Airline companies operating in India require a strong, supportive promoter to improve their viability amid the challenging operating environment, says India Ratings and Research (Ind-Ra).
The companies are prone to becoming distressed assets due to their cost structure related inefficiencies driven by taxation and regulatory issues, high financial leverage and chronic cash flow generation issues. Globally, the airline sector is most vulnerable to cyclical demand due to capital intensity and price wars, the ratings agency said.
Ind-Ra 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 agency estimates that the utilisation level (measured as block hours of an airline) of domestic aircraft is 10-15 per cent lower than that of profitable global players. The route disbursal guidelines, some of which mandate airlines to fly on economically unviable routes, further impact the operating margins.
Domestic passenger load factor (PLF) deteriorated to 74 per cent in 2012 from 77 per cent 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 (5m13), passenger volumes may fall 3-5 per cent y-o-y in 2013 (2012: down 3.5 per cent y-o-y). However, PLF may increase 200bp-400bp y-o-y in 2013 only because one major airline has stopped operations, thereby reducing the available capacity. Any profligate plans for expanding fleet size by any player may destabilise the sector further.