The Troika of Fuel, Finance and Currency Creates the Perfect Storm in Indian Aviation

India’s largest airline, IndiGo, released its annual results last week. With a loss of Rs 6,161 crores for FY22, the numbers were humbling. Especially since the airline compared to its competitors has a much stronger cash position, a well-defined asset strategy and mitigating measures to reduce revenue risks.

Other airlines – private and public – are likely to report similar figures. The quantum of these results surprised many. It was hoped that 83 million flyers taking flight in FY22 — a 58% growth from the previous year — would lead to some respite.

Yet it is the input costs for the industry as a whole that have gone awry and the troika of fuel, finance and currency is creating the perfect storm. Industry cash flow continues to be artificially supported by government imposed tariff levels, which simultaneously impact the ability to manage yield. Market forces are not allowed to run their own course. It is an untenable situation. And things are likely to get worse before they get better.

Tariffs continue to be artificially supported

Indian airlines operate under a particular mandate. Namely, price caps. Or the government mandate on minimum and maximum ticket prices that airlines can charge. The government has been dictating fares since the opening of the indoor skies in May 2020.

Industry experts say this is to help the cash flow of weaker airlines and ensure they are not bled by the strongest. But the intention versus the impact of such a policy is questionable as it also prevents the rationalization of capacities that could lead to an overall stabilization of the sector.

Interestingly, the fare cap is generally irrelevant except during peak periods when flights are fully booked. And it’s the price floor that’s missing because it prevents the airline from reducing seats, capturing cash flow and managing revenue. And with airlines offering increasing numbers of flights and load factors not quite where they need to be updated, it’s an essential tool.

For example, a Delhi-Mumbai plane ticket would cost at least 40% less without the price floor. But with a price floor that is quite a high price floor, it effectively excludes a large segment of the market while interfering in airline business decisions.

Input costs are rising and there is no respite

Key input costs, led by fuel, continue to rise for airlines. Jet fuel is at levels that are on average 70% higher than the previous year and if that wasn’t tough enough, the rupee is down about 5% from the previous year. Significant investment costs for airlines, including fleet financing and maintenance, are denominated in dollars. Thus, a weakening of the rupee has devastating effects. Mitigation measures for fuel and currency prices are few and far between.

While going through these rate increases is a logical step, at some point the consumer will simply not absorb the additional pricing, which then means an impact on existing margins.

Funding issues are also starting to worsen given the inflation and interest rate scenario. Add to that the fact that almost all major airports will seek to increase airport charges. Other line items show similar trends. Banks continue to be hostile to the sector and without parent company guarantees lending is severely restricted.

As a result, airlines continue to resort to mechanisms such as sale-and-leaseback to generate cash, with the result that additional capacity comes to market without sufficient scope for deployment. With costs at current levels, the industry continues to fly but is locked into an unstable approach. Without course correction, a hard landing could very well be the result.

New entrants – domestic and foreign – will lead to further erosion of margins

The sector will see two new entrants into the domestic skies, namely Akasa Air and the relaunch of Jet Airways, which will further impact capacity and costs. Although capitalization levels differ for the two, it is reasonable to assume that entrants will plan at least 12 to 18 months towards stabilization.

To make a dent in the market, it is safe to assume that both will use proven price leverage. This means that price wars are inevitable. But it can also mean that routes that are close to breaking even may suffer losses as capacity is added.

Additionally, for all airlines, new and old, cash cushions will be essential. But carrying excess cash is something that needs to be planned for. Through access to credit facilities, strong balance sheets and continuous margin assessment. With costs rising disproportionately to revenues, cash consolidation remains a distant dream. At present, credit quality between airlines varies widely and for some weaker airlines, equity injections – usually a first measure remedy – have not happened.

Finally, if the domestic challenges weren’t tough enough, the international competitors are also gearing up. To deploy capacity where possible, offer new prices and products, and take advantage of growing demand from India. Competing with such airlines which benefit from a stronger currency and wider networks will be a task for the most experienced managers. The market has already seen new players like Qantas start to fly direct. Other airlines such as WizzAir and FlyNas are expected to follow.


Airline ratings fluctuate wildly. Mainly because of projections into the future and the uncertainty of those projections. Certainly, the uncertainty comes from structural challenges that have simply not been addressed. While it is true that passenger traffic has shown a rebound, it is also true that the market situation is such that all but one airline has no clear path to profitability. Cash flow is constrained and some airlines continue to delay payments, review contractual commitments and cancel and consolidate flights.

The current market structure of two full-service airlines and four low-cost airlines will soon evolve into a structure comprising two full-service offers, one hybrid service and five low-cost offers.

Either way, if you slice and dice the numbers, the dynamics of supply and demand don’t create very healthy margins. The bleeding will continue for a while. The losses will pile up. All is not well with Indian aviation.

—Satyendra Pandey is the managing partner of Indian aviation consultancy AT-TV. The opinions expressed are personal.

(Edited by : Ajay Vaishnav)

First post: STI

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