Airport and airline operators have been facing a serious crisis. With the prospect of over capacity for several years to come, Indian airports will need to shift to airline-driven and passenger-centric business models while they are engaged in cut-throat competition to attract traffic and generate revenue. Industry experts share their views on the progress in the airport sector, the impact of key government initiatives and Covid-19, the key challenges and the future outlook for the sector. Excerpts…
What has been the progress in the airport sector in the past one year?
Most public-private partnership (PPP) airports actually saw an increase in the total non-aero revenue per passenger, driven by an increase in duty-free sales per international passenger. This was largely a mathematical aberration arising from the fact that passengers who traditionally do not spend on duty-free (for example, labour and other low-yield segments) and dilute the overall SPP, were not travelling. Furthermore, those that were purchasing duty-free were buying larger volumes of products such as alcohol on arrival, due to uncertainty about their availability during lockdowns.
Although cargo volumes at PPP airports declined by 24.8 per cent year on year in financial year 2021, the revenue they generated from cargo handling activities increased marginally to Rs 6.8 billion ($92 million) due to a significant increase in yields and earnings for airports, especially in the international segment owing to demurrage and other optional services.
With the Covid pandemic, lockdowns and the restrictions thereof, passenger traffic in financial year 2021 declined to 34 per cent compared to financial year 2020, with domestic passenger traffic declining to 38 per cent and international passenger traffic declining to 15 per cent. Domestic aircraft traffic movement (ATM) declined to 50 per cent while international ATM declined to 31 per cent. On the cargo front, the domestic freight handled declined to 72 per cent while the international freight handled declined to 76 per cent.
Post recommencement of flight operations in May 2020, GMR Hyderabad International Airport (GHIAL) witnessed a recovery in domestic and international passenger traffic to around 64 per cent of pre-Covid levels in February 2021. However, due to the second wave of Covid impacting India and other countries, passenger traffic in the domestic and international sectors went down to 16 per cent of pre-Covid levels in May 2021. This again recovered to 23 per cent of pre-Covid levels in June 2021 and 40 per cent in July 2021. With international commercial flights not operating and international travel restrictions continuing, traffic recovery is primarily due to domestic traffic. The decline in passenger traffic has substantially affected the profitability of airport operators. As per CAPA India, Indian airport operators reported losses of Rs 70 billion in financial year 2021 as against a profit of Rs 51.6 billion in financial year 2020.
What has been the impact of key initiatives undertaken by the government?
The government remains committed to the privatisation of Air India, showing strategic resolve to conclude the transaction as a priority. However, the reality is that the second wave of Covid-19 has increased industry challenges significantly, with a potential increase in the liabilities of Air India to an estimated $20 billion by financial year 2025. Taking into account the estimated losses in financial years 2021 and 2022, Air India’s liabilities will amount to over $16 billion. Besides the existing liabilities, the airline is likely to incur close to $4 billion in losses during financial years 2023-25. Hence, the equation from an investor’s perspective is a potential liability of around $20 billion before the business turns around. The government must, therefore, keep this massive financial burden in mind and take it into consideration for making changes to the terms and conditions.
The government’s intention to exit Air India is the right strategy and must be pursued aggressively. It would be unfortunate if the government has to continue supporting the national carrier when there are so many high-priority health and social infrastructure projects post-Covid, that require public funds. But as it stands, shortlisted bidders may find it difficult to prepare a bid in the current challenging environment. It is, therefore, not certain at this stage whether the privatisation will succeed, unless changes are made to the offer. We believe that the government must have a Plan B for Air India in place now, which can be immediately operationalised, if required. Ideally, the transaction should go through successfully, but the government should not be left scrambling for answers should that not be the case. Closing Air India would not only be extremely challenging politically, but will have a notable impact on the market, especially in the international segment.
The government must provide immediate fiscal relief to the sector. This could start with bringing aviation turbine fuel under the goods and services tax (GST) framework; rationalisation of fuel excise to 4 per cent; and a reduction in GST on aircraft spares. This may generate investor interest and assist airlines in successfully recapitalising. Without these measures, it will hurt any remote chance of recapitalisation.
