India’s airlines are flying towards their steepest-ever net loss of more than Rs 20,000 crore this fiscal — 44% more than the Rs 13,853 crore bled last fiscal — owing to the twin headwinds of the third wave of the Covid-19 pandemic and high aviation turbine fuel (ATF) prices.

This would push back the industry’s recovery beyond fiscal 2023, a CRISIL Ratings analysis based on three large listed airlines ― IndiGo, SpiceJet, and Air India ― which have a 75% share in domestic traffic, shows.

To be sure, domestic air traffic had seen a swift recovery after the second Covid wave and reached 86% of the pre-Covid level in December 2021 (compared with December 2019, refer to chart 1 in Annexure), while regular international flights were expected to start after January 2022.

However, the third wave has already caused domestic air traffic to plummet 25% in the first week of January. A similar trend was observed during the second wave in April and May 2021 when air traffic declined 25% and 66%, respectively, on a sequential basis.

Says Nitesh Jain, Director, CRISIL Ratings, “The three large listed airlines have already reported a net loss of Rs 11,323 crore in the first half of fiscal 2022. The sharp jump in domestic air traffic would have cushioned the losses in the third quarter, but the net loss will increase significantly in the fourth quarter as the third wave has brought back travel restrictions and flight cancellations. As a result, we expect Airlines to report steepest net loss this fiscal (refer to Chart 2 in Annexure).”

Domestic passenger load factor (PLF), a key operating metric, improved to 80% in December 2021 from 50% in May 2021, driven by increasing passenger traffic. Although PLF improved, it remained significantly lower than 88-90% in the pre-pandemic times leading to persistent operating losses. Continued suspension of scheduled international flights is further hurting the sector as international routes are generally more profitable.

Besides the decline in passenger traffic, high ATF prices (refer to chart 3 in Annexure), which account for a third of the operating cost, will accentuate pressure on profitability.

ATF prices had hit an all-time high of Rs 83 per litre in November 2021, rising from and average price of Rs 44 in fiscal 2021 and ~Rs 63 in April-June 2021. While ATF prices declined 6-8% in December 2021 and January 2022 because of reduction in value-added tax by various states, they remain high at Rs 77-78 per litre.

Says Rakshit Kachhal, Associate Director, CRISIL Ratings, “Persistent operating losses led to a 35% increase in debt (excluding lease liabilities) to above Rs 54,000 crore from March 2020 to September 2021. Continuing net losses will keep balance sheets stretched leading to a negative outlook on the sector.”

While the increasing Covid-19 infection will sharply impact air traffic over the next few weeks, CRISIL Ratings expects a swift recovery from March 2022 onwards.

In the milieu, airlines are likely to continue to conserve cash, including deferring maintenance as well as major capital expenditure, while renegotiating leases of aircrafts and keeping a leash on other fixed costs. Besides sustenance of cost control measures, a prolonged third wave, onset of newer variants and increase in competitive intensity with launch of new airlines are downside risks.