Covid-19 impact: Air India sell off will be delayed, says CAPA

The privatisation process for Air India will be further delayed, aviation advisory CAPA said on Wednesday in a report title, ‘Impact of Covid-19 on Indian aviation’.

The report points out that the submission date for Expression of Interest has already been pushed back by six weeks. As a result, the government will need to commit significant and immediate interim funding of $300-400 million for the national carrier, to ensure that it is able to operate at least in its current condition till the sale transaction is concluded.

“The government must also have a fall-back plan to regroup and continue to operate the airline for the medium term if the privatisation process is unable to proceed,” the report adds.

The government started the divestment process for Air India in January and wanted to identify the qualified bidders whose price bids were to be be accepted by the end of March. It, however, extended the deadline for submission of expression of interest till April 30 recently.

Hardeep Singh Puri, Minister of State for Civil Aviation, has been categorical in stating that the sale will go through. Unlike the earlier failed attempt, this time around the government is looking to sell 100 per cent stake in Air India and Air India Express apart from a 50 per cent stake in in Air India SATS Airport Services Private Ltd.

The CAPA report released on Wednesday also says that it is expecting demand to weaken substantially with a drop of 40-50 per cent or even higher in the near term, as is being seen in other markets. CAPA estimates forward bookings are down 30 per cent relative to last year.

Yields may also come under further pressure and could deteriorate by 25 per cent or more. However, given the structural reason for the decline in demand, reducing fares will not stimulate traffic, but will simply dilute yield on those passengers that clearly have an urgent need to travel regardless, the report adds.

At an industry level, CAPA estimates consolidated losses to be in the range of $500-600 million for the quarter (excluding Air India). However, these are very preliminary estimates and are subject to further downward revision.

To overcome the current crisis, CAPA reiterated its recommendation of introducing a regulatory requirement for airlines to hold cash balances that can support six months of operations in the absence of revenue, to be able to both obtain and to renew an Air Operator Permit.

When airlines expand without the balance sheet strength to support their growth, this results in excess capacity and loss-leader pricing which destabilises the entire industry.

“Incumbent airlines will of course need to be given adequate time to comply with this requirement, but this will be an important step in ensuring that they are better placed to withstand the shocks that regularly visit the industry,” says the report.

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