Higher ATF prices, Rupee depreciation likely to pose threat to domestic carriers’ recovery: Report

Higher Aviation Turbine Fuel (ATF) prices and Rupee depreciation are likely to pose a serious threat to the recovery process for domestic carriers, credit ratings agency ICRA said on August 17.

“In India, ATF accounts for around 45% of the operational cost of an airline. Besides, as much as 35-50% of the airlines’ operating expenses are U.S. dollar driven,” as per ICRA.

An area of concern remains the ATF prices, which surged by around 77% Y-O-Y in August, given the increased crude oil prices due to geo-political issues arising from the Russian invasion of Ukraine, the ratings agency said.

On an aggregate basis, it said a return to normalcy will lead to recovery in passenger load factors, which, in turn, will aid revenues; however, these two factors will continue to weigh on the domestic airlines” earnings in FY23.

Apart from this, the expected launch of Jet Airways and the entry of Akasa Air, are likely to intensify the competition for the domestic carriers.

“ICRA believes that the domestic air traffic yields have moved up by 25-30% over pre-COVID levels on domestic routes. The industry earnings in FY2023 will continue to reel under pressure owing to the elevated jet fuel prices, coupled with the depreciation of the Indian Rupee against the US dollar,” Suprio Banerjee, vice-president and sector head at ICRA, said.

On a month-on-month basis, domestic air passenger traffic was 7% lower in July compared to the June passenger volumes of 10.05 million, given some impact of the cyclicality in passenger travel, mainly arising from the lean period during the monsoon, it said.

ICRA said the hardening of fares impacted leisure travel during the month which, in turn, also impacted the volumes.

The ratings agency also said the removal of ceiling on airfares from August 31 will help domestic airlines to bring their ticket prices in line with the supply-demand dynamics.

“Although removal of fare restrictions from August 31 will partially enable domestic carriers to pass on the escalated cost by way of fare hikes, the possibility of such sharp fare hikes is limited, given the intense competition,” Mr. Banerjee opined.