Aug. 22--Airlines operating in India are prone to becoming distressed assets because of their inefficient cost structure, India Ratings and Research Ltd said in a report released on Thursday.
Given their cost structure, competitive intensity in the business and muted growth expectations in the medium term, the ratings firm said a majority of domestic airlines are unlikely to enjoy investment grade ratings on a stand-alone basis. To address the situation, the airlines will require a strong, supportive promoter to improve their viability amid the challenging operating environment, said the report.
"Globally, the airline sector is most vulnerable to cyclical demand due to capital intensity and price wars," the report said, adding that the inefficiencies are driven by taxation and regulatory issues, high financial leverage and chronic cash flow generation issues.
India Ratings estimated that tax on aviation turbine fuel or jet fuel erodes the operating margins of Indian airline companies by 12-18 percentage points. Higher estimated maintenance cost and sundry taxes further weaken the margins, it said.
"Infrastructure-related constraints make aircraft handling and scheduling inefficient," the report said. The agency estimated the utilization level of aircraft of Indian airlines to be 10-15% lower than those belonging to profitable global companies. 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 3-5% year-on-year in 2013 (2012 -- down 3.5% y-o-y)," the rating company said.
On 16 August, Mint reported that Indian airlines, excluding the grounded Kingfisher Airlines Ltd, are expected to lose a combined $400-450 million in the second quarter of the current fiscal, citing a report by consulting firm Centre for Asia Pacific Aviation, or Capa. State-run Air India Ltd will account for the largest share of the loss, but as the airline continues to be funded by the government and its overall financial performance has improved in the past year, it is not expected to press the panic button, Capa said.
In the first quarter of the current fiscal, the airline industry lost nearly $200 million although low-fare carriers posted profit in the range of $40-$50 million. Airlines, excluding Kingfisher Airlines, lost an estimated $1.95 billion in the last fiscal on a combined revenue of $9.5 billion.
Copyright 2013 - Mint, New Delhi
