Hitting an Air Pocket

The domestic aviation sector is in the doldrums. If last year wasn’t bad enough, the second wave of the pandemic has left the carriers in utter ruin. Take a look at the numbers. In seven months to July 2021, the domestic traffic more than halved — to 39.34 million — compared to the same period in 2019.

Aviation consultancy CAPA India says the two waves of Covid-19 have created a high level of solvency risk for most airlines, which could impact the entire industry, including airports. “After taking into account the impact of the second wave, our model projects domestic traffic of 80-95 million passengers in FY22, up from 52.5 million in FY21, but well below the 140 million in FY20. This projection does not take into account a third wave [of Covid-19]. We expect that Indian airlines will lose a consolidated $4.1 billion in FY22, similar to that in FY21,” says CAPA India Airline Outlook FY2022 report.

“Despite the increase in traffic in June-July, there is no guarantee that this trend will continue. Countries like the US, for example, have fully vaccinated more than 50 per cent of their population and are still witnessing record Covid cases. Prior to Covid, approximately 350,000 passengers were flying daily. At present, this number is about 200,000. If we don’t see a third wave, we should be able to cross the 300,000 figure by Diwali. However, this is subject to many other external factors,” says Vinamra Longani, Head of Operations at Sarin & Co, a law firm specialising in aviation matters.

While Covid might prove to be a turning point for the sector with the possible launch of one or two airlines (Akasa, Jet Airways) and closure of some weaker ones, the journey over the next several quarters will depend upon vaccination drives and how the coronavirus behaves.

Then there is the issue of the sharp rise in crude oil prices. Brent crude oil prices have jumped 51.5 per cent since last August, pushing up aviation turbine fuel (ATF) prices. ATF accounts for 30-40 per cent of an airline’s cost. Its impact can be partly neutralised by a rise in fares. But for that, all airlines have to be on the same page.

Fare Caps, Other Pain Points

Besides the slump in demand, fare and capacity restrictions imposed by the government have also clipped the wings of airlines. For instance, IndiGo believes that fare caps are restricting their ability to stimulate demand in a particular sector, say Delhi-Mumbai, by lowering the fares. India is a price-sensitive market where consumers don’t have loyalty to any particular brand. Any airline offering lower fares than others can get more bookings.

While the restrictions have been eased of late, the carriers still have to figure out new ways of revenue management. In mid-August, the minimum and maximum fares for the shortest flights were increased to Rs 2,900 and Rs 8,800, respectively. The earlier caps were Rs 2,600 and Rs 7,800, respectively. Moreover, these fare caps will be applicable for bookings within 30 days.

“As widely reported, IndiGo is not in favour of the current restrictions on fares and capacity. Other cash-poor airlines are supportive of this decision because it saves them from aggressive players who may offer discounted fares and operate substantially higher number of flights at a loss, which will make it extremely challenging for them to compete,” says Longani of Sarin & Co.

The situation of smaller carriers is even worse. As per unconfirmed media reports, AirAsia India, which has just 3.3 per cent market share, has posted a net loss of Rs 1,533 crore in FY21. The same reports say Tata Group’s other airline, Vistara, which has 8.1 per cent share, posted net losses of Rs 1,612 crore during the year. “Given that business and leisure travel is low due to state-level restrictions and fear, it’s better if airlines increase fares to stay afloat and not get into a dogfight,” says Mark Martin, CEO, Martin Consulting.

Riding the Same Boat

IndiGo has already got a substantial market share post-Covid, and with its relatively strong financial position, experts feel it would want to further consolidate its presence. For instance, in February 2020, just before the first lockdown, IndiGo’s market share stood at 48 per cent. It climbed to 58.6 per cent in July 2021.

However, a senior executive in SpiceJet, on the condition of anonymity, says that even IndiGo is just two quarters away from a crisis. How? IndiGo started FY21 with free cash of Rs 8,928.1 crore. In the 15 months to June 2021, the low-cost carrier has posted net losses of Rs 8,980.6 crore. “This essentially means the airline has lost its biggest strength. Give it another quarter or two, and IndiGo will struggle just like the others. In the last quarter, 70 per cent of IndiGo’s fleet was grounded,” he says. SpiceJet’s problems are no different than that of others, he says.

“At one point in time, we used to fly 118 aircraft. Today, we are operating about 50. Things are bad at SpiceJet, but in my decades of experience in the aviation sector, I have learnt that never say never,” says the SpiceJet executive.

IndiGo is evaluating a qualified institutional placement (QIP) of Rs 4,000 crore. The airline has been talking about this for a while but is yet to take a final call. “Given the current cash position of the company, we continue to evaluate the timing and size of any QIP,” IndiGo CEO Ronojoy Dutta had said in an investors’ call in July.

“One does feel bad for IndiGo. They were in a privileged position before Covid. IndiGo has finite cash reserves and will need to raise money from the market because there’s no certainty when travel will resume meaningfully,” says an analyst at a broking firm.

HDFC Securities had downgraded IndiGo in the fourth quarter of FY21, and maintains its stance. ICRA continues to downgrade IndiGo’s short-term ratings. “Some carriers have sufficient liquidity and financial support from a strong parent [Tata Group], which is likely to help them sustain over the near term. In the case of others, the credit metrics and liquidity profile have deteriorated. Some airlines have sought deferment of their lease rental payments while some have entered into sale-and-leaseback transactions to shore up liquidity in the near term,” says Kinjal Shah, Vice President, ICRA.

