Bank lending to aviation sector surges 65% as airlines borrow more to fund lease contracts, hirings

In absolute terms, lending to the sector jumped to Rs 40,449 crore in November 2023 from Rs 24,452 crore in November 2022 and Rs 26,780 crore in November 2021.

Indian banks have significantly ramped up lending to the country's booming aviation sector over the last 12 months to fund lease contracts and hirings, according to the Reserve Bank of India (RBI) data. On a year-on-year basis, bank lending to the aviation industry surged 65.4 percent at end-November 2023 compared with a contraction of 8.7 percent in the preceding comparable period, the latest sectoral credit data with the RBI showed.

At least four bank executives and airline company executives Moneycontrol spoke to attributed the higher credit demand to a jump in lease contracts and more hirings and a positive outlook towards the medium-to-long-term growth in the aviation sector.

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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 eying to lend to some airlines. “We are looking at lending to some airlines and we have a small portfolio of around Rs 100 crore for now. Our goal is to look at long-term lending,” said a chief executive officer of a private bank who did not wish to be named.

Recently, Dinesh Khara, Chairman of State Bank of India (SBI), the country’s largest lender, said that the bank is now choosy while lending to airlines. “Lending growth to airlines has been constant in the industry. We are choosy in lending to airlines,” Khara said after announcing the June-September financial year 2023-24 results.

Banks are optimistic about the aviation sector even though Go First filed for voluntary bankruptcy in May and sought an interim moratorium on financial obligations due to liabilities of Rs 11,463 crore. SpiceJet was earlier subjected to heightened monitoring due to instances of inadequate maintenance and incidents during the monsoon in 2022. Later, the DGCA removed the airline from its enhanced surveillance regime.

Airlines look for more funding channels

Executives of some airlines, who spoke to Moneycontrol, said that in addition to more contracts and hirings, hedging against high fuel rates and forex prices has led to a rise in borrowing from banks. The Air India executive mentioned above added that the airline’s market borrowing as a whole (as a collection of the four Tata group airlines) has risen significantly since July 2023, as the group has been taking deliveries of new aircraft to expand its fleet.

Additionally, the creation of new companies under the Air India group, like the creation of a new leasing company in GIFT City, increased hiring across four airlines. It also increased the borrowing to hedge against high fuel rates and forex prices which led to Air India taking more loans from banks in the last six months compared to a year ago. Similarly, a senior IndiGo official told Moneycontrol that the airline has increased its market borrowing to hedge against high fuel prices and forex rates.

The official, who did not wish to be named, added that IndiGo commands a better interest rate when borrowing from domestic banks when compared to the return the airline makes on hedging against foreign currency and fuel prices. 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 official said.

The aircraft leasing math

Aircraft leasing is a popular private aviation option for corporate entities and private individuals alike. To lease an aircraft, a lessee (airlines) and the lessor must sign an aircraft lease agreement, which defines the terms of the lease, such as who is responsible for operating and maintaining the aircraft, the length of the lease and so on.

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Airline payrolls account for around 35 percent of an airline's operating expenses. For this reason, airlines are quick to lay people off whenever there is a downturn in traffic. As seen from many airline failures, especially government-owned ones, having a bloated payroll prevented them from making a profit and ultimately led to collapse when the government refused to inject more cash.

Depending on the plane, it costs anywhere from nearly $100 million for a Boeing 737 to around $300 million for a Boeing 787 Dreamliner. Many airlines do not have the funding to buy aircraft outright, so they opt to lease them from a third party. Leasing costs typically make up around 15-20 percent of an airline's operating expenses.

The cost of jet fuel is a significant expense for airlines, accounting for 10 percent and 12 percent of all operating costs globally, but in India, it makes up close to 20 percent of all operating costs. Unlike all the other expenses, airlines are subject to fluctuating fuel costs and do their best to lock in prices.

Also, airline companies have beefed up hiring in the recent past, which too led to higher capital requirements. In May 2023, Tata Group-owned Air India’s low-cost carrier subsidiary Air India Express hired over 280 pilots and 250 cabin crew during a recruitment drive across Delhi, Mumbai and Bengaluru. It also announced hiring more than 1,000 pilots, including captains and trainers, to support its fleet expansion plans.

Additionally, IndiGo and Air India also announced plans to buy 480 and 500 new aircraft, respectively in 2023, and with that have increased hiring for pilots, ground handling and cabin crew.

According to a senior Air India executive, the price of monthly aircraft leasing contracts has recently risen nearly 1.5-2 percent when compared to 2022 leading to higher borrowing when taking delivery of aircraft for domestic airlines. "The collapse of Go First and the AWG (Aviation Working Group) downgrading India's ranking due to stuck aircraft has led to a significant increase in leasing costs, which is a huge financial burden for airlines," the executive said.

Spreading wings

The Centre for Asia Pacific Aviation (CAPA) India, an aviation consultancy agency, forecasts that by 2043, India could be handling 1.3 billion passengers and operating a commercial fleet of 4,000 aircraft. The industry handled close to 200 million passengers in FY23.

Credit rating agency ICRA predicts the domestic air passenger traffic to grow at 8-13 percent in FY24 to touch 150-155 million. The agency maintained a Stable outlook on the Indian aviation industry amidst the continued recovery in domestic and international air passenger traffic in FY24, and improved pricing power of the carriers.

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“The industry is estimated to report a significantly lower net loss of about Rs 3,000-5,000 crore in FY2024 compared to about Rs 17,000-17,500 crore in FY23,” said Suprio Banerjee, Vice President & Sector Head-Corporate Ratings.