Domestic airlines require strong promoters: India Ratings and Research

MUMBAI: The domestic airlines require a strong, supportive promoter to improve their viability amid a challenging operating environment, says a report.

Besides, a majority of domestic airlines are unlikely to enjoy investment grade ratings on a standalone profile, given the challenges in cost structure, competitive intensity and muted growth expectations in the medium term, said India Ratings and Research ( Ind-Ra) in its special report on airline industry released here today.

According to the report, the domestic airlines are prone to becoming distressed assets due to their cost structure related inefficiencies, driven by taxation and regulatory issues, high financial leverage and chronic cash flow generation issues.

Globally, the airline sector is most vulnerable to cyclical demand due to capital intensity and price-wars, it said.

Stating that higher taxes on the jet fuel erodes the operating margins of the domestic airlines by around 12-18 per cent, the report said "higher estimated maintenance cost and sundry taxes further weaken the margins."

Noting that the infrastructure-related constraints make aircraft handling and scheduling inefficient, the report said "the utilisation level (measured as block hours of an airline) of domestic aircraft is estimated to be 10-15 per cent lower than that of profitable global players."

Besides, the route disbursal guidelines, some of which mandate airlines to fly on economically inviable routes, further impact the operating margins.

According to the report, the domestic passenger load factor declined to 74 per cent in 2012 from 77 per cent in 2010, which indicates overcapacity in the airline industry, that may persist in the medium-term.

The agency expects passengers volumes may fall 3-5 per cent y-o-y in 2013 from 3.5 per cent in the previous year, considering the passenger traffic in the first five months of the current year, which stood at 5.13 million.

However, load factor may increase by 2-4 per cent y-o-y in 2013 due to the grounding of Kingfisher Airlines, thereby reducing the available capacity, the report said.

Any profligate plans for expanding fleet size by any player may de-stabilise the sector further, it added.