Indian aviation sector taking flight amidst challenges

The Indian aviation industry is progressing rapidly, with numerous airlines entering the competitive market in pursuit of profits. Though the demand for air travel has gone up and passenger traffic has witnessed a substantial increase, the sector continues to face challenges related to supply chain, credit, liquidity and financial distress. All these result in high losses for the airlines. 

In its recently released report for the Indian aviation sector, Investment Information and Credit Rating Agency (ICRA) presented the current situation and prospects for the airlines. The key highlights included an eight per cent rise in domestic air passenger traffic on a yearly basis. “The industry has seen a significant recovery in terms of passenger traffic as well as curtailment of net losses. It has witnessed domestic passenger traffic growth of 60 per cent in FY 2022, 60 per cent in FY 2023 and 13 per cent in FY 2024, showcasing recovery post-covid. The net loss for the industry, which was around Rs 21,700 crore in FY 2022, is estimated to have come down to Rs 3,000 to 4,000 crore in FY 2024,” says Kinjal Shah, Senior Vice President and Co-Group Head, Corporate Ratings, ICRA Limited.

Showcasing a steady recovery post-Covid19, the Indian aviation sector has seen a rapid growth in terms of passenger traffic. However, it suffers due to poor liquidity and credit profiles due to various reasons such as underutilisation of capacity, stiff competition restricting proportionate expansion in yields and persistent high Air Turbine Fuel (ATF) prices. According to the report, the average ATF prices till the month of May for FY2025 showcased a growth of four per cent on a yearly basis despite recovery in air passenger traffic and improvement in yields. However, the movement of the latter will remain monitor-able amid elevated Aviation Turbine Fuel (ATF) prices and depreciation of the INR vis-a-vis the US$ over pre-Covid19 levels, both of which have a major bearing on the airlines’ cost structure.

Shedding light on the poor liquidity and credit profiles in the aviation sector, Shah says, “While some airlines have adequate liquidity and/ or financial support from a strong parent, supporting their credit profiles, the credit metrics and liquidity profile of few remain under stress, given underutilisation of capacity, stiff competition in the sector, restricting proportionate expansion in yields and persistent high ATF prices.”

Moreover, the primary cause of the situation could be summed up to the sector suffering from supply chain challenges. By March 31, 2024, nearly 24-26 per cent of the total fleet of Indian airlines in operations was grounded due to to supply chain challenges and issues of engine failures for the Pratt and Whitney (P&W) engines supplied to various carriers. The recall of the engines globally and other existing issues with the Original Equipment Manufacturers’ (OEMs) engines in FY 2024 is the primary reason for Go Airlines (India) Limited grounding half of its fleet stalling operations. InterGlobe Aviation Limited (IndiGo) also grounded more than 70 aircraft due to engine issues, including the powder metal contamination factor with its P&W fleet.

“Considering the bulk recall of the engines globally by P&W and other existing issues with the OEMs’ engines, the testing by P&W is likely to take longer at 250-300 days. To overcome the issue to an extent, the industry is resorting to short-term leasing of aircraft. In addition, the industry has a large pending order book wherein the deliveries in FY2025 and FY2026 will add to the fleet base, and thus to the overall capacity,” remarks Shah on the supply chain challenges faced by the Indian aviation sector. 

The adverse effects of the supply chain issues can be seen as the airlines struggle with increased operating expenses towards the cost of grounding, increased lease rentals due to additional aircraft being taken on lease to offset the grounded capacity, rising lease rates and lower fuel efficiency which will impact the cost structure. Although the earnings have witnessed a gradual pace of recovery, the expected net loss for the aviation sector stands at about Rs 30-40 billion in FY2025, significantly lower than Rs 170-175 billion in FY2023 which showcases that the sector is facing challenges in earning profit. This financial distress is apparent in some airlines, with Go Airlines (India) Ltd experiencing payment defaults with vendors, aircraft lessors and financial creditors, leading to its filing for insolvency with the National Company Law Tribunal (NCLT).

To alleviate the challenges of the sector, the Government plans to introduce new policies and incentives for the MRO (Maintenance, Repair, and Overhaul) industry. These include a uniform five per cent IGST rate on the import of aircraft parts, components, testing equipment, tools and toolkits, regardless of HSN classification. Additionally, the export period for goods imported for repairs will be extended from six months to one year, along with other policy changes. In addition to extending the time limit for reimporting goods for repairs under warranty from three to five years, the Government will exempt customs duty on tools and toolkits, simplify the clearance process for parts, and allow 100 percent Foreign Direct Investment (FDI) in the MRO sector via the automatic route.

Further explaining the policy changes, Shah says, “At present, India’s presence in the MRO segment is still evolving and yet to reach a mature scale and size. Hence, this sector remains an emerging one and requires requisite Government support in terms of fiscal as well as other incentives. The Government has been announcing incentives for this sector to make it more lucrative for the MRO service providers. Hence, in the long run, such reforms are going to help the OEMs in getting the MRO services done locally and become competitive globally in terms of service offerings.”

The policy changes will ease problems for the aviation sector in the long haul as it will relieve the MRO industry allowing for Foreign Direct Investments, simplified clearances, exempted customs duty and changes in import and export policies.

Sidharth Singh

BW Reporters