“The unprecedented slump in traffic as a result of Covid-19 has set the clock back by 13 years. The total
traffic at Indian airports fell by 66.3 per cent in FY2021 to 115 million passengers, a level last seen in FY2008.” Kapil Kaul
What has been the impact of Covid-19 on the sector? What has been your organisation’s response to the pandemic?
The unprecedented slump in traffic as a result of Covid-19 has set the clock back by 13 years. The total traffic at Indian airports fell by 66.3 per cent in financial year 2021 to 115 million passengers, a level last seen in financial year 2008. This comprised 105 million domestic airport passengers (equivalent to 52.5 million airline passengers, each of them counted twice, once at the departure airport and then at the arrival airport), and just over 10 million international passengers. Domestic traffic declined by 61.8 per cent to 105 million passengers, while international traffic was decimated, declining by 84.8 per cent to just 10.1 million passengers, the lowest level in almost 30 years. CAPA Advisory estimates that the total traffic could have been 7 million-10 million passengers higher were it not for frequent changes in travel restrictions, which caused confusion and deterred travel. It is estimated that Mumbai airport alone may have lost 3.5 million-4.5 million passengers as a result. Among the metro airports, Mumbai experienced the steepest decline in total traffic.
Airport operators and airport-based concessionaires (such as retail, duty-free, food and beverages, car parking, ground handlers, maintenance, repair and overhaul) combined are estimated to have lost Rs 149 billion-Rs 186 billion (approximately $2 billion-$2.5 billion) in financial year 2021. The combined operating revenue of Indian airports declined by an estimated 64.1 per cent to Rs 83.1 billion ($1.1 billion) in the same year. However, due to the fact that most airport expenses are fixed, Indian airports saw their operating costs decline by only 13.8 per cent (increasing to 28.5 per cent if the impact on revenue share is included).
To successfully overcome Covid-19, airports had to fundamentally change their operating norms. Passenger safety is of utmost importance and passengers had to be assured of the Covid protection measures being taken in order to catalyse travel.
GHIAL actively engaged with various stakeholders at the airport to sensitise and educate them on the safety and health measures to be taken. GHIAL is providing a seamless passenger experience by strictly adhering to Covid-19 protocols such as double masking and social distancing. Surveillance teams with the help of the Telangana state police partnered with airport officials to ensure safety and adherence to Covid-19 protocols. In addition to this, the DGP Telangana state has authorised GHIAL officials to temporarily enforce government orders to make sure that passengers comply by wearing masks at the airport at all times. Accordingly, 20 officials of GHIAL were appointed as special police officers to safeguard and help in the enforcement of Covid-19 safety guidelines.
RT-PCR reports have become crucial in domestic and international travel. GHIAL was quick enough to come up with an RT-PCR facility at the airport itself. Now, passengers flying in and out of Hyderabad can get their RT-PCR reports within a few hours.
GHIAL was also quick to adopt new technology interventions to promote safe travel. Immediately after the recommencement of operations following the lockdown in May 2020, the airport enabled many innovative solutions such as contactless boarding, contactless entry, baggage tag dispensing machines, contactless UV-operated elevators, a disinfection tunnel for luggage trolleys, etc. GHIAL also recently introduced artificial intelligence (AI)-enabled advanced queue management solutions at various touchpoints of the airport such as entry, check-in, security and immigration. The innovative queue management system combines internet of things security cameras and AI video analytics that monitor various key parameters such as peak passenger waiting time and helps in monitoring social distance.
“Domestic passenger traffic is expected to recover to pre-Covid levels by FY2023 and international passenger traffic by FY2025.” Pradeep Panicker
What are the sector’s key challenges that remain unaddressed?
Massive, perennial losses have created a debt trap, which has resulted in most airlines having very limited means of recapitalisation. The government is providing almost no direct support; lenders have, by and large, closed their doors to airlines, even for restructuring purposes; and lessors will soon have no option but to start applying pressure on the defaulting airlines. Simultaneously, we are heading towards a higher-cost environment, while staff morale is declining.
Lurching from one crisis to another has become a familiar story since 2004 because the industry has chosen to pursue profitless growth, resulting in chronic losses for many years. Two major airlines have failed in the past 10 years, leaving a trail of $7 billion in liabilities. Yet, nothing has changed. The twin waves and the sudden impact of Covid have resulted in a high level of solvency risk for most airlines, which could impact the entire industry, including airports.
