The airport sector is one of the infrastructure sectors that has suffered the strongest impact of the Covid-19 pandemic and the consequent air travel restrictions imposed by affected countries. While domestic passenger traffic has finally begun to recover, demand for international passenger flights continues to be abysmally low, with the exception of repatriation operations. The year 2020-21 is being considered a complete washout for the aviation industry. Airport operators are struggling to utilise existing capacity, let alone move ahead with expansion plans. Industry experts share their views on the impact of Covid-19, their response to the pandemic, the outlook for the sector and key priority areas for the future…
What has been the impact of Covid-19 on the airport sector?
Daniel Bircher
India has been in a tremendous growth phase over the past decade. Major infrastructure projects have been initiated to increase overall capacity. However, the Covid-19 pandemic has had a tremendous impact on the airport sector. Demand has collapsed over the past few months and major activities have been halted, which has caught a number of airport operators on the wrong foot. Although we now see some recovery on the domestic front, the pandemic has created a lot of uncertainty for travellers due to the uncoordinated activities of different countries and even different states within a country, with regard to anti-pandemic measures. This has resulted in a lack of confidence on the part of travellers and hence the overall recovery of the entire aviation sector is expected to be slow.
Manvi Hooda
Government measures such as lockdowns, physical distancing, and restrictions on borders and economic activity to contain the spread of Covid-19 have severely hit air travel globally, bringing it to a virtual standstill. According to the International Air Transport Association, when the pandemic advanced globally in April 2020, available seat kilometres (ASKs) were down 87.0 per cent y-o-y. International ASKs suffered a decline of 95.1 per cent y-o-y, while domestic ASKs suffered a decline of 72.1 per cent y-o-y. Moreover, load factors decreased by 46.6 percentage points to 36.6 per cent.
In India, domestic air travel was almost zero during the lockdown and international air travel continues to be more or less paused, with the exception of repatriation flights. In June 2020, when domestic operations resumed, capacity deployment was about 25.0-30.0 per cent of the level in June 2019. Since the resumption of domestic travel, traffic from metros to non-metros has had a higher share of domestic traffic than that from metros to metros.
What has been your organisation’s/industry’s response to the pandemic?
Daniel Bircher
Fixed costs comprise almost 80 per cent of the total costs in the airport sector. Thus, although the first response of any airport operator in this situation would be to cut down its costs, this step will not have any significant impact since the fixed costs will have to be borne by the operator anyway. As long as the airports, as part of public infrastructure, are obliged to operate, these operational costs will have to be borne. Meanwhile, numerous airport operators have resorted to postponing investments and to refinancing as a tool to enhance their liquidity. In the current environment, continuity of operations is a major focus area for operators, apart from operational measures to ensure safety of passengers. Hygiene measures and implementation of standard operating procedures for physical distancing are some of the standard measures being applied by airport operators to ensure passenger safety.
Manvi Hooda
There is a lot of uncertainty about the progression of the Covid-19 pandemic, as well as its ultimate conclusion. The year 2020-21 is a virtual washout for the aviation industry. As a result, the industry is struggling with liquidity challenges and airlines have stressed balance sheets. The majority of Indian carriers have frozen their new aircraft induction plans. IndiGo, the growth driver of the industry, is focused on fleet modernisation instead of fleet expansion. It is one of the few airlines that has not deferred its fleet plans amid the pandemic. Airlines that intended to expand operations have put their plans on hold.
Airports too have deferred expansion plans in view of the collapse in traffic and, thus, revenues. In an instant, airports went from constrained capacity to overcapacity. Greenfield airport construction across India has slowed or halted and additional capacity requirements may be deferred by a few years. The industry has witnessed cost-cutting measures such as pay cuts across levels, downsizing and consolidation of operations to single terminals/office buildings. The workforce employed in Indian aviation may be reduced by at least 30.0 per cent.
What is the outlook for the sector?
Daniel Bircher
Currently, it is difficult to make any predictions due to the uncoordinated anti-pandemic measures followed by different countries and regions. However, we expect domestic traffic to make good recovery once the infection figures drop. For example, in Europe, traffic figures have now recovered as the infection figures have crossed the peak. Even in India, domestic traffic is slowly recovering, however, when it comes to international traffic, the predictions are rather difficult to make at this point in time. Once countries begin to follow a coordinated approach regarding quarantine, visa and immigration requirements, passenger confidence will eventually start returning. Having said this, full recovery of international traffic seems to be difficult within the next two years and is expected to take place at a slow pace.
Manvi Hooda
In 2020-21, domestic and international passenger traffic will decline to about 40-50 million and 10-15 million, respectively. Indian aviation is likely to shrink significantly, even if some vulnerable airlines manage to survive the crisis. Domestic traffic is estimated to have stood at 2.5 million in the first quarter of 2020-21 vis-à-vis 34 million in the corresponding period of 2019-20. Scheduled international operations had been grounded during the quarter.
Indian airlines will have a surplus fleet of 250-300 aircraft at the end of 12 months. A sizeable portion of the fleet of Indian carriers will remain grounded. Indian airlines are estimated to have incurred a loss of USD1.5 billion-USD1.75 billion in the first quarter of 2020-21 and are likely to incur losses of USD4.0 billion-USD4.5 billion in 2020-21.
Considering domestic travel is now allowed, we expect the market to reach at 30.0-40.0 per cent of the pre-Covid-19 capacity in the second quarter of 2020-21, at 60.0 per cent in the third quarter and at 70.0 per cent in the fourth quarter of the year. According to our preliminary estimates, the combined earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of India’s four public-private partnership metro airports would decline to -21.0 per cent in 2020-21 from over 40.0 per cent in 2018-19.
What will be the key priority areas in the post-Covid-19 world?
Daniel Bircher
We still have a lot of excess demand in India and I am confident that once the pandemic situation is under control, the country will return to steep and continued growth in air traffic, as it is one of the key driving forces of the Indian economy. The current situation will definitely improve and return to the pre-Covid times. However, it will take some time. Adequate sanitation and hygiene measures and proper implementation of security protocols have been some of the priority areas in the past couple of months and we expect them to continue in the future as well.
Manvi Hooda
Covid-19 has almost destroyed air travel demand in India. Traffic, which took 70 years to develop, evaporated virtually overnight. Post-Covid-19 will be a significantly smaller new world. The high double-digit growth rates that the aviation industry was used to had already started moderated sharply from 2019-20. The pandemic will further reduce collective domestic and international traffic by around 70.0 per cent. The fleet size will have to be adjusted to the new traffic levels. Until air travel demand rebounds to the pre-Covid-19 level, Indian aviation will witness a reset across all segments.
Airlines, airport operators and other industry companies with strong balance sheets that are technology-driven, and customer- and cost-focused will be the key in the post-Covid-19 world. Indian aviation has had a culture of growth and expansion without the strengthening of balance sheets. The risk framework has been poor in most cases, especially with respect to airlines. Following the effects of the pandemic on aviation, the industry will be more cautious and risk assessment will be conducted strategically. A right-sized industry will have to ensure that a profit-driven culture is established.
A complete shift in the mindset from that which has been seen in the past 15 years, during which growth was taken for granted, is needed if airports want to successfully rebuild traffic and revenue from zero. Airports will need to shift virtually overnight from growth management and infrastructure development to the creation of new capabilities in forecasting, planning and route development, while collaborating with stakeholders and adopting a more active commercial orientation.