Capital structure of airlines to improve, says report

The decision to allow foreign airlines to invest up to 49 per cent stake in domestic carriers is expected to improve the capital structure of airlines with viable business models, according to a report by India Ratings and Research.

The possible equity infusion would not only de-leverage the sector but also provide funds for long-term growth. However, structural challenges may limit its attractiveness for such foreign investors, at least in the medium term, the report has said.

In addition to equity infusion, stronger strategic and operational ties with foreign partners with stronger credit profile may potentially improve the credit profile of domestic airlines. This may have a beneficial impact on the funding cost of the sector, known for being highly capital intensive.

Lack of control

While the long-term growth potential of the Indian market may draw interest from international airlines, the continuing structural weakness and regulatory risks may increase the perceived risk in such tie-ups. Other key considerations of pospective joint venture partners would be the lack of majority equity control in addition to specific board constitution, the IRS report added.

The key structural weakness of the Indian airlines industry is its higher operating costs, driven primarily by a higher tax on aviation fuel, compared with that of the other emerging markets. The cost of infrastructure development is also higher for the Indian industry — which usually translates into higher airport usage charges. This is in addition to the currently limited airport infrastructure, which acts as a bottleneck to significantly improving scheduling efficiency. The latter, the report adds, is a direct drag on operating cost.

For the financial year ended March 2012 (FY12), EBITDA margin of three of the listed airlines ranged between one per cent and a negative 37 per cent. In India, aviation turbine fuel (ATF) accounts for 40-50 per cent of the airlines’ operating costs compared with a standard of 30 per cent. This is mainly because of higher taxes on ATF, at around 35-40 per cent.

http://www.thehindubusinessline.com/todays-paper/tp-logistics/article3923856.ece