The future of Indian aviation in 2025: ICRA Report

India’s aviation sector is soaring to new heights, driven by increasing passenger traffic, expanding international operations, and evolving market dynamics. According to a recent report by ICRA, the domestic aviation industry is poised for a year of moderate growth in FY2025, despite facing challenges like supply chain constraints and rising operational costs.

This article touches down to the key findings of the report, presenting a comprehensive analysis of the trends shaping the Indian aviation landscape. Kinjal Shah, Senior Vice President & Co- Group Head, ICRA, commented, “ICRA expects the industry to report a net loss of Rs. 20-30 billion in FY2025 and FY2026 each, significantly lower than the losses witnessed in the past supported by improved pricing power of the airlines. The spread between revenue per available seat kilometre and cost per available seat kilometre (RASK-CASK) saw some moderation in H1 FY2025 over FY2024 due to higher fuel prices and overall increased costs amid grounding of aircraft, while yields moderated marginally as airlines strove to maintain adequate passenger load factors (PLFs). Nonetheless, the same is expected to pick up in H2 FY2025, amid healthy passenger traffic. The industry debt metrics in FY2025 are expected to remain stable, with interest coverage of 1.5-2.0x times.”

“As on September 30, 2024, the industry had a total fleet of 853 aircraft (including ~144 aircraft on ground). There are large aircraft purchase orders announced by various players in the industry and as per the indicative numbers, the total pending aircraft deliveries is around 1,660, which is almost double the current fleet in operations. However, a large part of these is towards replacement of old aircraft with new fuel-efficient ones. ICRA believes that capacity addition for the industry will only be gradual as the supply chain challenges faced by the aircraft and engine OEMs may result in intermittent delays in deliveries.

Furthermore, a sizable part of the fleet added by airlines will be meant for expanding international operations. In FY2024 and H1 FY2025, the share of Indian carriers in international traffic (to and from India) stood at 43-44 per cent. This offers adequate growth potential for Indian carriers to gain traction in international traffic over the medium term,” Shah added.

Domestic growth
The domestic air passenger traffic for FY2025 is projected to grow by 7-10 per cent, reaching a robust 164-170 million passengers. In the first half of FY2025 alone, 79.3 million passengers took to the skies, marking a 5.3 per cent year-on-year increase despite disruptions caused by extreme weather, including severe heat waves. This uptick demonstrates the sector's resilience and underscores the enduring demand for domestic air travel in India.

International passenger traffic is expected to grow at an even faster pace, with a projected year-on-year increase of 15-20 per cent, bringing the total to 34-36 million passengers by the year-end. The sustained growth in international travel showcases the expanding footprint of Indian carriers in global markets, capturing 43-44 per cent of international traffic to and from India.

Financial Performance
Despite the growth in passenger volumes, the Indian aviation industry is expected to incur net losses of Rs  20-30 billion in FY 2025 - 26. These losses are significantly lower than those of previous years, thanks to improved pricing power among airlines. However, profitability remains elusive due to rising fuel costs, higher lease rates, and operational inefficiencies caused by grounded aircraft.

The average aviation turbine fuel (ATF) price for the first eight months of FY2025 stood at Rs  96,192 per kiloliter, a 6.8 per cent decrease year-on-year but still significantly higher than pre- covid levels. Fuel costs, which constitute 30-40 per cent of an airline's expenses, continue to weigh heavily on the industry. Additionally, fluctuations in the Rupees and Dollars exchange rate impact foreign-denominated expenses, including lease payments and maintenance costs.

Supply chain challenges
One of the most pressing issues for the industry is the grounding of aircraft due to engine failures and global supply chain disruptions. As of September 30, 2024, 16-18 per cent of the total fleet, or approximately 144 aircraft, were grounded. While this represents an improvement from the 20-22 per cent grounding rate observed in 2023, the challenges persist. Airlines have been forced to lease older aircraft on short notice, leading to increased operating costs and reduced fuel efficiency.

The industry’s fleet size currently stands at 853 aircraft, with pending orders for an additional 1,660 planes. However, the pace of fleet expansion is likely to be gradual due to delays in deliveries from original equipment manufacturers (OEMs) and supply chain bottlenecks. A significant portion of these new aircraft is expected to replace older models, aligning with the industry's push for fuel efficiency.

Indian carriers are capitalising on the growing demand for international travel. The share of Indian airlines in international traffic offers substantial growth potential, especially as they continue to expand routes and improve service offerings. Fleet additions planned for FY2025 will further bolster their ability to capture market share in the international segment.

Operational hurdles
The availability of trained pilots and cabin crew remains another critical challenge. Airlines have faced disruptions in schedules due to staffing shortages, leading to cancellations and delays. Addressing these human resource constraints will be crucial for the industry to maintain its growth trajectory.

Future ahead
ICRA maintains a stable outlook for the Indian aviation industry, buoyed by healthy passenger traffic and improving financial metrics. Interest coverage ratios are expected to remain stable, ranging between 1.5-2.0x. The second half of FY2025 is anticipated to witness stronger financial performance as yields improve and passenger load factors remain high.

As the Indian aviation industry enters FY2025, it stands at the cusp of transformation. Despite obstacles like supply chain disruptions, fuel price volatility, and operational inefficiencies, the sector continues to demonstrate resilience and adaptability. With a strategic focus on fleet modernisation, international expansion, and improved service delivery, Indian aviation is well-positioned for sustained growth in the years to come.