IndiGo, for example, added 44 Airbus planes in 2020, and another 10 planes in the first quarter of FY22. In fact, it is one of the few airlines globally that has not deferred aircraft deliveries despite weak demand. Why? Each aircraft delivery brings a couple of million dollars from sale-and-leaseback arrangements.

The situation is bad even at SpiceJet, which has defaulted on statutory and vendor dues. Industry insiders say lessors have refused to give it planes for longer tenures. “We remain cautious on SpiceJet due to its weak balance sheet (negative net worth) as well as lower yields amid rising fuel costs. The key to its survival is availability of liquidity (either through debt or equity),” BOBCAPS said in a July report.

SpiceJet executives say the airline’s troubles will be over once capacity is expanded and Boeing 737 Max planes get back into operations. In August end, the Directorate General of Civil Aviation gave security clearance to Boeing 737 Max, which means they are safe to fly in India. SpiceJet is one of the biggest customers of Boeing 737 Max, and the decision will provide it a breather. The airline had ordered 205 Max out of which 155 are firm orders. India joins the US, Europe and Canada to certify Max planes, which were grounded in March 2019 after two incidents involving this aircraft type.

“Due to coronavirus issues, liabilities have accumulated. We are in discussions with Boeing to get compensation for our 737 Max orders. The compensation will be finalised within a couple of months. Once the 737 Max issue is sorted, we will do sale-and-leaseback of these planes. The compensation from Boeing will help us pay lessors’ dues,” says the executive. Reports suggest that SpiceJet is planning to hive off its cargo and logistics businesses to generate liquidity.

“Given the onset of Covid-19 2.0, the demand recovery will be delayed for FY22. Consequently, debt levels are likely to remain high for the industry, and are estimated to be range-bound at around Rs 1.2 lakh crore (including lease liabilities) with the industry requiring additional funding support of Rs 45,000-47,000 crore over FY22 to FY24,” ICRA said in a report in August. Martin says SpiceJet is the worst affected. Both SpiceJet (Rs 127.51 crore) and Go First (Rs 25.65 crore) were recently given loans under the Emergency Credit Line Guarantee Scheme (ECLGS).

“SpiceJet is surviving on time borrowed from the government. ECLGS is a good step but the industry needs more funds,” says Martin. Emails to IndiGo and SpiceJet didn’t elicit any response.

Go First, earlier known as GoAir, is also in an unenviable position. But with Sebi clearing the decks for its initial public offering (IPO), the airline will have a fresh flow of funds to tide over the crisis. “Go First’s debt has been managed effectively. It seems that the micro-management of the promoters has worked. We need to see how much funds raised through the IPO will be ploughed back into the company,” says an analyst quoted above.

“In 18 months, the carriers have accumulated liabilities, which they have managed to defer in the name of pandemic and truncated operations. In the next 9-12 months, we will see how many of them survive,” says Harsh Vardhan, Chairman, Starair Consulting.

The Green Shoots

June and July traffic data shows a spurt in demand as Covid cases slide. In July, traffic jumped 132 per cent over July 2020. The number of departures was 49 per cent higher than in June. Experts say this was largely due to leisure travel as people socialise again. “We are witnessing 30 per cent increase in flight bookings over May,” says Prashant Pitti, co-founder of EaseMyTrip.

An IndiGo source confirms that unlike last year, when lockdown restrictions were eased, this time demand is coming from corporates, too. The share of the business segment for IndiGo had fallen to about 7 per cent in the June quarter as compared to 20 per cent earlier. “Big corporates have started opening offices, which should further boost the traffic. The moment the virus is contained, flights will be jam-packed again,” he says. “On the domestic side, the traffic is 60-65 per cent of the pre-Covid level. The international traffic is much below 50 per cent (of pre-Covid level), and will continue to remain weak for a longer time. In the best case scenario, domestic traffic should reach 80 per cent by the end of the March quarter, and the airlines might break even at the P&L level,” says Ashish Shah, analyst at Centrum Broking.

Despite the challenges, ace investor Rakesh Jhunjhunwala recently announced plans to start a ULCC (ultra low-cost carrier) Akasa Air by reportedly building a fleet of 70 Boeing 737 Max over four years. Experts say choosing Boeing over Airbus will land Jhunjhunwala a sweet deal since Boeing is trying to gain a foothold in the narrow-body market in India. Airlines such as IndiGo, Go First, Vistara and AirAsia India are primarily Airbus customers.

“After Jet’s fall, and issues with 737 Max, Boeing is keen on selling its narrow bodies in India. With its ULCC model, Akasa could fill a gap in the domestic market. Since Jet is also trying to re-enter the market with new promoters, consumers will have more options,” says an aviation consultant.

“The re-entry of Jet Airways and Akasa’s launch might upset the apple cart. As soon as the traffic grows, the fares will start hardening. If new players come, the price war would restart, and impact the health of the industry,” says Vardhan of Starair Consulting.

So far, there has been no casualty in aviation owing to Covid. Most of the operating carriers today have outlived two major bankruptcies (Jet Airways, Kingfisher Airlines), yet the current times present one of the biggest survival tests for them.

@manukaushik