Bank lending to aviation sector fell 58% in 2024 on fall in new plane orders

Net borrowing is the difference between the amount of money an industry or entity borrows and the amount of money it saves or lends out.

The total outstanding loans to the aviation industry rose 17 percent at end-November 2024 compared with a 65.4 percent increase over the same period in 2023 and a contraction of 8.7 percent in 2022.

Bank executives and airline company executives Moneycontrol spoke to attributed the lower credit demand to a fall in new plane orders and lower hirings in the sector witnessed in 2024 when compared to 2023.

Despite the lower borrowing seen in 2024 and the liquidation of two airlines in the country in 2024, most bankers Moneycontrol spoke to were confident in the growth of the aviation industry in India, especially the growth of the country's two largest airlines, IndiGo and Air India.

Bankers said that they are looking at long-term lending as they are positive on the medium-to-long-term growth of the segment and are confident that lending to the sector will rise in the coming years after new plane deliveries start to both IndiGo and Air India.

"Most lenders in India are confident of lending to the two large airlines and going forward there is likely to be a lot of healthy competition between lenders to provide funds to the largest airlines not only in India but the world," said a chief executive officer of a private bank who did not wish to be named.

He added that smaller players in the airlines space will have to prove their reliance and operational excellence before inviting lower interest rates and being eligible for higher quantum of loans, but added that the growth of the domestic Indian market offers room for all players to grow.

Executives of some airlines who spoke to Moneycontrol said that 2024 was a year of consolidation and sustainable growth for the Indian aviation market, which has not completely recovered from the aftermath of the Covid-19 global pandemic.

A senior Air India executive said that as deliveries of aircraft, especially wide-body planes, increases from 2026-27, and the international market opens up for Indian airlines, carriers will look to raise more funds to fuel growth.

He added that airlines will also look to borrow more in the coming years if the Indian rupees continues its long-term trend of depreciation against the US dollar, and airlines are forced to hedge against high fuel rates and forex rates.

A senior IndiGo executive too told Moneycontrol that the airline may look to increase its market borrowing to hedge against high fuel prices and forex rates if the rupee depreciation continues.

The official, who did not wish to be identified, added that IndiGo enjoys a better interest rate from domestic banks compared to the return the airline makes on hedging against foreign currency and fuel price movements. Banks are eager to lend to domestic airlines at the moment due to the expected growth of the Indian aviation market for the next few years and the strong financial position of incumbent players, the executive said.

Domestic airlines may also be forced to borrow more funds due to rising cost as they ramp up their fleet expansion plans. They are collectively expected to add 90-100 new aircraft in 2025, with the number expected rise further in 2026 and beyond.

In all, Indian airlines are now estimated to have nearly 1,300 aircraft on order. These are likely to be delivered till mid-2030s. India is the world's third largest aviation market and is also among the fastest-growing major aviation markets globally.

In August 2024, Moneycontrol had reported that Akasa Air, India’s newest airline, was planning to raise as much as $1 billion through debt and equity over the next three years to expand its fleet size and boost market share.

Sources mentioned that Akasa Air's aircraft leasing costs are expected to rise from $80-90 million per annum at present (for 24 aircraft) to around $250-300 million per year for 74 aircraft, over the next three years. The airline expects to receive deliveries of 202 aircraft over eight years, giving it a steady stream of new aircraft to support its domestic and international expansion plans.

Domestic airlines may also be forced to borrow more funds to make up for losses they are currently suffering. According to ICRA Limited, the industry is expected to report a collective net loss of Rs 2,000-3,000 crore in both FY25 and FY26, even as it projected a 7-10 percent year-on-year rise in domestic air traffic to 164-170 million in FY25. International traffic for Indian carriers is expected to grow even faster, with a 15-20 percent rise, reaching 34-36 million passengers by the end of FY25.

Kinjal Shah, senior vice-president at ICRA, had last month said that the industry is expected to report a net loss but it would come in significantly below the losses witnessed in the past, supported by improved pricing power.

The cost dynamics are sobering. Jet fuel prices, accounting for 30-40 percent of total expenses of an airline, have eased by 6.8 percent year-on-year to Rs 96,192 per kilolitre in FY25 so far but have remained far above pre-Covid levels. Moreover, nearly half of airline expenses, including aircraft leases and maintenance, are dollar-denominated, leaving the carriers susceptible to currency fluctuations.