Nepal’s airlines fly high despite turbulence

Nepal’s domestic aviation has not just recovered from the pandemic, but has overtaken pre-Covid numbers in terms of total passengers carried as well as operating revenue for most carriers.

But they are flying through turbulence as high fuel prices due to Russia’s invasion of Ukraine have suppressed profitability for the three main domestic carriers -- Buddha Air, Yeti Airlines, and Shree.

“Domestic aviation in Nepal was just beginning to rebound to pre Covid-19 levels, but recent geopolitical crises have had multiplier effects on fuel prices, the key driver of inflation,” says Dipendra Karna of Buddha Air.

A strong dollar, and consecutive second quarter losses this year in US stock exchange have raised fears of a recession. Interest rates on borrowings are high as Europe battles inflation, and the GBP and Euro are both at par with the USD. This global effect is already sending aftershocks in Asian economies and affecting tourism.

“Geopolitical instability remains the top cited threat to global economy and inflation has overtaken volatile energy prices to become second most cited concern,” Karna adds.

Even so, Nepal’s domestic airlines have seen a 15% growth in traffic with nearly 4 million passengers on routes in fiscal year 2021-22, even as Nepal’s limited airport infrastructure struggled to cope. 

A recent report by the credit ratings agency ICRA Nepal of domestic operators gives Buddha Air an A- score for long-term credit, which means the company is considered to be servicing its financial obligations in a timely manner, and has low credit risk. Yeti and Shree have scored B+, meaning they are at higher risk of default. The airlines’ standings for short-term credit ratings gives Buddha an A2+, and Yeti and Shree at A4.

Indeed, key financial indicators show that all three airlines are doing as well as, if not better, than pre-Covid years. Buddha Air’s operating income was Rs6.8 billion in 2018-19, dropped to Rs4.9 billion in 2019-2020, and further to only Rs3.3 billion last year.

In 2021-22, operating income has rebounded to Rs7.7 billion. The OPBIDTA operating margin for Buddha Air was also a healthy 14%, although it is down from the peak of 31.8% in 2017-18 when fuel prices are lower.

Buddha Air is marking 25 years of operation this week. It started operations on 11 October 1997 with a Raytheon 1900D flight from Kathmandu to Pokhara. Today, it is the biggest airline in Nepal with 16 aircraft. This Dasain saw record numbers of passengers – the unseasonal rains affected flights, but there was a higher demand for tickets because landslides blocked many highways during the holidays. Buddha Air, set a record of flying 8,835 passengers on a single day on 8 October.

Yeti Airlines has also added another aircraft bought from Virgin Australia to its fleet, bringing the total to five ATR-500s. But the carrier is facing pressure from maturing debt repayment schedules for which the strong USD has not helped. The high interest rate on borrowings from Nepali banks has made the situation more precarious.

Read also: Sky high fuel price hits Nepal’s tourism, airlines, Nepali Times

Buddha Air has the best total debt/tangible net worth ratio among domestic airlines, although its ratio increased in 2019-20. Yeti has negative ratio in the last two consecutive years, and Shree Airlines ratio is not satisfactory either. Buddha Air also has the best ratio for total outside liabilities.

Buddha Air has the best debt/OPBDITA ratio (2.21 in 2021-22) among the three operators with best financial capability on debt repayment. Buddha Air cleared all its IFC World Bank loans two years ago.

Read Also: Airlines hit hardest by Nepal's fuel hike, Nepali Times