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The turbulence in India’s aviation sector isn’t ending anytime soon

By Kamalika Ghosh

There’s no fair weather in sight for the Indian airline industry.

The pressure on profitability is unlikely to ease in the next few months given the rising costs, among other reasons, Sydney-based aviation think tank Centre for Asia Pacific Aviation (CAPA) said in a recent report.

“For most carriers, the fuel price is already close to or at the break-even price. CAPA expects industry-level profitability to be constrained in FY2019 (April 2018-March 2019) relative to last year due to the twin impact of rising costs and lower yields due to rapid capacity induction,” the report, released last week, said.

The cost of aviation turbine fuel (ATF) has soared nearly 30% on average in India over the past year, and about 25% in just the last six months. In June, IndianOil Corporation (IOC), the country’s largest fuel retailer, hiked prices for the 11th consecutive month.

In addition, the Indian rupee has been under pressure due to rising crude oil prices and higher capital outflows, losing over 8% against the dollar in 2018. On June 28, it touched a lifetime low of Rs69.01 against the US currency.

These factors are already weighing heavy on the aviation industry. In financial year 2018, it saw a higher-than-estimated aggregate loss of around Rs2,500 crore ($364 million). The following year, too, began on a rough note.

In April-June 2018, IndiGo, India’s largest airline by passengers flown saw net profit nosedive 97% year-on-year to Rs28 crore. ”The current level of yields is not sustainable in long term, especially the yields received from the (ticket bookings) during the 0-15 day window,” Greg Taylor, the company’s senior adviser, said during a post-earnings investor call on July 30.

The pressure on the balance sheet may hurt airlines’ expansion plans, CAPA said.

Investment woes

Buoyed by the positive market conditions over the past few years, Indian airlines went all out to expand their fleets. But with dwindling profitability, these purchases may become hard to close.

The carriers are expected to get deliveries of about 100 planes annually over the next five years, according to CAPA. Companies will need about $50 billion to take these deliveries, it estimates.

“Projected fleet expansion represents a major opportunity for aircraft investors looking to deploy capital in new generation assets. However, despite the strength of underlying demand, operators in the Indian market face a number of challenges,” CAPA said.

On the cost front, they pay some of the world’s highest rates of fuel tax and also incur levies on aircraft leases. On the supply side, infrastructure and skills shortages (particularly in the case of commanders) potentially constrain growth.