Lower domestic air traffic compared with pre-pandemic levels, together with high fuel prices and only a gradual recovery in international operations, mean airlines will continue to log net losses, though this will be 35-40% below the fiscal 2021 mark, at Rs 9,500-10,000 crore.
A CRISIL Ratings study of the top three airlines, which account for 78% of total passenger traffic, indicates this.
A resurgence of Covid-19 infections across the country -- especially in Mumbai and Delhi, which account for 36% of overall air traffic - is expected to stall the recovery seen over the past six months. In fact, average daily domestic passenger air traffic has fallen in April by almost 20% to ~2.35 lakh compared to February 2021.
Domestic traffic, which accounts for ~75% of airline revenues, is expected to surge 120-130% this fiscal on a low base (68% decline in fiscal 2021), though it will still be significantly lower at ~70% of fiscal 2020 level.
Says Gautam Shahi, Director, CRISIL Ratings, "Domestic traffic fell 85% in the first half of last fiscal due to lockdowns and restrictions on operations. Despite the second wave-induced fresh curbs, which will temper recovery, domestic traffic in the first half of this fiscal is likely to be 3.5-4 times higher on-year, on a low base. The second half should see good recovery in traffic, supported by acceleration in the vaccination drive and people gradually taking to travel after prolonged stay at home."
A gradual recovery in international operations in the second half of fiscal 2022 will also boost traffic.
However, airlines have also seen their cost of operations spurt due to a rise in the price of aviation turbine fuel (ATF), a key cost head for them. The price, which remained low until November 2020, limiting their losses, has shot up 30% since then.
This will offset the benefits from some of the initiatives the carriers undertook to reduce cost - employee costs, rentals, etc. - last fiscal, and which are being carried forward into the current fiscal.
Says Sushant Sarode, Associate Director, CRISIL Ratings, "Net-net, a ramp up in domestic operations with relaxation of seat capacity and pricing constraints have hit an impasse with the second wave. That said, absence of full restriction on operations this fiscal and a gradual recovery in domestic and more profitable international operations will help offset part of the impact of higher ATF prices. Therefore, net losses for key airlines are seen reducing 35-40% on-year in fiscal 2022, though will still be 20-25% higher than fiscal 2020."
Last fiscal, net losses curtailed liquidity and airlines availed of additional debt as well as moratorium on debt repayment to make up for the shortfall in cash accrual vis-à-vis fixed obligations. A 25-30% increase in debt (excluding lease liabilities) last fiscal and continuing net losses in the current fiscal will keep their balance sheets under pressure. High leverage will also result in continued negative outlook for the sector.
Fluctuations in crude oil price (and of ATF, in turn) and foreign exchange rates (majority of airline debt is denominated in foreign currency), prolonged impact of the second wave on domestic traffic volume, and the pace of recovery in international travel, which is more lucrative, will be key monitorables.