This cannot be allowed to continue. If we are to achieve the prime minister’s vision of affordable connectivity as a critical enabler of economic transformation, the viability of the airline sector must receive the highest level of attention and support from the Ministry of Civil Aviation and the entire industry.
The Government of India has played a proactive role in ensuring the gradual opening up of domestic passenger traffic and a measured opening up of international passenger traffic. For the airport sector to recover, the key focus for the government will have to be on the adoption of a travel pass such as the International Air Transport Association (IATA) Travel Pass (which integrates information on the vaccination status and Covid test results), reinstatement of commercial flight services in place of bubble arrangements with various countries, removing of price bands for airline ticket sales and removal of capacity caps on domestic airlines. Airport tariffs are regulated by the Airports Economic Regulatory Authority of India and timely completion of the tariff determination process by the regulator will provide predictability of cash flows to airport operators.
What is the sector’s outlook for the next couple of years?
After taking into account the impact of the Covid-19 second wave, our proprietary forecasting model projects a domestic traffic of 80 million-95 million passengers in financial year 2022. This projection does not take into account the third wave. Although our forecast ranges between 80 million and 95 million, bearing in mind the considerable uncertainty that exists in the market, our guidance, based on the currently available information, is for traffic towards the bottom end of the range at around 80 million. International traffic is projected to be in the range of 16 million-21 million passengers, but again based on the current settings, it is likely to be constrained towards the lower end of the range because of border restrictions, market access and other strategic risks. However, international traffic will be particularly sensitive to discrete decisions taken by governments on such matters, which cannot be predicted.
We expect that Indian airlines will lose a consolidated $4.1 billion in financial year 2022, similar to that in financial year 2021. This will take the total losses over two years to around $8 billion as a result of the two Covid waves. In financial year 2022, full-service carriers are expected to contribute $2.1 billion in losses, while low-cost carriers would account for $2 billion. The projected losses could rise further, if necessary recapitalisation comes in the form of debt, for which borrowing costs need to be included. At this stage, it is not known how recapitalisation will be funded. Air India and IndiGo combined will represent around $4.5 billion of the approximately $8 billion losses.
Airlines are estimated to need close to $5 billion of recapitalisation in financial year 2022 just to survive, including requirements generated through the course of financial year 2021. Of this, it is estimated that around $1.1 billion is in the pipeline in the form of initial public offerings, qualified institutional placements and other instruments. This does not include additional funding required to achieve solvency. In light of the known recapitalisation plans of Indian carriers, the incremental requirement could decrease to $3.5 billion. However, it is not currently possible to qualify whether the $1.5 billion of planned recapitalisation will materialise.
The industry is expected to induct around 70 aircraft in financial year 2022. However, more than 80 aircraft are likely to be retired, resulting in a slight net contraction of the fleet size. But as older aircraft exit, the outcome will be a younger and more fuel efficient fleet. At the end of financial year 2021, 49.3 per cent of the narrow-body fleet consisted of re-engined Neo and MAX aircraft, which is expected to increase to 60.8 per cent by the end of financial year 2022.
We continue to believe that there will be strategic consolidation in the Indian airline sector once the Covid cloud has lifted. If there is no consolidation (although such a scenario appears unlikely) and if the privatisation of Air India does not proceed, the Indian aviation sector may emerge from Covid with more airlines than it went in with, as it is possible that one or two start-ups may launch, resulting in eight to nine carriers in total. Under other scenarios, we could be left with just three to four carriers. Every airline’s business case will be impacted by different competitive dynamics under each of these diverse scenarios. The next few months will be key to determining the long-term outlook.
With social distancing, other Covid protocols and the vaccination drive, passenger traffic recovery is expected to happen gradually. Worldwide, there is a demand to adopt IATA norms, which will provide a digital identity for passengers regarding their vaccination status and Covid test results, thereby enabling other countries to accept flyers to travel without redundant and multiple checks.
Domestic passenger traffic is expected to recover to pre-Covid levels by financial year 2023 and international passenger traffic by financial year 2025. Cargo traffic is expected to be relatively less impacted due to the pandemic. Financially, airports will have to resort to cash conservation and ensure they have enough liquidity to sustain their operations.