Flight Plan

Indian carriers must refocus as financials crash amid Covid

Ashwini Phadnis/Anand Kalyanaraman | Updated on October 13, 2020 Published on October 13, 2020

With limited operations, both IndiGo and SpiceJet posted huge losses in June. Modifying revenue and leasing models could help ease the blow to an extent

In what will perhaps go down as the toughest period in India’s aviation history, the country’s two listed airlines, Indigo Airlines and SpiceJet, posted huge losses in the June 2020 quarter. IndiGo’s consolidated loss of ₹2,844 crore was its highest ever, while SpiceJet’s consolidated loss of ₹601 crore was among the largest it has posted so far. This is in stark contrast to the profits of ₹1,203 crore posted by IndiGo and ₹263 crore by SpiceJet in the year-ago period. SpiceJet reported its Q1 numbers on September 15 while IndiGo declared its Q1 numbers on July 29.

SpiceJet’s losses in the June quarter would have been higher by ₹141 crore, had it not accounted for ‘other income’ towards claims of reimbursement from Boeing for the grounding of its MAX aircraft.

The spread of Covid-19 and the consequent lockdown on flights meant that both SpiceJet and IndiGo flew passengers for just 37 of the 91 days in the June quarter, and that too on truncated schedules.

As a result, IndiGo’s revenue from operations crashed 92 per cent y-o-y in the June quarter to ₹767 crore. SpiceJet, too, saw an 83 per cent y-o-y fall in revenue from operations to ₹490 crore, led by a 90 per cent fall in capacity. IndiGo’s load factor (an indicator of capacity filled) fell to 61 per cent (from 89 per cent) while that of SpiceJet fell to 67 per cent (from 93 per cent).

As if this was not bad enough, with the pandemic showing no signs of abating, the future does not seem bright for these two listed airlines either.

Limited respite

IndiGo and SpiceJet are getting some relief through flights under the Vande Bharat Mission (VBM) and cargo flights, though this respite is only marginal. IndiGo has flown to Vientiane, Saudi Arabia and Qatar and SpiceJet to Manila, Almaty, Moscow and Tashkent under the VBM. The two airlines are also using cargo operations for ferrying cargo across the country and to other parts of the world.

According to Jagannarayan Padmanabhan, Director & Practice Leader, Transport & Logistics, CRISIL Infrastructure Advisory, the cash burn is quite significant when there are limited operations, so the VBM and other such operations are helping the airlines salvage some of their fixed costs — but this will only help to soften the losses a bit, and not alter the financials materially.

Pointing out that at present, the VBM and cargo operations are very limited, Waseem Khan, Industry Analyst, Aerospace, Defense & Security Practice, Frost & Sullivan, adds that while these will contribute to revenues, airlines cannot only depend on these operations to help shore up their bottom lines. “According to our analysis, in 2019, globally the cargo operations contributed 12 per cent to the total revenue of the commercial airline business,” he adds.

What airlines can do

Analysts list some things that these two low-cost carriers can do to tide over this phase. According to Padmanabhan, these airlines’ immediate focus should be on liquidity and cash as a short-term goal, while profitability and topline numbers should be the medium-to-long term goal as demand picks up.

Khan is of the view that the carriers need to enhance and restrategise their ancillary revenues as most of their revenue is linked to passenger traffic.

“Airlines need to analyse each sub-segment (frequent flyer programmes, commission-based revenue and a la carte revenue) and decide which sub-segment will be their primary focus,” Khan says.

Khan further adds that these airlines could also follow Air Asia X, which recently introduced subscription-based pricing whereby a customer is allowed unlimited flights on some routes by paying a fixed amount.

“This pricing model will not only help with a quick influx of cash but also increase brand loyalty,” Khan adds.

Another possible solution is re-negotiation of aircraft lease. According to Padmanabhan, employee costs and rental lease are the two major fixed cost components for an airline, with rental lease constituting 13-15 per cent of the 35-40 per cent fixed-cost component for airlines.

Padmanabhan points out that according to Indigo, 50 per cent of its supplemental lease rentals have been negotiated. “Assuming these have been deferred, this can contribute about ₹2,900-crore yearly savings to enhance the airline’s bottomline,” he says. This is based on the assumption that in its annual report for fiscal 2019-20, IndiGo said its supplementary lease rentals were at ₹5,800 crore.

Khan agrees, adding that Indigo has to focus on one of its major sources of revenue streams which come from sale and lease-back agreements.

Govt measures

However, analysts are quick to point out that airlines need the government’s backing to mitigate credit risks, which they may face if demand remains tepid. This support could be in the form of bridging finance, fiscal reforms such as reduction of sales tax on ATF, soft loans and extended moratoriums, including bringing ATF under the GST and providing short-term relaxations from airport charges.

How these two listed airlines fare in the next few months will also depend on the government, as a major chunk of their business comes from flying on domestic routes. Hence, a lot will depend on how soon the government lifts the cap on ticket pricing. “Otherwise, it will be very difficult for the airlines to get back on track during these unprecedented times,” Khan cautions.

The September 2020 quarter will likely be better than the June one, given the gradual relaxations in domestic capacity deployment (currently 60 per cent, which could go up to 75 per cent soon). Also, the resumption of some international flights under the ‘air-bubble’ agreements and flights under the VBM should help.

However, it’s a long way to normalcy for Indian carriers. Airlines are likely to post losses again in the September quarter and the FY21 bottomline of the Indian aviation sector could be awash in red. This could translate into shakeouts and consolidation.

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Published on October 13, 2020
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