The Indian airline industry is going through the worst year in aviation history. Several airlines have incurred huge losses on account of the Covid-19 outbreak, leading to salary cuts and job losses. The weak liquidity position of some airlines is likely to benefit market leaders such as IndiGo and SpiceJet. IndiGo is well placed to further consolidate its market position in the coming months due to the liquidity pressure on rival airlines. Its share of domestic passengers had already risen to 60 per cent by end July 2020 from 48 per cent in January-March 2020. Despite the low crude oil prices, airlines are curtailing capacity deployment because of the outsized impact of demand destruction, thereby restricting opportunities to benefit from low crude oil prices. The pandemic is also bound to affect the net fleet addition of Indian carriers. Fleet additions are likely to be limited to fleet replacement, with newer-generation aircraft replacing older-generation leased aircraft.
Airlines staring at losses
According to the Directorate General of Civil Aviation (DGCA), domestic air passenger traffic slumped by 66 per cent in September 2020 as compared to the same month a year ago. From January 2020 to September 2020, airlines carried a total of 44 million passengers, a decline of 58 per cent as compared to the corresponding period of 2019. The passenger load factor, a measure of seat occupancy, fell to 61 per cent in September 2020 as compared to 63 per cent in August 2020.
The two-month ban on scheduled domestic passenger flights in the country from March 26, 2020 to May 24, 2020 had a severe impact on the financial condition of airlines. The lockdown caused non-recoverable revenue losses leading to airlines taking severe cost-cutting measures, including salary cuts, furloughs and lay-offs. 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, the airline market could shrink to two to three players.
The pandemic has left airlines deeply in the red. SpiceJet and IngiGo reported losses in the first quarter of 2020-21 on account of suspension of flight operations, poor coverage of fixed costs and low fleet utilisation. IndiGo, the largest airline in the country, posted a net loss of Rs 28.44 billion for the period April-June 2020-21. It had recorded a net profit of Rs 12.03 billion during the same period a year ago, primarily on account of gains after the shutdown of Jet Airways, the second largest airline then. SpiceJet, the second largest airline in the country at present, reported a net loss of Rs 5.93 billion in the first quarter of 2020-21 as against a profit of Rs 2.62 billion in the corresponding period of 2019-20. The Covid-19 pandemic and its related impact on the aviation industry has worsened the financial position of Air India, which incurred a net loss of Rs 25.7 billion in the first quarter of 2020-21 vis-à-vis a net loss of Rs 7.85 billion in the corresponding period a year ago. An amount of Rs 10 billion has also been provided as a loan to Air India in the current financial year.
Domestic flights were allowed to resume from May 25, 2020. However, capacity restrictions and fare brackets remain in place. The government allowed carriers to deploy 45 per cent of their capacity in late June 2020, and this was later increased to 60 per cent in September 2020. Fare brackets were also put in place to prevent price spikes while helping airlines cover their costs. The government has 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.
Plans to recoup
Domestic carriers are making desperate attempts to stay afloat during the Covid-19 crisis. While IndiGo is using this time to gain greater 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. IndiGo also plans to boost its liquidity, which is robust as it has a net cash position after excluding capitalised operating lease liabilities, through measures such as the sale and leaseback of its unencumbered assets and raising of equity. SpiceJet announced plans to induct its first Airbus A340 cargo aircraft in its freighters fleet, taking the freighter count to 13. In a major milestone for SpiceXpress, SpiceJet’s dedicated cargo arm, it is set to receive permission from the DGCA to conduct drone trials. With this, the airline aims to provide quicker, and cost-effective delivery of medical, pharmaceutical and essential supplies, and e-commerce products, especially to remote areas. Besides, SpiceJet recently launched dedicated cargo services to various cities in the Northeast, becoming the first Indian carrier to do so.
Delay in bids for Air India and Jet Airways
The pandemic has exacerbated difficulties for the already troubled airline sector. While Air India continues to scout for buyers, Jet Airways’ resolution plan has been delayed inordinately. The market disruption caused by the pandemic has forced the government to extend bid deadlines multiple times for its disinvestment in Air India. The latest deadline for bid submission is December 14, 2020, extended from October 30, 2020. Addressing the concerns of potential buyers, the centre is trying to sweeten the privatisation deal by allowing flexibility on the debt component for Air India. The biggest change has been in the valuation method of Air India itself. Bidders can now make offers based on the enterprise value of the airline. The enterprise value to be quoted will comprise at least 15 per cent in cash payment to the government and debt takeover by the bidders equivalent to 85 per cent of the value quoted. As of now, the Tata Group is evaluating a bid for the maharaja airline.
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 due to Covid-19-related restrictions. In October 2020, lenders to Jet Airways accepted a Rs 10 billion bid by a consortium of UK-based Kalrock Capital and UAE-based entrepreneur Murari Lal Jalan to revive and operate the airline. The revival plan is currently awaiting the nod of the National Company Law Tribunal.
In sum
Given the second wave of the Covid-19 pandemic in the West, the global aviation industry is far from being out of the woods. For India, as the government continues with unlocking the economy and business activity gets back to normal, there will be improvement in the operating environment for airlines. Notwithstanding these factors, industry experts believe that the overall recovery will be slow owing to low consumer confidence in travelling and different quarantine rules across states. A revival to pre-pandemic levels thus appears unlikely even in the next fiscal year.