Indian domestic air travel industry is experiencing a robust rebound, with June 2024 witnessing a 6.3% increase in passenger traffic compared to the same month last year. This upsurge translates to a significant 10.4% jump from pre-pandemic levels, according to a recent report by ICRA, a leading rating agency.
Positive Outlook For Indian Domestic Air Travel
ICRA maintains a positive outlook for the Indian aviation sector. The report cites the ongoing recovery in both domestic and international travel alongside a relatively stable cost environment as key factors. This momentum is expected to carry forward into the 2025 financial year (FY2025).
The industry has also seen improvements in pricing power, with airlines fetching higher yields (revenue per passenger) compared to pre-pandemic times. This has resulted in a favourable spread between Revenue per Available Seat Kilometre (RASK) and Cost per Available Seat Kilometre (CASK) for the airlines.
However, ICRA cautions that further yield expansion might be limited in FY2025. The report highlights two key challenges: elevated Aviation Turbine Fuel (ATF) prices and the depreciation of the Indian Rupee (INR) against the US Dollar (USD) compared to pre-pandemic levels. Both factors significantly impact airlines’ cost structures.
Expanding Profit Margins
While ATF prices in FY2024 were 14% lower than in FY2023, they remain 58% higher than pre-pandemic levels. The average ATF price for Q1 FY2025 is already 5.4% higher year-on-year. Fuel costs account for a substantial portion (30-40%) of an airline’s expenses. Additionally, 45-60% of operating expenses, including aircraft leases, fuel, and a significant portion of maintenance costs, are denominated in USD.
Several airlines also carry foreign currency debt, further exposing them to currency fluctuations. Although domestic earnings offer some natural hedges for airlines with international operations, their net payables are generally in foreign currency.
The report emphasises that airlines’ ability to raise fares in line with rising input costs will be crucial for expanding profit margins. The industry’s recovery in terms of earnings is likely to be gradual due to its high fixed-cost nature.
ICRA predicts that the Indian aviation sector will report a similar net loss of ₹30-40 billion in FY2025. This represents a significant improvement from the ₹170-175 billion loss recorded in FY2023. This positive outlook hinges on continued healthy passenger traffic growth and airlines maintaining a disciplined pricing strategy.
Cover Image Courtesy: Canva (Representative Image)
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