10 airlines, including scheduled and regional airlines. They are IndiGo (run by InterGlobe Aviation Ltd), Jet Airways (India) Ltd, Air India Ltd, GoAir (Go Airlines (India) Ltd), SpiceJet Ltd, AirAsia (India) Pvt. Ltd, Vistara (Tata SIA Airlines Ltd), regional airlines Air Costa Aviation Pvt. Ltd, Air Pegasus (Decor Aviation Pvt. Ltd) and TrueJet (Turbo Megha Airways Pvt. Ltd).

ICRA expects passenger growth to remain robust at 20-25% in 2016-17, even if the seat occupancies are maintained at the current levels. The domestic airlines are likely to add 55 new aircraft in this period as against 33 during 2015-16.

The addition of aircraft in the fleet, coupled with improved network planning and operational efficiencies, are likely to boost overall industry capacity, with the industry ASKMs (available seat kilometers) expected to report strong double-digit growth in 2016-17.

While ICRA expects domestic airlines to continue to sustain the improved performance in 2016-17 on account of a favourable jet fuel pricing environment and growth in passenger traffic, the Indian aviation industry is still subject to ongoing structural challenges and intense competition is placing pressure on yields.

“The Indian carriers have been under severe financial stress due to a combination of weak past operating performance and high investment requirements. ICRA estimates that despite improved operating performance, the Indian aviation industry would continue to have significant funding requirements in the near term until the carriers are able to significantly reduce their debt levels through a combination of improving their operating performance and/or an equity infusion," ICRA pointed out.

Jet Airways last week reported a fourth straight quarter of profit and posted its first ever annual profit on a consolidated basis, benefiting from lower fuel prices, higher traffic and lower finance costs.

Two other listed airlines also made a profit in 2015-16. Last month, IndiGo, India’s biggest airline—reported a record net profit of 1,990 crore in the year ended 31 March, while SpiceJet posted a record profit of 407 crore for the year.

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