The ascent of profitability - For LCCs, operating cash flows seen rising to decadal highs - Crisil
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The ascent of profitability For LCCs, operating cash flows seen rising to decadal highs CRISIL Opinion l September 2019
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
(%)
35% 30%
30% 26% 26%
24-25%
25% 21% 21%
19%
20%
15%
10% 14% 14% 15-16%
11% 11%
5% 7% 10%
0% 5% 6%
-5% -1% 0 to -2%
-10% -6%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20P
EBITDA margins - LCC* EBITDAR margins - LCC
E: Estimated, P: Projected
*Due to a change in reporting by airlines to Ind AS 116, EBITDA margins for the players may not be comparable in FY20.
Note: Considering Indigo, SpiceJet, GoAir and AirAsia (India), which account for 70% of domestic revenue passenger kilometer
(RPKM) in FY19
Source: Company reports, CRISIL Research
2Ind AS 116 has narrowed the differential between EBITDA and EBITDAR margins
35% 32% 32%
30%
28% 28%
30% 25% 26%
23% 25%
25% 20% 19% 19%
20% 17% 17% 25%
15%
12% 13%
15%
9%
10% 6% 7%
4% 5%
3% 2%
5%
0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
-5% FY17 FY17 FY17 FY17 FY18 FY18 FY18 FY18 FY19 FY19 FY19 FY19 FY20
-12%
-10%
-15%
EBITDA margins* EBITDAR margins*
Note: *EBITDA/EBITDAR margins are for Indigo and SpiceJet, which account for 79% of LCCs RPKM in FY19
LCCs include Indigo, SpiceJet, GoAir and AirAsia (India) which account for 70% of RPKM in FY19
Source: Company reports, CRISIL Research
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.
3Chief contributors to operating cost (excluding rentals) for LCCs, fiscals 2018-2020
(₹/ASKM)
3.4
3.2
0.01 0.02 0.05 0.02 0.02 0.02
0.11
3
3.00
2.8 0.28
2.74
2.6
3.10 3.01
2.4
2.2
2
FY18 Fuel Employee Maintenance Others FY19E Fuel Employee Maintenance Others FY20P
Note: Includes Indigo, SpiceJet, GoAir and AirAsia India which account for 70% of domestic revenue passenger kilometers
(RPKM) in FY19
Source: Company reports, CRISIL Research
Industry to see single-digit growth in passenger traffic this fiscal, but LCCs 4x that
For the industry overall, domestic passenger traffic is forecast to grow 6-8% this fiscal, mainly due to non-revival of
Jet Airways.
This is way below the 14% growth logged in fiscal 2019 and the compound annual growth rate (CAGR) of 18% seen
in the last five years, but is higher than our earlier estimate of 2% growth and factors an upward revision in capacity
addition plans of LCCs.
LCCs, on their part, are expected to post strong double-digit growth of 25-30% in passenger traffic for fiscal 2020.
The traffic forecast assumes
Capacity (in terms of available seat kilometers (ASKM)) increase of more than 45% and 30% by SpiceJet and
Indigo, and 15-20% by the rest of the players, including Go Air, AirAsia (India) and Vistara
Non-revival of currently grounded Boeing 737 Max for fiscal 2020.
Non-revival of Jet Airways as the deadline set by lenders for on-boarding new investors through Expression of
Interest has expired
Even if Boeing 737 Max aircraft resumes operations post H1 FY20, the domestic passenger traffic growth for the
industry could grow faster by about 80-100 bps at best to 7-9%.
The capacity addition of players is supported by deregistration of aircraft of Jet Airways, which were under operating
lease (accounting for about 85% of the airline’s fleet) and re-leasing them to players such as SpiceJet and Vistara.
