Skies open, but who wants to fly? Airlines grapple with low demand, high costs

After a series of flip-flops, the Ministry of Civil Aviation (MoCA) has finally given its green signal for resuming domestic flights from May 25. International flights, however, will remain suspended for the time being. Civil Aviation Minister Hardeep Singh Puri has clarified that flights will be resumed with certain riders. Airlines will be allowed to operate at only one-third capacity approved in the summer schedule in 2020. For instance, if all the airlines were to operate 100 daily flights between Delhi and Mumbai as per the summer schedule, they can only take 33 now. Puri further said airlines would be allowed to add more flights "in a calibrated manner", but he didn't elaborate the conditions that are to be met.

In addition, the Civil Aviation Ministry has given a fare band under seven categories depending on the duration of the flight. For instance, a Delhi-Mumbai flight ticket can be priced between Rs 3,500 and Rs 10,000, with 40 per cent of the tickets to be sold below Rs 6,750. Then, there are a host of guidelines for the passengers keen on air travel after flights are resumed.

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With this, the airlines have gone back to the drawing board to prepare a fresh reboot plan. As carriers take to the skies after a gap of 62 days, they would be facing the most difficult question: Will there be a sustained demand for air travel in the COVID world? Experts say demand for air travel is going to peak around a week or so post May 25 since a lot of people who were stranded would return to their safe zones. After that, there is a strong likelihood that the demand would tank.

As per some estimates, nearly 80 per cent of air travel demand would get wiped out over the next three months. That's because nearly 40 per cent of air travel is driven by leisure. Until a cure is found, this segment would remain fragile as holiday travellers prefer their private vehicles for a trip within a driving distance of three-five hours. Even though the demand from business segment, which is 60 per cent of the overall demand, is expected to be better than leisure, the overall pie would shrink.

"After a week, I believe that there will be a true test of the demand. This is the biggest demand shock for the airline sector in history. Even one-third capacity is a bit much, and I see airlines would be forced to sell tickets at the lower end of the band," says Vinamra Longani, head of operations at Sarin & Co, a law firm specialising in aircraft matters.

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Much like the hotel sector, where operators are finding it hard to keep their establishments running, experts believe that it might come to a point where airlines find it unprofitable to keep the operations running. In a normal situation, nearly 40 per cent of the airline's expenses are fixed (salary, leases, etc), and 30 per cent is ATF cost. Though some of these have been rationalised in the COVID period, there's still a significant cost that airlines will have to bear to fly planes.

"The airlines have a long list of creditors (lessors, airports, oil companies) who are waiting to get paid. This is on top of the Rs 3,700 crore of pending refunds to the passengers. Some airlines have stopped paying staff salaries from April. Operating flights at weak load factors would aggravate their losses when they are already facing huge financial challenges over the past two months," says an aviation consultant.

As per ratings agency ICRA, domestic carriers are losing Rs 75-90 crore per day, and their debt level is expected to rise to Rs 46,500 crore in FY22. "Even when the operations resume and passengers start flying, a large percentage of passengers may be using these credit shells, and thus may not bring any significant additional cash inflows to the airlines," said Kinjal Shah, vice president at ICRA.

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Weaker airlines like SpiceJet and GoAir (with poor cash situation) are stating at an additional challenge of fighting it out with stronger players like IndiGo and Tata Group-owned carriers (Vistara, AirAsia India) who could likely use this as an opportunity to decimate competition. That's exactly the reason given by the MoCA to introduce fare bands. But Aviation Minister Puri has made it clear that this is not fare fixation as the government is dealing with an extraordinary situation. "It's conceivable that the fares would skyrocket. Based on consumer feedback, once we exit the three-month period, we could return to status quo or market-based system, which is equitable," Puri said.

Mark Martin of Martin Consulting says that the government should not control fares even in the current circumstances. "The airlines have been bleeding for over two months. The government doesn't own these airlines. Regulating fares doesn't make sense, and it distorts the demand-supply equation. Let the market forces decide," he says.

The decision to resume flight operations has come as a surprise for the airlines, travel agents and online travel aggregators (OTAs). After the May 17 circular by Ministry of Home Affairs (MHA) prohibited domestic and international flights till May 31, the sector had gone into wait-and-watch mode. On May 20, when Puri tweeted about lifting the flight suspension, it again swung into action. However, it remains to be seen if the flight resumption would give a booster shot to the sector or actually pull it further down.

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