Ind-Ra: High ATF Prices & Fleet Expansion to Delay Recovery in Credit Metrics of Airlines in FY19-FY20

The gradual strengthening of global crude prices, along with the ongoing fleet expansion by domestic airline operators, is likely to put pressure on the airline industry's debt protection metrics over FY19-FY20, says India Ratings and Research (Ind-Ra).

Brent crude prices recovered by over 35.00% to USD79.54/bbl on 17 May 2018 from USD52.98/bbl on 28 April 2017. The recovery led to a corresponding increase in domestic aviation turbine fuel (ATF) prices to INR65,340/kilolitre from INR50,700/kilolitre during the period.

Ind-Ra has analysed the performance of four leading private airline operators: Go Airlines (India) Limited ('IND BBB'/Stable), Jet Airways (India) Limited, Interglobe Aviation Limited and SpiceJet Limited.

Fuel cost is the single-largest component of an Indian airline's cost structure and represents about 35.00% of the total operating expenses on an aggregate basis. Therefore, any challenges in passing on an increase in fuel costs to end users could adversely affect the profitability margins of Indian airline operators.

The unfavourable exchange rate movement exacerbated the impact of the increase in crude prices on airline operators' fuel bills in FY18E. As a result, the average fuel cost per available seat kilometre increased 5.73% yoy in FY18E.

Assuming a weighted average PLF (of the Ind-Ra sample) of 84.00% for FY19 and 86.00% for FY20, Ind-Ra expects the weighted average fixed cost coverage (EBITDAR/interest + lease rental) of the airline industry to be 30.00%-35.00% lower in FY19-FY20 than the agency's base case estimates. Under the base case estimates, the entire increase in ATF prices is assumed to be passed on to end users.

Powered by Capital Market - Live News