After a muted domestic passenger growth in 2019, the aviation sector is staring at yet another year of losses in FY20. Though the second half of FY20 has shown some signs of improvement, the weak performance of the first half is going to drag down the financials of the entire year.
As per rating agency ICRA, the industry's losses are likely to stand at around Rs 7,800 crore in FY20 as against some Rs 10,000 crore in FY19. While a large part of these losses are contributed by national carrier Air India, the rest of industry, which primarily includes private carriers like IndiGo, SpiceJet and Vistara, has not been in the best of health in the first half of FY20.
For instance, the industry's losses - excluding Air India - are expected to be Rs 1,500 crore in FY20. The weak balance sheet structure and continued losses for the next few quarters are expected to weigh on the industry which would need about Rs 22,500 crore equity infusions over the next three years, says the ICRA report.
Kinjal Shah, Vice President and Co-Head, Corporate Sector Ratings at ICRA, said "Pressure on yields, increased maintenance costs and foreign exchange losses impacted the profitability of the industry during the second quarter of FY20. The two listed airlines [IndiGo and SpiceJet] have together lost about Rs 1.8 crore per day during April-to-September period..."
Though the third quarter results of IndiGo has given some respite in the backdrop of a gloomy scenario. The largest domestic carrier reported over two-fold rise in net profits to Rs 496 crore in the October-to-December 2019 period. The government has also firmed up plans to sell beleaguered Air India in an attempt to privatise it and possibly turning it into a profitable airline under a new private owner.
A major reason that has contributed to the losses of airlines in the past year is their inability to increase fares due to the highly competitive scenario. This problem is likely to exacerbate in the next few quarters as domestic carriers aggressively add new capacity on domestic and international routes. For instance, the industry has a pending order book of nearly 790 aircraft as compared to the current fleet of 682 aircraft. It's expected that the domestic capacity in FY20 would be low due to Jet Airways' shutdown last year, grounding of Boeing 737 Max aircraft owing to technical issues with its flight control software, and issues with the Pratt & Whitney engines for Airbus 320 neo planes (flown by IndiGo and GoAir).
The FY21's capacity additions would likely to better - at around 18 per cent - as most of the capacity issues would likely be resolved in the medium-term.
"Improvement in the core growth drivers like economic environment, tourism demand and regulatory support is essential for improved passenger traffic growth. Though there have been steps towards improving airport infrastructure, the pace of implementation remains a key concern. The industry prospects are expected to gradually improve, contingent on the movement in the ATF [aviation turbine fuel] prices," the ICRA report says.