STORM AHEAD
India’s airlines are staring at aggregate losses of a staggering Rs 1.3 lakh crore by the end of the next fiscal year. The fare hike will bring some relief but not quite enough
The pandemic has India’s airlines staring at aggregate losses of Rs 1.3 lakh crore by the next fiscal
Wthe pandemic forced weeks of shutdown of domestic and international air travel in India in end-March last year, SpiceJet chairman & MD Ajay Singh got down to some out-of-the-box thinking to navigate his airline through the impending financial crisis. Among the first things he did was put a dedicated fleet of nine freighters—five Boeing 737s, three Bombardier Q400s and a wide-body A340—into operation. Between end-March and November 2020, SpiceJet operated nearly 10,000 flights and carried 77,000 tonnes of cargo, including essential items like food and medicines, to 41 international destinations. By October, it had emerged as the largest international cargo operator at the Delhi airport. With revenue from passenger business drying up during the pandemic, airlines the world over turned passenger aircraft into temporary cargo carriers to make money and stay afloat. In India, too, airlines deployed dedicated freighters and even used overhead storage in plane cabins to ferry perishable cargo—mostly fruits and vegetables—and medicines. The margins were low as domestic air freight traffic fell by 74 per cent and international air freight traffic by 57 per cent in the Aprilhen
June 2020 period than a year ago. But airlines had few options—freight was the only business operational.
CRIPPLING LOSSES
Freight movement improved gradually, from a contraction of 41 per cent in June 2020 to that of 14 per cent in October. Passenger traffic also picked up with the phased lifting of air travel restrictions from end-May. But the shock suffered in the first two months of the national lockdown had taken its toll on airlines. According to ratings agency Crisil, the Indian aviation sector is staring at revenue losses of Rs 1.1-1.3 lakh crore, due to the pandemic, over fiscals 2020 to 2022. Worse still, another ratings agency ICRA estimates that the country’s airlines would require around Rs 37,000 crore in additional funding over 2020-21 to 2022-23 to recover from losses and debt. ICRA maintains a “negative credit outlook” for the industry. It means moves to raise money through bank loans will prove to be costlier for airline companies.
Although the Centre recently allowed airlines to hike fares by as much as 30 per cent, the move can be a further dampener for air travel as passengers, already wary of travel due to the pandemic, will have no option but to pay more for air tickets or switch to other options, including the railways.
The turbulence is hardly surprising, considering that passenger air traffic fell by 82 per cent in April-October 2020 from a year ago while aircraft movement (take-offs and landings) was 71 per cent lower. The flights handled at domestic airports in these seven months have been the lowest in 16 years. On a yearly basis, domestic flights have been 70 per cent lower while international flights were down by 77 per cent during April-October 2020.
Crisil says the net fleet addition of Indian carriers, which had around 900 aircraft on order as on March 31, 2020, will also be affected since passenger traffic is unlikely to rebound to even fiscal 2020 levels in the medium term. Beginning December 3, 2020, the government raised the passenger capacity limit on flights to 80 per cent of pre-Covid levels. But the profitability of Indian airlines has nosedived during FY20-21, thanks to low revenues and high fixed costs. The two listed airlines, IndiGo and SpiceJet, together lost about Rs 31 crore per day during the first half of the year. This when the aviation sector was already going through a rough patch, with airlines reporting net losses of Rs 12,700 crore during 2019-20. A research report by ICRA estimates the overall debt of the Indian aviation industry to touch about Rs 50,000 crore by 2021-22.
FARE HIKE BREATHER
The government had imposed fare restrictions when flights resumed in May 2020 to ensure that ‘dynamic pricing’, wherein fares surge with demand, does not pinch passengers. With this cap relaxed on February 12, air fares are expected to go up by as much as 30 per cent until March-end. The cap on airline capacity (80 per cent) has been extended till March 31. Civil aviation minister Hardeep Singh Puri said in Parliament recently that some carriers wanted full capacity operations while others preferred a graded increase.
