Omicron wave to push airlines to record losses, says Crisil

India’s transportation industry has been badly affected by the pandemic and the airline industry is one of the industries which has been bleeding since the end of March 2020. This has been exacerbated by the onset of third wave of the coronavirus pandemic and higher crude oil prices.

Rating agency Crisil in its new report said that airline companies in India are expected to witness their steepest-ever net loss of more than Rs 20,000 crore in the current financial year. This is 44% more than the Rs 13,853 crore loss in the last fiscal owing to the twin headwinds of the third wave of the Covid-19 pandemic and high aviation turbine fuel (ATF) prices.

The rating agency noted that this double whammy situation would push back the airline industry’s recovery beyond fiscal 2023. This is based on its analysis based on three largest airlines in India namely IndiGo, SpiceJet, and Air India, which have a 75% share in domestic traffic.

“The three large airlines have already reported a net loss of Rs 11,323 crore in the first half of fiscal 2022,” said Nitesh Jain, Director, Crisil Ratings. He added that the sharp jump in domestic air traffic would have cushioned the losses in the third quarter, but the net loss will increase significantly in the fourth quarter as the third wave has brought back travel restrictions and flight cancellations. Therefore, the rating agency expects airlines to report steepest net loss this financial year.

Air Traffic

Omicron wave has already caused domestic air traffic to plummet 25% in the first week of January. This decline in air traffic is similar to the one during the second wave in April and May 2021 when air traffic declined 25% and 66%, respectively, on a sequential basis.

This was not the case a few months back. Domestic air traffic rebounded swiftly after the second Covid wave and reached 86% of the pre-Covid level in December 2021, while regular international flights were expected to start after January 2022. Domestic passenger load factor (PLF), a key operating metric, improved to 80% in December 2021 from 50% in May 2021, driven by increasing passenger traffic.

However, PLF remained significantly lower than 88-90% in the pre-pandemic times leading to persistent operating losses. Furthermore, continued suspension of scheduled international flights is hurting the sector as international routes are more profitable.

Rakshit Kachhal, Associate Director, CRISIL Ratings, said, “Persistent operating losses led to a 35% increase in debt (excluding lease liabilities) to above Rs 54,000 crore from March 2020 to September 2021. Continuing net losses will keep balance sheets stretched leading to a negative outlook on the sector.”

Higher Fuel Prices

Aviation Turbine Fuel (ATF) prices that account for a third of the operating cost in India remains to be elevated and it will put pressure on profitability. This is in addition to declining passenger traffic.

ATF prices had hit an all-time high of Rs 83 per litre in November 2021, rising from and average price of Rs 44 in fiscal 2021 and approximately Rs 63 in April-June 2021. While ATF prices declined 6-8% in December 2021 and January 2022 because of reduction in value-added tax by various states, they remain high at Rs 77-78 per litre.

In this backdrop, airlines are likely to continue to conserve cash, including deferring maintenance as well as major capital expenditure, while renegotiating leases of aircrafts and keeping a leash on other fixed costs. Continued cost control measures, a prolonged third wave, onset of newer variants and increase in competitive intensity with launch of new airlines are downside risks for the incumbents.

Even though the increasing Covid-19 infection is likely to sharply impact air traffic over the next few weeks, Crisil expects a swift recovery from March 2022 onwards.