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According to the latest report from rating agency ICRA, the Indian aviation industry is expected to witness a more favorable financial trajectory in the coming years. Despite ongoing challenges, the sector is expected to keep its losses in a range of INR 20-30 billion for FY2025 and FY2026, down from previous estimates of INR 30-40 billion.
ICRA has revised its fiscal 2025 domestic air passenger traffic growth forecast to a 7 to 10 percent year-on-year increase due to the high base for fiscal 2024 and disruptions from extreme weather events in the first quarter of fiscal 2025. This revised outlook translates expects domestic passenger traffic of 164 to 170 million in FY2025. However, the international segment is expected to witness healthier growth, with air passenger traffic for Indian airlines expected to increase by 15 to 20 percent.
Improved industrial conditions despite pressure
The aviation sector has demonstrated strong pricing discipline, reflected in the greater spread between revenues per available seat kilometer (RASK) and costs per available seat kilometer (CASK). This improved pricing power has led ICRA to maintain a stable outlook for the sector, with continued growth in both domestic and international passenger volumes and a relatively stable cost environment.
Suprio Banerjee, Vice President & Sector Head – Corporate Ratings at ICRA, commented: “While the sector is expected to report net losses of INR 20-30 billion in FY2025 and FY2026, this is a marked improvement over previous projections due to better pricing practices. and a stable cost structure. However, pressure on yields remains as airlines strive to maintain adequate passenger load factors (PLFs) amid rising aviation turbine fuel (ATF) prices.
ICRA’s analysis shows that ATF prices, which historically accounted for 30 to 40 percent of airlines’ operating costs, increased 4 percent year-on-year in the first five months of FY2025. The average ATF price for the period was INR 99,468 per kiloliter, compared to INR 95,906 per kiloliter in FY2024.
Supply Chain Problems and Grounded Aircraft
Despite a 10 percent capacity expansion in FY2024, the number of operational aircraft in India fell to 664 by March 2024 due to supply chain challenges and engine failure issues. This represents a significant reduction compared to the 725 aircraft in service in March 2023. As of June 2024, approximately 134 aircraft, or 15-17 percent of the total fleet, remained grounded, further straining the industry’s capacity.
The report also points to supply chain disruptions impacting the availability of aircraft engines and parts, delaying deliveries and limiting the industry’s ability to ramp up capacity. This has led to higher operating costs, including higher lease rental rates for older, less fuel-efficient aircraft used to compensate for grounded aircraft.
Banerjee added: “The current supply chain challenges, coupled with the availability of pilots and cabin crew for select airlines, are likely to result in continued capacity constraints and higher operating costs in the near term.”
Prospects for capacity expansion
While the industry has seen large aircraft purchase orders, with a total of 1,660 aircraft deliveries underway, the pace of capacity expansion is expected to remain gradual due to ongoing global supply chain challenges. A significant portion of these orders are intended to replace older aircraft with new, fuel-efficient models.
ICRA expects aviation industry debt figures to remain within the improved FY2024 levels. Total debt to operating profit before depreciation, interest, taxes and amortization (OPBDITA) is expected to remain in the range of 6 to 6.5x, with interest coverage of 2 to 2.5x.
While the Indian aviation industry continues to face challenges, especially with regard to rising fuel costs and supply chain disruptions, ICRA’s latest report indicates that the sector is navigating towards brighter skies. Improved pricing discipline, a gradual recovery in international traffic and a relatively stable cost environment are expected to help airlines keep losses within manageable limits in the coming years. However, supply chain challenges and capacity constraints may continue to impact the sector’s recovery path in the near term.
