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Domestic air travel witnessed nearly 60 per cent YoY growth in FY2023 but is still 4 per cent lower than pre-Covid levels.

Despite healthy recovery in passenger traffic, the domestic aviation industry continues to face challenges on account of elevated ATF prices and depreciation of the Indian rupee with respect to the US dollar, both of which have a major bearing on the airlines' cost structure, said an ICRA report on domestic aviation sector.

Fuel costs account for nearly 30-40 per cent of the airlines' expenses, while 35-50 per cent of their operating expenses - including aircraft lease payments, fuel expenses, and a significant portion of aircraft and engine maintenance expenses - are denominated in dolalr terms. Furthermore, some airlines also have foreign currency debt.

While domestic airlines also have a partial natural hedge to the extent of earnings from their international operations, overall, their net payables are in foreign currency.

Suprio Banerjee, Vice President & Sector Head - Corporate Ratings, ICRA, said that for FY2023, domestic passenger traffic is estimated at nearly 1,360 lakh, a YoY growth of nearly 60 per cent over 852 lakh in FY2022, and only short by 4 per cent, compared to pre-Covid levels of 1415 lakh in FY2020.

"The domestic aviation industry continues to witness recovery, with domestic passenger traffic for March 2023 estimated at nearly 130 lakh, about 8 per cent higher in comparison to the domestic passenger traffic of about 121 lakh in February 2023, 22 per cent higher in comparison to 106 lakh in March 2022 and 12 per cent higher by pre-Covid levels of 116 lakh of March 2019," he said.

"For FY2023, the overall airlines' capacity deployment was higher by 38 per cent as compared to FY2022. The airlines' capacity deployment in March 2023 was higher by nearly 14 per cent than in March 2022 and 7 per cent higher than pre-Covid levels of March 2019. It is estimated that the domestic aviation industry operated at a passenger load factor (PLF) of about 89 per cent in March 2023, against 82 per cent in March 2022 and 87 per cent in March 2019 (pre-Covid levels)," he added.

The pace of recovery in industry earnings will be gradual owing to the high fixed-cost nature of the business. The industry is estimated to report a net loss of Rs 110-130 billion in FY2023 due to elevated ATF prices twined with depreciation of the INR against the US$. However, the same is much lower than the net loss of Rs 235 billion in FY2022, said the ICRA report.

The outlook on the Indian aviation industry remains stable. The stable outlook was revised from negative in the recent past, on the back of fast-paced recovery in domestic passenger traffic in FY2023 and expected continuation of the same in FY2024, it said.