The domestic aviation industry is expected to report a net loss of Rs 25,000-26,000 crore this fiscal with elevated jet fuel prices and fare caps continuing to pose a major challenge for the airlines' profitability, domestic rating agency ICRA Ltd said on March 3.

The domestic airlines, however, are likely to post a reduced net loss of Rs 14,000-16,000 crore in the next financial year on the back of a "notable recovery" in air passenger traffic and lower level of debt, ICRA said.

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The ratings agency also estimates that the industry will require an additional funding in the range of Rs 20,000-22,000 crore during FY22-24. ICRA said it expects domestic air passenger traffic to witness a strong Y-o-Y growth of 50-55 per cent in 2021-22 supported by the fast pace of vaccination and gradual relaxations in restrictions by the regulatory authorities.

However, this recovery will be on a much lower base of FY2021, it said. It added that this will be significantly lower than the pre-COVID-19 levels, given that the recovery to pre-COVID-19 levels is expected by FY2024.

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"With the onset of the second wave of the pandemic and the later emergence of the Omicron variant, the recovery in passenger traffic remained gradual in the current fiscal. Further, elevated aviation turbine fuel (ATF) prices, (which were 68 percent higher year-on-year basis in 11 months of the ongoing fiscal FY2022) and continued fare caps continue to pose a major challenge for the profitability of the airlines," Suprio Banerjee, Vice-President and Sector Head of ICRA Ltd, said.

Therefore, the Indian aviation industry is expected to report "a net loss of Rs 250-260 billion (Rs 25,000-Rs 26,000 crore) in FY2022," as per earlier estimates of ICRA, he said. However, the expected commencement of scheduled international operations and the waning Omicron wave will result in a notable recovery in passenger traffic in FY2023, said Banerjee.

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"Coupled with lower debt levels, estimated to reduce to around Rs 1,000 billion (including lease liabilities) in FY2022 driven by a notable reduction in debt levels in Air India Ltd before the stake sale, the net losses are likely to reduce to around Rs 140-160 billion in FY2023," he said.

This is even though airlines will have to pay much higher fuel bills in FY2023, owing to a sharp rise in crude oil prices amid rising geopolitical development surrounding the Russia-Ukraine conflict, Banerjee added.

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While debt reduction in FY2022 is largely driven by a notable reduction in the debt level in Air India Ltd before its stake sale, ICRA said it continues to maintain its negative credit outlook on the Indian aviation industry. This is given the elevated ATF prices, overhang of the recent COVID-19 wave and continued suspension of scheduled international travel.

The recovery in domestic air passenger traffic is expected to be supported by pent-up demand in the leisure travel segment and gradual recovery in business travel as corporate offices move towards the resumption phase, after the third wave, ICRA said.

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The impact of the pandemic has been more profound and long-lasting on international travel, compared to domestic travel, with scheduled international operations still under suspension, it stated. In the near term, the balance sheets of Indian carriers will remain stressed until the carriers are able to reduce their debt burden through a combination of improvement in operating performance and/or through equity infusion, according to the rating agency.