Coronavirus Lockdown: Flying in turbulent conditions

The COVID-19 pandemic has caused unprecedented turmoil in the aviation industry. With the pandemic wiping out travel demand this year, the government’s failure to announce a bailout package for the sector has pushed the industry into uncertain territory. The journey towards normalcy will be tough for the sector with reduced demand, high operating costs and liquidity crunch. Airlines in India, which carried over 350 million passengers last year, could take at least two years to recover.

The airline industry had already been hit by the overall economic slowdown even before COVID-19 struck a far more severe blow. Passenger traffic, which grew at a CAGR of 12% over the last decade, rose by only 2.5% last year. But when all flights were suspended on March 25, airlines began to bleed, with no passenger revenues. The industry estimates the losses in the two months of lockdown at Rs 20,000 crore. In the current fiscal, the aviation industry’s losses could hit Rs 25,000 crore to Rs 40,000 crore. That would reverse the industry’s growth trend of about 11% per annum between 2010 and 2019.

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What’s worse, the losses will climb if travel restrictions last longer in hubs such as Mumbai, Delhi, Chennai and Kolkata. It is expected that the industry will take at least 6-8 quarters to reach pre-pandemic levels.

Says Crisil’s Jagannarayan Padmanabhan, “These are preliminary estimates, and aggregate losses could increase if the lockdown is extended beyond the first quarter. As and when operations resume, overall operational capacity will hover at 50-60% for the rest of the fiscal. Consequently, mergers and acquisitions of airlines, and relook at expansion plans of private and upcoming greenfield airports would be possibilities.”

Domestic passenger traffic is expected to witness a de-growth of 41-46% in FY2021, with the first half of the fiscal witnessing a sharper fall, followed by some recovery in H2 FY2021 as the airlines have resumed operations on a low key. Further, the impact of the COVID-19 outbreak will last longer on international travel than on domestic travel. Thus, international passenger growth for Indian carriers will shrink in the range of 67-72%, rating agency ICRA said.

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With the government allowing airlines to resume operations, things might change for the industry. However, its recovery depends on how soon people return to flying. The general feeling in the industry is that passenger numbers will not return to pre-COVID levels for another two years as people avoid unnecessary travel.

“Directionally, the government has done the right thing by allowing airlines to operate. The airlines need to be subjected to all conditions of health that are needed to protect passengers. I think the airline industry will go through a significant transformation in the coming days,” says Bhaskar Bhat, Chairman, Vistara.

Given the current situation, he said, the airline industry would lose upto Rs 30,000 crore this year and it will take at least a year to bounce back, provided the government creates a conducive environment for the operators.

Measures needed

First, there is an urgent need to bring back confidence among air travellers that it is the safest mode of transport in the current scenario. “The air inside the cabin is fresh and recycled frequently. There is nothing that you can touch in an aircraft except
your own bag. The boarding pass is digital and the security check by CRPF is contactless. If you want to travel, air travel is the safest mode today, and technology is enabling this,” Bhat says. Second, if quarantine restrictions on travellers are eased, the airline industry will bounce back faster.

Airlines in India face very high fixed costs, with fuel costs (about 40%), lease charges (30%) and operation and maintenance costs (15-20%) accounting for 85-90% of the total costs.

The government should bring aviation turbine fuel (ATF) under GST. The tax on ATF in India is the highest in the world at 11% excise duty and upto 30% value added tax levied by state governments. “This is killing the industry,” Bhat says. The government should also direct banks, which are reluctant to give loans to airlines, especially after Jet Airways went down, to give loans to airline companies.

Other measures that the industry has sought include waiver of airport charges, passing the benefit of reduced international oil prices to airlines, increasing the credit period given by oil companies, and waiver of the 80/20 rule for slots for an interim period, a further impetus to the UDAN scheme through advance viability gap funding and return of bank guarantees. Unless these major issues are addressed, it would be a tough job to bring airlines back to health, Bhat said.

What govt is doing

The government has been silent on the aviation industry’s demands for a bailout package to survive the COVID-19-induced crisis that has left them staring at huge losses.

In multiple representations to the government, airlines requested fiscal support to pay salaries of employees, waiver of statutory charges such as aircraft parking charges, airport charges, route navigation charges for at least one year.

The ‘reforms’ unveiled by the government earlier this month have failed to enthuse the airlines. The reform measures included optimum use of airspace by allowing airlines to take the shortest route to a destination by allowing overflight over certain sensitive installations such as military sites.

Government estimates show that shorter flying time between destinations could lead to savings of about Rs 1,000 crore per year. However, this will take at least two months to be finalised through discussions with the Department of Military Affairs.

The other two announcements – privatisation of airports and developing India into a Maintenance, Repair and Overhaul (MRO) for aircraft – were made in the Union Budget. It has also reduced GST for MRO activities from 18% to 5% to attract more investments in the sector.

As the demand for air travel will be muted in FY2021, airlines will be operating at much lower load factors and may continue to see many of their aircraft grounded even when operations resume fully.

Asked about a bailout package, Finance Minister Nirmala Sitharaman had said, “We will announce when we have something to announce.” The airline industry is waiting. 

(With inputs from Sagar Kulkarni)