Of all the infrastructure sectors, the aviation sector has undoubtedly been the worst hit by the Covid-19 pandemic. The sector, which for a long period prior to the virus outbreak witnessed double-digit growth in air traffic, is now staring at a prolonged crisis. The complete suspension of air travel adversely impacted the revenue streams of airports. Private operators sought relief in the form moratoriums on debt obligations and waivers of the revenue shares payable. While the Airports Authority of India (AAI) deferred the payment schedules, operators were looking for suspension of payments through bilateral negotiations with the authority and invocation of force majeure. The government had suspended domestic and international flights in March 2020 to control the spread of the virus. Operations have now been resumed in a calibrated manner. Since the government has not extended any relief package to the aviation sector, industry players need to urgently find new ways to recapitalise their balance sheets and rethink the business models.
Airports face huge revenue shortfalls
Traffic at airports saw a sharp drop after the nationwide lockdown in end March 2020. During April-June 2020, passenger traffic at airports declined by 94 per cent to 4.9 million over the corresponding period of 2019-20. While domestic flight services resumed from May 25, 2020, international travel is still not permitted. This was reflected in a steeper fall in international passenger traffic by 97 per cent during the first quarter of 2020-21 versus the same quarter last year. Airfreight traffic is also down despite easing of restrictions by the government. There was a 64 per cent plunge in overall freight traffic in the April-June quarter of 2020-21 from the same quarter last year. Airports are witnessing a revenue collapse in terms of both aeronautical and non-aeronautical revenues. The latter have collapsed completely due to closure of duty-free and food and beverage shops. While aeronautical revenues can be compensated for in the subsequent control periods, non-aeronautical revenues that have been lost are gone and cannot be compensated for later. 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. To get some relief, Mumbai International Airport Limited requested invoking of force majeure for suspension of payments due to AAI for April-June 2020-21. However, AAI agreed to only defer the revenue share payments till June 2020.
Strained prospects for capacity addition
India Infrastructure Research tracked a total of 135 airport projects, of which 64 projects worth Rs 822 billion are under construction. The pandemic-induced lockdown has impacted construction activity due to shortages of labour, slow pace of work on account of physical distancing, and days lost due to the lockdown. There are also issues pertaining to the procurement of material and equipment for construction work. Projects are expected to get delayed by three-six months. Key upcoming airport projects at Mopa, Jewar and Navi Mumbai are all witnessing delays. In fact, the Uttar Pradesh government has once again deferred the signing of a key pact for Jewar airport with its developer in view of the pandemic.
Airlines at risk of collapse
According to the Directorate General of Civil Aviation, domestic air passenger traffic slumped by 82 per cent in July 2020 as compared to the same month a year ago. From March to July 2020, airlines carried a total of 12 million passengers, a decline of 79 per cent as compared to the corresponding period of 2019. Prior to Covid-19, Indian airlines, barring IndiGo, were already vulnerable with poor financial health. The outbreak has only worsened the situation. According to CRISIL, Indian airlines will face a revenue loss of Rs 1.3 trillion between 2019-20 and 2021-22 because of the pandemic. If the crisis is prolonged, India’s airline market will shrink to only two-three players. At present, the centre has allowed 60 per cent capacity utilisation on domestic routes. Domestic flights were allowed to resume on May 25, 2020, two months after a blanket suspension since the lockdown was first announced. The government has since restarted domestic flights on many major routes and while scheduled international flights are still not allowed, it has created bilateral travel bubbles and allowed special repatriation flights both by Indian carriers and foreign airlines to carry stranded citizens back home.
Domestic carriers are making desperate attempts to stay afloat during the Covid-19 crisis. While IndiGo is using this time to gain more market share among passengers, SpiceJet is looking to strengthen its position as a cargo operator. The former recently launched a flexible payment scheme for its passengers. SpiceJet will soon induct its first Airbus A340 cargo aircraft in its freighters fleet, taking the freighter count to nine. The pandemic has left airlines deeply in the red. SpiceJet and IndiGo reported losses in the first quarter of 2020-21 on account of the suspension of flight operations, poor coverage of fixed costs and low fleet utilisation.
