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Airlines: The ascent of profitability

For LCCs, operating cash flows seen rising to decadal highs

Airline margins set for take-off as supply shock pushes up fares


Firmer fares and strong passenger-traffic growth are estimated to propel the earnings before Interest, tax, depreciation, amortisation and lease rentals (EBITDAR) margin of India’s low-cost carriers (LCCs) to 24-25% this fiscal, compared with 15-16% in the last.


Fares are expected to rise because of limited capacity additions in the industry since Jet Airways ran aground.


With the improvement in EBITDAR margin, the LCCs’ operating cash flows are expected to touch a decadal high of Rs 4,700-5,200 crore this fiscal.


The LCCs are expected to post a strong double-digit growth of 25-30% on-year in domestic passenger traffic, led by robust expansion of domestic capacity by SpiceJet and Indigo. However, non-revival of Jet Airways would curb growth at the industry level.


Profitability to rebound as airfares rise; EBITDAR margins to hop up


With the improvement in fares and robust growth in passenger traffic for LCCs, we anticipate the EBITDAR margin to rebound to 24-25% this fiscal from 15-16% in fiscal 2019. The carriers’ operating margin had come off after touching a decadal high of ~30% in fiscal 2016.


The recovery this time will be led by a significant jump in air fares due to sudden squeeze in capacity by airlines, following the grounding of the Jet Airways fleet in April.


EBITDAR margin of LCCs to soar 900 bps this fiscal


Ind AS 116 has narrowed the differential between EBITDA and EBITDAR margins


From fiscal 2020, due to implementation of Accounting Standard 116 (Ind AS 116), the earlier reporting structure of aircraft lease rentals has changed. As part of this change, the operating lease rentals of aircraft, which were earlier part of operating expenses, will now be classified as depreciation and interest expense. This has removed the differential in reporting structure between operating and financial leased aircraft in the profit and loss statement.


Accordingly, the EBITDA margin of the industry has inched closer to the EBITDAR margin from the first quarter of fiscal 2020.


Fiscal 2020 EBITDAR margins have been projected considering a 5-10% on-year decline in crude oil prices at $63-68 for calendar year 2019, depreciation in exchange rate to Rs 71/$ and a 300 bps cut in excise duty for aviation turbine fuel (ATF) in October 2018.


The benign fuel cost, coupled with expected lower foreign exchange losses and a rise in share of fuel-efficient aircraft such as A320neo and A321neo from 23% in fiscal 2019 to about 27-30% in fiscal 2020, is expected to aid contraction in operating costs (excluding rentals) in fiscal 2020.