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The financial performance of Indian airlines is likely to remain under pressure in the near term, even as recovery in domestic passenger traffic has been healthy, said Corporate Rating firm ICRA.

Elevated ATF prices will continue to pose a major threat to earnings and the liquidity profile of the airlines in the near to medium term. Also, the depreciation of the Indian Rupees against the US dollar (which adversely impacts lease rentals, maintenance cost and other overheads) will have a major bearing on the airlines' cost structure. This apart, likely near-term relaunch of Jet Airways and the entry of low-cost domestic carrier, Akasa Air, will further intensify competition in the domestic aviation industry.

The airlines' efforts to maintain and/or grow their market share will limit their ability to expand margins in an elevated fuel cost environment, said Suprio Banerjee, Vice President & Sector Head - Corporate Ratings, ICRA Limited.

The domestic aviation industry continues to witness recovery as domestic passenger traffic for September 2022 is estimated at nearly 103 lakh, about 2 per cent higher compared to nearly 101 lakh in August 2022 and about 46 per cent higher in comparison to the domestic passenger traffic in September 2021.

The airlines' capacity deployment in September 2022 was nearly 27 per cent higher than September 2021. However, it was lower by about 9 per cent than the pre-Covid levels.

It is estimated that the domestic aviation industry operated at a passenger load factor (PLF) of 84 per cent in September 2022, against 73 per cent in September 2021 and 86 per cent in September 2019. The international passenger traffic for Indian carriers in September 2022 strongly surpassed the pre-Covid level of 25.1 lakh by 34 per cent, said ICRA on Tuesday.

It said that a steady rise in prices of aviation turbine fuel (ATF) and a general inflationary environment continue to dampen the industry earnings, with ATF prices in October 2022 higher by nearly 60 per cent on a Y-o-Y basis. However, the same declined by 4.5 per cent sequentially. While airlines have been increasing yields, in ICRA's view the same has not been adequate to offset the impact of the rising ATF prices.

"A quick recovery in the domestic passenger traffic is expected in FY2023, aided by normalcy in operations and a waning pandemic. However, the earnings recovery for domestic airlines will be slow-paced due to elevated ATF prices in addition to the rupee depreciation against the US dollar amid a heightened competitive environment," it added.