The pandemic has exacerbated difficulties for the already-in-trouble airline industry. While Air India continues to scout around for buyers, Jet Airways’ resolution plan has been inordinately delayed. Another fallout of the pandemic has been the delay in the disinvestment of Air India. The market disruption caused by Covid-19 has forced the government to extend bid deadlines multiple times for disinvestment in the airline. With airlines being at the frontline of the disruption caused by Covid-19, attracting buyers for the loss-making national carrier at an attractive valuation will be challenging. As of now, the Tata Group is considering bidding for the takeover of Air India. Meanwhile, the insolvency process for Jet Airways, grounded since April 2019 due to a severe cash crunch, was earlier supposed to be completed by June 13, 2020. This was extended to August 21, 2020. The deadline for completing the insolvency process has since been extended further due to Covid-19-related restrictions.
Mitigation strategies and the government’s response
As part of the economic response to the pandemic, the government announced a Rs 20 trillion package encompassing all sectors. For the aviation industry, six airports have been identified for the second round of bidding for O&M on a public-private partnership (PPP) basis. Additional investment by private players in 12 airports in the first and second rounds is expected to bring in around Rs 130 billion. Another six airports will be put up for bidding in the third round. Besides, the tax regime for the maintenance, repair and overhaul (MRO) ecosystem has been rationalised. Convergence between the defence sector and civil MROs will be established to create economies of scale. Restrictions on utilisation of the Indian airspace will be eased so that civilian flying becomes more efficient.
In the first round, airports in Lucknow, Ahmedabad, Jaipur, Mangaluru, Thiruvananthapuram and Guwahati were cleared for O&M through PPPs. Adani Enterprises had won the rights to run the six airports. The company has already signed the concessionaire agreement with AAI for the Ahmedabad, Mangaluru and Lucknow airports. Even amidst the ongoing disruptions, the Union cabinet has approved the proposal for leasing out the other three airports, Jaipur, Guwahati and Thiruvananthapuram, to Adani Enterprises. Citing the pandemic’s adverse impact on the aviation sector, Adani invoked force majeure to seek more time for taking over the airports and AAI has granted an extension till March 2021. Meanwhile, privatisation of Jaipur airport has been postponed till March 2021 due to the Covid-19 crisis. AAI and private airport operators are looking for funds to meet their working capital requirements as well. Due to a sharp drop in revenues and limited operations, AAI has taken credit to the tune of Rs 15 billion from the State Bank of India to fund its working capital needs (including salary payments).
Tackling the new normal
The Covid-19 outbreak in the country has brought the concept of physical distancing to the forefront. For most airports, technology has come to the rescue. Contactless plane boarding procedures are already being followed at most airports in the country. Hyderabad airport has introduced a new service, contactless parking using FASTag, which is India’s first car parking service to offer 100 per cent contactless service. In the battle against the virus, airports have prepared standard operating procedures for staff and passengers to follow. Airports have had a digital makeover to minimise human contact. Delhi, Bengaluru and Hyderabad airports have introduced biometric boarding systems, while India’s first artificial intelligence-enabled temperature screening airport gate is coming up at Kannur airport. In order to ensure the movement of medical essentials such as testing kits and medical equipment during the lockdown, the government launched Lifeline Udan, under which flights operate in a hub- and- spoke model. India is also operating repatriation flights and has established bilateral air bubbles with the US, the UK, the UAE, France, Germany, Qatar and the Maldives, among others, under its Vande Bharat Mission. The government has announced the sixth phase of this mission – from September 1, 2020 to October 24, 2020.
The aviation sector is not expected to recover any time soon and definitely not until the pandemic is effectively under control. The industry is expected to see pre-Covid traffic only by the end of 2022-23. According to CAPA, domestic traffic is expected to decline by over 60 per cent and international traffic by 70-80 per cent in 2020-21. The unpredictability of the lockdowns imposed by state governments and the differing quarantine rules are also making consumers averse to travelling. Demand destruction can be gauged from the fact that even after resumption of domestic air services, the passenger load factor is hovering at 50-60 per cent. Airlines are expected to log operating losses this year despite the lower crude oil prices.
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. w
Ishita Gupta and DeekshaSoni