Following a near tripling of operating profit in FY24, the domestic airline industry will see its operating profit to touch over 20% next fiscal, said credit rating agency CRISIL Ratings Ltd.

“The domestic airline industry will see operating profit rise more than 20% next fiscal, after a near-tripling this fiscal, fuelled by a strong recovery in passenger traffic, ability to pass on volatile fuel prices to flyers, and reduced fluctuation in foreign exchange rates,” CRISIL Ratings said.

This will support their credit metrics despite significant increase in debt expected through this and next fiscals to fund fleet additions. An analysis of three airlines, which account for two-thirds of India’s air traffic, indicates as much.

Passenger traffic should ascend 18–20% this fiscal (on-year), comfortably surpassing the pre-pandemic level, with business and leisure travel soaring.

This trajectory is expected to sustain next fiscal, too, given economic growth.

The rise in passenger traffic has strengthened the ability of airlines to pass on fuel costs (comprising 40-50% of the total cost) to flyers. This is reflected in the gross margin, which remained stable despite fuel prices more than doubling in the last three fiscals, CRISIL Ratings said.

Another factor supporting improvement in profitability is lower foreign exchange (forex) losses compared with last fiscal, driven by a relatively steady exchange rate.

Forex volatility impacts the profitability of airlines as two-thirds of their total debt (including lease liabilities) and about a third of their total costs are denominated in foreign currency.

“Next fiscal, operating profit growth is expected to be in the vicinity of 20% from Rs 18,000-20,000 crore estimated this fiscal, even as technical issues in some engine types could ground some aircraft and limit the increase in operational fleets. The impetus to passenger traffic growth should continue next fiscal, though growth in operating profits will normalise given the high base of this fiscal,” Mohit Makhija, Senior Director said.

The calculus assumes steady forex movement next fiscal, just the way it has been this fiscal.

A convergence of the favourable factors and healthy profit potential, presents a case for fleet additions. Domestic airlines have placed large purchase orders in the past few years. Net fleet additions by airlines in our sample set is likely to be 80-85 this fiscal and may remain at similar levels next fiscal, the credit rating agency said.

Around two-thirds of the capital outlay towards these fleet additions will be funded through debt (including lease liabilities) and remaining through internal accruals and equity infusion.

According to Snehil Shukla, Associate Director, while net debt (including lease liabilities) will double to about Rs 1 lakh crore by the end of next fiscal over fiscal 2023, credit metrics will strengthen supported by strong operating performance and equity infusion.

That being said, timely infusion of equity, lower-than-anticipated operational fleets due to technical issues and any adverse movement in the exchange rate will be monitorable, CRISIL Ratings said.