On Thursday the 26th of March, amid a nationwide lockdown the Directorate General of Civil Aviation (DGCA) announced that “All international and Domestic commercial passenger flights will remain suspended till April 14”. As the number of COVID-19 cases was leaning dangerously more than 650 and the nationwide death toll crossing more than 15.
The timing of the resumption of services is entirely in the control of the government, but it will most likely be beyond 30 April. As a result, the entire Indian commercial fleet of around 650 aircraft lies grounded. In fact, not a single scheduled aircraft movement will take place at Indian airports over the coming days, either by an Indian or a foreign airline. The severity of disruption which the Indian aviation industry is experiencing will have an impact that is felt well beyond FY2021, unless the government can provide quick and meaningful support. Industry stability in the post-COVID period will also depend upon promoters of distressed airlines themselves bringing in significant funds.
The impact of COVID-19 will be so severe that even the stronger carriers may not be immune. In the event of a 3-month shutdown, the two listed carriers alone – IndiGo and SpiceJet – could report combined losses of USD1.25-1.50 billion across 4QFY2020 and 1QFY2021. IndiGo’s hitherto enviable free cash reserves may almost be wiped out by the end of 2QFY2021. Smaller carriers may exit. There is a strong likelihood of aircraft orders being deferred or even canceled. Some leased equipment – particularly those aircraft approaching the end of their lease terms – may be returned early to lessors. Tata Sons may be strategically compelled to operate just one rather than two airlines (AirAsia India and Vistara). This may be the right time to rationalize its airline portfolio.
Most airlines like Indigo, SpiceJet, Go Air may go bankrupt by May without govt action as most of them operate on low-costs. They may get driven into technical bankruptcy, at least substantially in breach of debt covenants and cash reserves are running down quickly as fleets are grounded. With few exceptions, Indian carriers have weak balance sheets and precarious levels of liquidity. Airlines have generated cash to stay afloat through advance sales or sale-and-leaseback margins (and government infusion in the case of Air India), but with no cushion to be able to withstand downward cycles. Although it has become trite in recent days to use the term “unprecedented” in relation to COVID-19, this is undoubtedly accurate.
India’s airline system is certainly not prepared for such a severe systemic shock, and this will have an impact on the entire aviation value chain, including:
Airport operators;
Duty-free, retail, food & beverage, and other airport concessionaires;
Ground handlers;
Maintenance Repair Operations (MROs);
Inflight catering companies;
not to mention travel distribution, which will be devastated.
Centre for Asia Pacific Aviation India (CAPA) preliminary estimates for industry losses in 1QFY2021
Sector of the industry Estimated loss in 1QFY2021
Airlines approx. USD1.75 billion
Airports and concessionaires USD1.50 – 1.75 billion
Ground handlers USD80 – 90 million
TOTAL USD3.3-3.6 billion
Source: CAPA India research and analysis
The second quarter is historically the weakest period for demand and hence airlines are only likely to limp back into recovery. As a result, the majority of the fleet is likely to be surplus to requirement during the first half of the financial year. Virtually all market segments are likely to see a very slow recovery. Air traffic would normally be the first to pick-up as friends and families seek to reunite after months of separation. However, health concerns associated with travel may limit this segment. Discretionary international leisure travel may take even longer as this will be impacted by the weak economy. Even labour traffic, mostly to the Gulf, may see downward pressure. Domestic traffic is expected to decline from an estimated 140 million in FY2020 to around 80-90 million in FY2021. International traffic is expected to fall from approximately 70 million in FY2020 to 35-40 million in FY2021, and possibly less.
The world’s largest aviation market, the United States, has also unveiled the most significant recovery package, valued at USD71 billion for the aviation industry alone. This consists of a combination of grants (to protect employee wages), loans and loan guarantees. But other Western economies, such as the UK and Canada, have not released an aviation-specific package and have instead mainly focused on job protection and wage subsidies across the entire economy.
Despite its best intentions, the Government of India has multiple competing calls on its limited resources. There is only so much that it can offer to the aviation sector given that numerous industries across the economy are under severe stress. And the priority will understandably be on providing a basic health and economic safety net for the most vulnerable segments of society. As a result, rather than a strategic package involving direct cash infusions and loans, the government may only be in a position to offer more functional relief consisting of waivers and moratoriums on liabilities. Given the massive structural dislocation faced by the aviation sector, this may not be sufficient for rescue operators, particularly by weaker companies. Any government support may be announced incrementally as greater clarity about the state of the industry emerges over time.
With FY2021 set to be an exceptionally challenging year, all segments of the aviation value chain will need to immediately start planning for much smaller- scale operations, supported by serious enterprise-wide restructuring. High profile airline failure such as Kingfisher and Jet Airways were arguably brought down because they did not right-size when necessary. As the saying goes: ‘never let a good crisis go to waste’. This may be the best opportunity for Indian carriers to make difficult calls to rationalise their operations and clean up their balance sheets. Aggressive expansion without the necessary cash and balance sheet has been repeatedly shown to be a very high-risk strategy.
Post COVID-19, the movement of passengers and cargo by air will be critical for the economy to repair itself. In recognition of the strategic role that aviation will play in national recovery, it is essential that the government’s response supports the revival and not simply the survival of aviation. With global aviation almost grinding to a halt – and for what could be an extended period – this is a state of affairs that will heighten risks for even the strongest carriers in the world. Meanwhile, several weaker airlines across the world are likely to exit.
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