Unprecedented Turbulence

Aviation industry struggling to ride out the COVID-19 storm

The aviation industry is facing its worst crisis ever. Global airlines with strong balance sheets are on the brink of bankruptcy. Even airline manufacturers such as Airbus and Boeing have been severely impacted with their supply chains being completely disrupted. The current situation cannot be viewed as the industry going through a period of downturn. This notion must be dispelled. The COVID-19 pandemic must not be seen as an economic crisis but as a humanitarian crisis. Hence, the policy response must be in line with the severity of the crisis. The aviation industry is expected to face an even bigger risk once the lockdown lifts. There are a number of uncertainties surrounding the sector – consumer behaviour towards air travel, government response, risk of a second wave of COVID-19, state of the economy post the lockdown, etc. Further, the resumption of business travel will be slow. There will only be essential travel and discretionary travel is unlikely. Thus, the crisis facing the aviation industry is likely to be prolonged and larger than in other industries.

To assess the Impact of COVID-19 on airports India Infrastructure hosted a panel discussion among Daniel Bircher, chief executive officer (CEO), Zurich Airport International AG, Florian Eggenschwiler, managing director (MD), Airports, Xovis; Rajeev Jain, CEO, Mumbai International Airport Limited; VidehJaipuriar, CEO, Delhi International Airport Limited; and KapilKaul, CEO and director, CAPA. Excerpts…

Impact on the airline industry

Prior to COVID-19, Indian airlines, barring IndiGo, were vulnerable as they were in poor financial health. The COVID-19 outbreak has only worsened the situation. Moreover, there is a reluctance to fund airlines and both investors and promoters are unwilling to infuse money into them. Till the second quarter of 2020-21, airlines are expected to have a fixed cost capital requirement of around $2.75 billion, of which $2.5 billion is the immediate capital requirement for survival. Fruther, international travel to India, which constitutes 60 per cent of total traffic, is completely paralysed due to the pandemic.

Airports at risk

Airports are witnessing a revenue collapse in both aeronautical and non-aeronautical revenues, with the latter collapsing completely due to closure of duty-free and food and beverage shops. While aeronautical revenues can be compensated for in subsequent control periods, non-aeronautical revenues that have been lost are gone and cannot be compensated for. Thus, the financial structure of airports has been impacted and will continue to be impacted in the near future. Capital expenditure on expansion plans will have to be deferred, especially since once operations resume a new operational impact is expected that will increase costs. The airport industry is likely to see consolidation. New airport models will have to emerge for players to emerge from this unprecedented crisis. As 80 per cent of the costs of airports are fixed costs, there is a limit to lowering the overall cost. All these factors will have serious implications on employment at airports as well.

With regard to new airport projects, construction has not commenced at Navi Mumbai airport. This is because the City and Industrial Development Corporation of Maharashtra, the nodal agency, is yet to provide land to the airport developer. Meanwhile, Mopa airport has not been affected by the lockdown as construction is ongoing with workers practising physical distancing. The upcoming Jewar airport is currently in the planning stage and ground work is slated to start in the first quarter of 2021. The overall traffic demand is expected to remain a little subdued at the time of the opening of Jewar airport.

While in retail one can work with the principle of “one in, one out”, airports are complex. It is important to identify hotspots at airports where physical distancing is a challenge. A distance of 2-6 metres will reduce the risk of transmitting the coronavirus. Thus, markers could be used on the floor to ensure physical distancing. Self-service kiosks could be closed as reducing touchpoints at airports has become critical. New biometric procedures will need to be introduced.

In the battle against COVID-19, airports are preparing standard operating procedures (SOPs) to be followed by staff members. Sanitisation of facilities and wearing of masks are compulsory. Airports are looking at new technologies for reducing contact. For example, Delhi airport is introducing touchless check-in, a UV tunnel for baggage scanning, shoe sanitisation procedures, etc. Airport developers are awaiting a consolidated policy document from the government for standardising SOPs across the board.

With the future being uncertain, airports have to be dynamic in terms of adjusting to the changing situation. Airports can absorb losses for two to three months. However, if the COVID-19 crisis is prolonged, this can become a structural problem. Mumbai airport, for example, has invoked the force majeure clause.

Expectations from the government

As airports have been generating negative cash flows month on month, they need to be compensated to enable regular operations to continue. While there is no expectation of a huge grant from the government, banks must provide a moratorium on repayment of interest and the principal amount and offer a line of credit at softer terms to help airports withstand the cash crunch. A special package for the aviation sector is required from the government, which must take a holistic view and formulate measures accordingly.

There is a clear conflict between airlines and airports regarding aeronautical charges. The Airports Economic Regulatory Authority of India (AERA) fixes aeronautical tariffs on a per passenger basis. With a substantial drop in traffic, airports will not be able to generate sufficient revenue to meet their expenses. Therefore, AERA needs to identify a different way of fixing tariffs that can be specified for two years and then reduced in the subsequent three years. Following the conventional tariff fixation methodology will only result in airports being devoid of cash.

Global leadership is the need of the hour. Domestic and international regulators need to work together to prepare a policy response for the global aviation industry. A piecemeal approach will not work. A coordinated effort is required to cater to the needs of both airlines as well as airports.

The case of Jet Airways is an example of massive corporate governance failure, as there were leakages in the system. Thus, the quality of corporate governance in Indian airlines needs to be strengthened. Entry barriers for airlines too are weak. Carriers with no cash are continuing to expand and operate. Thus, the government must collaborate with other stakeholders to rethink the strategy for the industry.

Grim outlook

The aviation industry must reset its expectations from the government. In the current crisis, the government will act in a calibrated step-by-step manner providing relief packages to those at the bottom of the pyramid first and then moving upwards. There will no strategic bailout from the government for the aviation industry; it’s response will be functional at best.

According to CAPA, domestic airline traffic during 2020-21 is estimated to be 70-80 million passengers per annum (mppa) in an optimistic scenario and 50-70 mppa in a realistic scenario. International traffic is projected at 30-35 mppa in an optimistic scenario and 20-25 mppa in a realistic scenario. Hence, there wil be an over 50 per cent dip in both domestic and international traffic during the year. There might be fewer airlines operating in the coming times from the current six-seven. CAPA is advocating the release of the National Civil Aviation Policy 2.0 for the industry as a structured policy response to the crisis.

On a positive note, normalcy is expected to return in the next two to three years. While there will be short-term disruption in air travel, the long-term outlook is reasonably stable. A sustained collapse of travel behaviour is not likely. Airport charges will not increase, at least in 2020-21. Most of the airport projects and equipment procurement plans will be deferred by two to three years. As the potential in the Indian aviation market is huge, growth in the aviation sector will resume in the times to come.

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