4For LCCs, domestic passenger-traffic growth has been consistently faster than the industry
35% 30% 29%
30% 26% 25-30%
23% 23%
25% 21% 21% 20%
20%
22% 22%
15% 19% 12% 19%
16%
10% 13% 14%
5%
6-8%
0% 5%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P
-5%
-10% -5%
Industry LCC
Note: LCCs include Indigo, SpiceJet, GoAir and AirAsia (India)
Source: Directorate General of Civil Aviation (DGCA), CRISIL Research
Quarterly on-year growth in domestic passenger traffic for the industry and LCCs
40% 100%
34%
35% 32% 95%
90%
30% 25% 26% 26%
25% 85%
23% 23%
25% 22% 80%
18% 19%
20% 24% 24% 17% 24% 75%
16%
21% 20% 70%
15% 19% 18% 18% 19%
82% 65%
10% 15%
12% 74%
60%
5% 1% 55%
65% 65% 68% 66% 67% 65% 67% 67% 68% 69% 70%
0% 5% 50%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
FY17 FY17 FY17 FY17 FY18 FY18 FY18 FY18 FY19 FY19 FY19 FY19 FY20
LCC Share Industry LCC
Source: DGCA, CRISIL Research
Due to the admittance of Jet Airways in the National Company Law Tribunal (NCLT), even the scheduled slots of Jet
are being reallocated to other airlines on a temporary basis, especially at key metro airports.
Meanwhile, international passenger traffic growth for the industry is expected to fall to 3-5% on-year in fiscal 2020,
compared with 6% in fiscal 2019. Despite the lower growth, the share of such traffic for domestic carriers is expected
to remain flat at 37%. The estimate factors the evacuation of Jet Airways – which accounted for 33% of the
international market among domestic carriers in terms of RPKM – and significant expansion planned by other
domestic players.
5Spurt in fares highest in many years
Domestic fares for the industry are expected to jump 7-9% on-year, the highest rise since fiscal 2013, when Kingfisher
exited. Consequently, CRISIL Research expects domestic passenger load factor (PLF) for the industry to remain flat
at ~86% in fiscal 2020.
Domestic fare hike this fiscal to be highest since fiscal 2013
20% 17%
15%
10% 7-9%
5% 2% 2% 2% 2%
0-1%
0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20P
-5% -3%
-10% -8%
-10%
-15%
Note: The above fares are for the industry
Source: Company filings, CRISIL Research
Operating cash flows of LCCs in fiscal 2020 to be at a decadal high
With operating costs rising, LCCs are estimated to have hovered around breakeven level in fiscal 2019, in line with
their operating margins.
For fiscal 2020, however, CRISIL Research expects operating cash flows to jump to a decadal high of Rs 4,700-
5,200 crore, led by a significant improvement in fares and EBITDAR margins. Moreover, unlike fiscal 2019, the
majority of the LCCs are expected to post positive operating cash flows.
Jump in operating margins to boost cash flows of LCCs this fiscal
(₹ cr)
6,000
4,700 - 5,200
5,000
4,000 3,352 3,525
3,000 2,602
1,967
2,000
798 605
1,000 516
0-300
-
(1,000) (462)
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20P
Note: includes Indigo, SpiceJet, GoAir and AirAsia (India) which account for 70% of the domestic RPKM domestic market in FY19
FY19 numbers are based on abridged financials of listed players
Source: Company reports, CRISIL Research
6Analytical contacts
Hetal Gandhi Elizabeth Master Pavan Kumar
Director, CRISIL Limited Associate Director, CRISIL Limited Senior Analyst, CRISIL Limited
hetal.gandhi@crisil.com elizabeth.master@crisil.com pavan.kumar@crisil.com
Media contacts
Hiral Jani Vasani Parmeshwari Bhumkar
Saman Khan
Media Relations Media Relations
Media Relations
CRISIL Limited CRISIL Limited
CRISIL Limited
D: +91 22 3342 5916 D: +91 22 3342 1812
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hiral.vasani@crisil.com parmeshwari.bhumkar@crisil.com
saman.khan@crisil.com
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