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Mayday signals from Indian airlines

Paran Balakrishnan | Updated on June 08, 2021

Plummeting passenger traffic and ballooning losses are pushing the aviation sector to the brink

It was May, not April, that was the cruellest month for Indian aviation. Last month, with Covid-19 tightening its grip on the entire country, just two million domestic passengers ventured onto flights. That figure was down from 5.7 million the month before and was a massive decline from the 12.2 million travellers who flew in May 2019 when there was no coronavirus.

Things are so bad for the sector that CAPA, which provides market intelligence to the aviation industry, makes a startlingly grim admission in its annual outlook that, “We have run out of words to describe the state of Indian airlines.” Its just-released report proceeds in a similar gloomy vein: “The industry is standing on the edge of a cliff. This is true even for airlines with access to large pools of capital.”

CAPA forecasts airline losses of $8 billion for FY2021 and FY2022 combined. The airlines racked up losses of $4 billion last year and CAPA expects a repeat this year. The red ink spilled in 2021-22 will be split almost equally with full-service carriers losing $2.1 billion and low-cost carriers losing $2 billion. CAPA says the airlines will need $5 billion to stay aloft but only have access to $1.1 billion through share offerings and other sources.

Just as the CAPA report came out, dominant player IndiGo gave a rude reminder of how bad things are by reporting fourth-quarter losses ballooned to ₹11.5 billion, outstripping analyst forecasts of ₹4.5-billion loss and bigger than its ₹8.7-billion loss for the same year-earlier quarter. The budget airline advised staff it’s implementing a leave-without-pay policy and not anticipating a return to profit until next year. To carry on, the airline is trying to increase borrowings. But even though it has reserves of ₹180 billion, it’s got a debt of ₹298.5 billion

Despite the year’s bad start, CAPA reckons passengers will total 80-95 million this year, significantly more than last year’s 52 million passengers. But there’s the big caveat that if a devastating third wave materialises, the industry will be knocked out of gear again and final numbers are likely to be closer to 80 million. That’s far short of the 140 million who boarded domestic flights in 2019, the last normal Indian aviation year.

Covid effect

Many planes have just been grounded or are flying only for a few hours each day. On May 10, for instance, only 961 domestic flights took off, compared to the over 2,000 planes that flew daily before Covid-19 struck. To give one example of how the number of flights has fallen, take a look what used to be the busy Mumbai-Thiruvananthapuram route which had around three to four flights daily. In recent weeks that’s been cut to four flights a week. Other flights have been taking off with just a handful of passengers.

Delhi Airport, which in pre-Covid days had over 200,000 passengers passing through its portals daily, suddenly found that number had dropped to between 30,000 and 40,000. In mid-May, Delhi airport closed Terminal 3 and announced all flights would take off from Terminal 2. Mumbai’s Chhatrapati Shivaji airport is also operating from one terminal.

And there’s no chance also international flights can pick up the slack. The huge number of Covid-19 cases in April and May has meant India is on most countries’ ‘Red List.’ CAPA projects international traffic of 16-21 million passengers but warns this is likely to be on the lower end of the spectrum and anyway can’t be predicted because it depends heavily on governments around the globe. Indigo isn’t expecting any international traffic recovery before the fourth quarter.

All this is a far cry from a few years ago when the airline industry was struggling to cope with runaway growth. Between 2014 and 2018, the industry almost doubled in size with growth of 20.8 per cent in 2015 and 22.2 per cent in 2016. In 2017, growth stayed high at 18.2 per cent and that was followed by 18.6 in 2018.

The result of those go-go years was that the industry planned ahead for an era of limitless growth. Delhi airport, built to handle 60 million passengers annually, suddenly found it had 69.2 million in FY2018-19. It then embarked on an expansion that would enable it to cope with 100 million passengers. The government also pushed ahead with its plans to build second airports like Navi Mumbai and Jewar to cope with excess traffic.

The airports are also squeezed in a different way. Airports have huge fixed costs and can’t easily lower spending. Similarly, it’s not even possible to reduce large staff numbers because they’re needed to keep airport facilities in working order.

Air India privatisation

What’s going to happen to Air India’s privatisation plans with the industry in the dumps? The airline is bound to wrack up huge losses this year and will be worth even less than it might have been a couple of years ago. Plus, there’s the crucial point that potential buyers like the Tatas will also be financially poorly placed to make generous offers. Equally, it’s tough to see how other buyers like SpiceJet’s Ajay Singh could assemble the capital for a serious offer in the current circumstances. CAPA suggests the government should put together a Plan B for the airline’s sale but doesn’t specify what form this might take.

Many analysts argue constant price wars have hurt the industry and led to airlines like Jet, Kingfisher and Sahara failing and others like SpiceJet hanging in there despite a weak balance sheet. But that argument can be countered by pointing at IndiGo, which over the last 16 years has seized almost 50 per cent market share and has abundant cash reserves. CAPA argues the industry has lurched from one crisis to another since 2004 and needs to put its house in order.

Where does all this leave the industry? Aviation experts point hopefully to January and February when traffic rose to 50 per cent of pre-pandemic levels. If the third wave holds off or isn’t as brutal as the second, the industry might be able to stagger back to better times. But the last few months will have taken a toll. IndiGo will survive the pandemic thanks to its deep pockets. All the others are perilously close to the brink and would need only the slightest push to tip them over the edge. Nevertheless, CAPA says one or two new airlines are likely to join the perennial quest to be a star of India’s skies, a strong testimony to the eternal lure of the aviation industry even during the stormiest weather. ·

Published on June 08, 2021

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