The easing of travel restrictions and rising monthly passenger traffic have improved the passenger load factor (PLF), or occupancy rate, for airlines. The PLF of major domestic carriers averaged 66 per cent in October 2020, a 3 percentage point improvement from the previous month, Care Ratings said. But this is significantly lower than the pre-pandemic (February 2020) average of 88 per cent.
Higher passenger volumes in recent months have helped airlines make some recovery. IndiGo, the country’s largest airline, narrowed its net losses for the third quarter of the fiscal to Rs 620 crore, from Rs 1,194 crore in the previous quarter. IndiGo CEO Ronojoy Dutta, though, has warned of a ‘volatile revenue market’. The airline’s PLF for the third quarter fell 15.6 percentage points to 72 per cent as against 87.6 per cent year on year. SpiceJet narrowed its losses by 38 per cent sequentially, from Rs 108.53 crore in the quarter ending September to Rs 66.77 crore in the October-December quarter. The airline has claimed the best domestic PLF (76.8 per cent) during the quarter. “The pandemic has, undoubtedly, been the biggest crisis to hit the aviation industry, but we are confident that things will only get better from here on,” says SpiceJet’s Singh. According to media reports, the pre-tax losses of Vistara, a joint venture between Tata Sons and Singapore Airlines, jumped to Rs 1,814 crore in 2019-20 as against Rs 831 crore in 2018-19. This is the airline’s highest single-year loss since it began operations in 2015. National carrier Air India had reported losses of Rs 8,000 crore for 2019-20, lower than 2018-19 (Rs 8,500 crore). The losses for 2017-18 were much lower, at Rs 5,300 crore. AirAsia India, the Tata Group’s other joint venture with AirAsia Berhad of Malaysia, widened its losses to Rs 332 crore during April-June 2020, from Rs 15.11 crore a year ago.
BUDGET BALM
Budget 2021 promises the battered aviation sector some succour, in the form of a tax holiday on capital gains for aircraft leasing companies, tax exemption on aircraft lease rentals paid to foreign lessors located at the International Financial Services Centre in GIFT City (Gujarat International Finance Tec-City), an allocation of Rs 600 crore for the UDAN regional connectivity scheme and monetisation of the Airports Authority of India (AAI) assets in Tier-2 and 3 cities. The introduction of tax exemptions is likely to encourage aircraft leasing companies to set up base in India over the medium term. This will benefit the aviation sector in terms of competitive lease rentals for new fleet, reduced forex fluctuations and broad-basing of the financial leasing market in the country.
But the budget ignored demands such as bringing ATF (aviation turbine fuel) under GST (Goods & Services Tax) and reducing airport charges. High fuel costs continue to hurt airlines. In July 2020, in the midst of the pandemic, oil marketing companies had raised ATF prices by nearly 48 per cent to Rs 33,575 per kilolitre (in Delhi). A series of price hikes later, ATF was priced Rs 55,737.9 per kilolitre as on February 16. Cash-strapped airlines have resorted to various cost rationalisation measures, such as renegotiating aircraft lease rentals, seeking relaxation/ waiver in insurance premium payments, renegotiating vendor contracts, reducing staff strength and salaries, and postponing taking deliveries of aircraft. But Care Ratings says the aviation sector faces grim prospects during the remainder of the current financial year. ‘Passenger traffic is expected to sustain the sequential improvement, but for FY20-21 as a whole, passenger travel demand is expected to remain muted and would be 60-65 per cent lower (year on year),’ it says. Air travel is expected to pick up slowly, more so as revival of the tourism industry is not foreseen before the next two to three years. While the Covid vaccination drive promises to rein in the deadly virus to some extent, finding a cure for the ailing aviation industry will be a long-drawn-out affair. ■
THE PANDEMIC HAS, UNDOUBTEDLY, BEEN THE BIGGEST CRISIS TO HIT AVIATION, BUT WE ARE CONFIDENT THINGS WILL GET BETTER FROM HERE ON” Ajay Singh Chairman & MD, SpiceJet