A year after posting first profits in a decade, India’s aviation industry is expected to slip back into the red in the ongoing and the next fiscal.
Limited ability to hike fares, rising crude oil prices and aggressive borrowing plans to buy planes may eat into the profitability of Indian carriers in the financial years (FY) 2016-17 and 2017-18, a report by aviation adviser and researcher CAPA India said.
IndiGo, Jet Airways, SpiceJet, GoAir and Air India Express are expected to remain profitable in FY17, but at a level lower than in FY16. Losses will increase at Air India, AirAsia India and Vistara, which is expected to pull the industry into the red with combined losses of $250-300 million, CAPA said.
The industry’s losses could widen to $380-450 million in FY18 with fuel prices estimated to be around $55-60 a barrel and exchange rate in range of Rs 73-75 a dollar, the report said.
Helped by lower fuel prices, modest capacity and a strengthening economy, listed players like SpiceJet Ltd., Jet Airways (India) Ltd. and InterGlobe Aviation Ltd. (IndiGo), which went public in November 2015, had reported profits on the back of surging traffic growth in FY16.
Indian carriers have ordered 880 aircraft, of which 600-650 are expected to be delivered over the next 10 years. Financing these orders, which have an estimated value of $30 billion, may become challenging, according CAPA India’s outlook for financial year 2017-18. The industry is scheduled to induct 60-65 narrow-body planes and 10-12 small aircraft in FY18, according to CAPA estimates. The airlines are expected to raise close to $1 billion in FY18, led by Jet Airways at $300-400 million. Any delay in raising funds may cost Indian carriers and market conditions are “expected to turn” in the near term, the report said.
Fuel expenses are a substantial part of an airline’s operating costs. The sharp fall in global crude oil prices had resulted in steep cuts in airfares in FY16.
Crude prices have started rising again, helped by production cuts since January by Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia. U.S. crude, or the generic WTI benchmark, has risen to $55 a barrel in February 2017 from below $30 a year ago.
There is uncertainty on where the fuel prices are headed. It largely depends on whether the OPEC bloc continues to cut production to boost prices. “We are going to go for much higher levels of compliance because of the very high level of stocks that we have brought over with us from 2016,” OPEC secretary-general Mohammad Barkindo said in a Bloomberg television interview in London. “Anything less than 100 percent is not satisfactory” PEC expects to achieve that level “in due course,” he said.
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