New Delhi: Vijay Mallya is the target of all-round ridicule for taking large loans from banks to run Kingfisher Airlines, defaulting on these loans and then cocking a snook at feeble recovery attempts by banks and government agencies. Kingfisher’s demise in 2012 and the debt pile-up was a result of the gross mismanagement by Mallya and his cronies in the airline, but other Indian airlines which survived the cost mayhem do not seem to have learnt many lessons. One look at the financials of India’s aviation industry makes it is clear that airlines’ cost strategies are still risky though their managements are more robust.
Airlines’ bottomlines have begun improving for the past few quarters but solely due to falling jet fuel prices – their costs remain as high as ever – and any significant uptrend in fuel prices over the next few months could bring India’s airlines back on their knees. Also, Kingfisher certainly overleveraged itself without adequate assets but the existing airlines are not really blessed with ideal debt:equity ratio either.
Take the case of state owned Air India, which accounts for the largest share of Indian airlines’ total debt pile. According to the latest data made available in Parliament, the airline was sitting on borrowings of over Rs 51,000 crore till March 31 last year. That is more than five times the debt that KFA has on its books at about Rs 9,000 crore. MoS Aviation Mahesh Sharma said in Parliament earlier this month that Air India has a total debt burden of Rs 51, 367.07 crore and this includes Rs 22,574.09 crore outstanding on account of aircraft loans.
As per the Turnaround Plan (TAP), the equity infusion by the Government into Air India also includes Rs 18,929 crore for the repayment of the government-guaranteed loans/interests till FY 2020/21. Outside of this, Air India is seeking fresh government guarantee to refinance existing term loans of Rs 10,000 crore. Air India’s interest bill alone for FY16 is estimated to be around Rs 3,700 crore! Since government is the owner of Air India, the airline seems to have a perpetual cushion to fall back on, something no private airline can boast of.
In a note to clients, Ashutosh Somani and Nitin Agarwala of J M Financial have analysed the debt situation of listed airlines. SpiceJet is expected to have net debt of Rs 1712.5 crore (Outgoing investors advances towards warrants at Rs 230.5 crore and CRPS at Rs 170 crore have been adjusted towards net debt) on its books by the end of next fiscal, Indigo is expected to have much less debt at jut Rs 46 crore by then. In fact, if one were to compare the Net Debt to EBIDTA ratio of airlines from around the world, SpiceJet is at 1.7, IndoGo at minus 0.4 but Jet Airways is at 5.1. The most leveraged airline as a percentage of EBIDTA is Norwegian at 7.7, followed by Jet Airways and then AirAsia BhD at 4.4.
An analyst with another brokerage pointed out that only debt numbers do not provide the true picture as mostly aircraft these airlines operate are on operating lease and this is an off-balance sheet item. So Kingfisher may be getting all the bad press but some other Indian airlines are also struggling in a debt trap.
In their report, Somani and Agarwala have also flagged another crucial aspects: an increase in Brent crude can materially impact airline earnings as fuel constitutes 40-50 percent of total cost of airlines. “We estimate that about 10 percent appreciation in crude can adversely impact FY18 EBITDAR by as much as 7.5 percent for SpiceJet and 8 percent for Indigo. Earnings could be adversely impacted by as high as 21 percent for SpiceJet and 18 percent for Indigo,” the two analysts have said.
A report in Mint newspaper last month cited the CASK – Cost per Available Seat Kilometer – of India’s airlines to drive home the point that fuel prices are make or break , since cost rationalization does not seem to be successful for India’s airlines. The report quoted data from a report by the Centre for Asia Pacific Aviation (CAPA), a global aviation consultancy.
The report said CASK (excluding fuel), a key performance metric of airlines, has gone up across the board in the first nine months of the current fiscal. The only exception is Jet Airways where it declined marginally by 0.2 percent. Market leader IndiGo posted 10.2 percent increase in CASK (excluding fuel). This just shows that improving financials of airlines masks their failure on the cost front.
Somani and Agarwala said besides fuel costs, rupee depreciation is the other significant risk for airlines since and can adversely impact earnings. Costs like aircraft lease rentals which constitute over 20 percent of total cost and fuel expenses are dollar denominated/benchmarked. “We estimate that a ~5 percent rupee depreciation can adversely impact FY18 EBITDAR by as much ~4.5 percent for SpiceJet and ~5 percent for Indigo.”
It is pertinent to raise the red flag over airlines’ finances and their cost management strategies now because apart from the usual risk factors, heightened competitive intensity will become an added burden if crude oil prices start climbing up.