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Indian airlines prone to becoming distressed assets: India Ratings
Chandan Kishore Kant
Mumbai, 22 August
Airlines operating in India require strong and supportive promoters to improve their viability amid a challenging operating environment, according to an India Ratings & Research report.
Aviation companies are prone to becoming distressed assets due to their cost structure-related inefficiencies, driven by taxation, regulatory issues, high financial leverage and chronic cash flow generation issues, the report said. Globally, the airline sector is vulnerable to cyclical demand due to capital intensity and price wars.
The research firm estimates that tax on aviation turbine fuel erodes Indian airline companies’ operating margins by around 12-18 percentage points. Higher estimated maintenance cost and sundry taxes further weaken the margins. Infrastructure-related constraints make aircraft-handling and scheduling inefficient.
The utilisation level (measured as block hours of an airline) of domestic aircraft is 10-15% lower than that of profitable global players, it added. The route disbursal guidelines, some of which mandate airlines to fly on economically unviable routes, further impact the operating margins, the report said.
Domestic passenger load factor (PLF) deteriorated to 74% in 2012 from 77% in 2010. This indicates overcapacity in the airline industry, which may persist in the medium term. According to the domestic passenger data, for the first five months of 2013, passenger volumes may fall three-five% year-on-year (2012: down 3.5% yoy).
However, PLF may increase 200 basis points to 400 basis points year-on-year in 2013 only because one major airline has stopped operations, thereby, reducing the available capacity. Any profligate plans for expanding the fleet size by any player may destabilise the sector further.
Given the challenges in the cost structure, competitive intensity and muted growth expectations in the medium term, the research firm expects that a majority of domestic airlines are unlikely to enjoy investment grade ratings on a stand-alone profile.
