Credit outlook negative for aviation industry, says ICRA

This reflects a view that financial performance of airlines is likely to remain weak in near-to-medium term amid weak air traffic

Rating agency ICRA has a negative credit outlook on Indian aviation industry, reflecting a view that financial performance of airlines is likely to remain weak in near-to-medium term amid weak air traffic.

However, there has been sequential improvement despite continuation of restriction on international traffic and subdued demand from the corporate traveller segment.

Notwithstanding the improving pace of vaccination, the sharp rise in infections in select states and measures taken to curb them continue to weigh on the recovery prospects, said ICRA. Besides, the credit profile of most airlines continues to be characterised by weak liquidity position.

ICRA said it expects earnings of the industry to be adversely impacted in FY2021 due to lower revenues and high fixed costs. It estimates the aviation industry to report a significant net loss of Rs 21,000 crore in FY21 against a net loss of Rs 12,700 crore in FY20.

With an improvement in passenger traffic in FY22, ICRA expects the industry's losses to reduce to Rs 14,600 crore in FY22.

Consequently, debt levels will remain high for the industry and are estimated to be range bound at around Rs 50,000 crore (excluding lease liabilities) in FY21 and FY22 with the industry requiring an additional funding support of Rs 35,000 crore to 37,000 crore over FY21 to FY23.

While some airlines have sufficient liquidity and financial support from a strong parent which is likely to help them sustain over the near term, there are others which are in financial distress and are now facing several issues, including stretched liquidity.

Even for the former, said ICRA, credit metrics and liquidity profile have deteriorated. Many have already undertaken several cost rationalisation measures including salary cuts for their employees, leave-without-pay options and laying off pilots and crew members to cut costs.

Some airlines have sought deferment in their lease rental payments. Some of the airlines have also entered into sale and lease back transactions to shore up liquidity in the near-term.

But until the cash inflows improve, the airlines will require funding support to meet their expenses. The credit profile of domestic airlines will thus weaken materially over the near term, said ICRA.

In the near term, the credit profile of carriers will remain stressed until the carriers are able to reduce their debt burden through a combination of improvement in operating performance and by way of equity infusion.