Indian airlines may face headwinds on profitability in FY17

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Mumbai: Airlines in India are likely to face headwinds in profitability in 2016-17 in the face of rising risks from increasing capacity, pricing pressure and possible cost increases, according to a sector outlook statement released on Thursday by consultancy firm Capa India.

Though the aviation firms will be largely profitable, the pressure on yields is expected to be over 5% for 2016-17 and is likely to impact profitability, the report said.

While flagging of risks, the report said that airlines have been benefitting on the back of declining jet fuel prices and strong passenger growth.

For the year ending 31 March, 2016, the aviation firms are expected to post a combined loss of $350 million, down from $500-550 million forecast in October, Capa had said in its January report. The estimate assumes that oil prices will remain low and that the currency will remain stable.

In 2015, the price of benchmark Brent crude oil fell 35%, while in 2014, it fell 48.3%. In India, fuel costs account for about 45-55% of the revenue of domestic airlines, and a 4% drop in fuel cost adds around two percentage points to the operating margin of airlines.

However, on 20 January, Brent crude hit a more than 12-year-low of $27.1 a barrel, but since then jumped over 30.33%.

Capa estimates significant capacity expansion with the country’s largest airline IndiGo (run by InterGlobe Aviation Ltd) and low-fare airline GoAir adding 30 new Airbus A320neos, while other airlines adding another 20 to 30 planes.

But there is some good news, too.

Capa estimates domestic air traffic to touch 100 million by the end of 2016-17.

“We expect close to 20% year-on-year growth in the domestic market and growth could exceed even further,” said Kapil Kaul, Capa’s chief executive (South Asia).

India’s local airlines carried 81.09 million passengers in calendar year 2015, as against 67.38 million in the previous year, registering a growth of 20.34%. Kaul said international passenger growth could see 10% growth.

He said Indian airlines would need to raise overall $1.4 billion for capitalization. While he expects GoAir to be listed in the next fiscal year, SpiceJet Ltd, another low fare airline, is expected to get funding from investors.

Jet Airways (India) Ltd, India’s second largest airline by passengers carried, is expected to raise $300-400 million debt from its equity partner Etihad Airways PJSC. Kaul hinted that this funding can happen even in the current fiscal year.

“State-run Air India could also raise $700 million while rival airlines such as AirAsia India and Vistara will witness further recapitalisation in FY2017,” Kaul added.