More turbulence ahead for domestic airlines

The bad fiscal situation of domestic airlines in FY2020 is set to continue into FY2021, and likely to become worse, as indicated by IndiGo and SpiceJet’s full-year financial reports for 2019-20. In FY2020, IndiGo reported a net loss of ₹234 crore (its first annual loss in at least a decade), and SpiceJet posted a net loss of ₹937 crore, one of its largest.

This was despite the lockdown in India coming into force only in the last week of FY20, though international operations had started feeling the impact since mid-February. The consolidated losses of the airlines in the March 2020 quarter — IndiGo’s ₹871 crore and SpiceJet’s ₹816 crore — were among their largest ever.

Among the various reasons for this was the forex losses the two listed airlines suffered because of losses on their lease liabilities. In fact, SpiceJet’s losses for FY20 would have been ₹1,651 crore had it not accounted for ‘other income’ towards claims of reimbursement from Boeing for the grounding of its MAX aircraft; the auditor has qualified the audit report saying that there is no virtual certainty to recognise such other income.

Bleak projections

The picture looks worse in FY2021. IndiGo, which has a market share of close to 50 per cent, reported its highest ever quarterly loss of ₹2,844 crore in Q1FY21. SpiceJet has not yet declared its results for the June quarter, but it would be reasonable to expect an alltime-high loss even for the low-cost airline.

One of the main reasons for such bleak projections for FY21 is the Covid lockdown. For example, SpiceJet’s consolidated net worth as of March 2020 deteriorated to a negative ₹1,580 crore from a negative ₹350 crore a year ago.

Given this, the airline’s auditor has highlighted ‘material uncertainty related to going concern’ of the airline. What is also not helping the airline is that its cash reserves are precariously low. Its financial assets as of March 2020 were ₹1,806 crore, of which cash, cash equivalents and bank balances were ₹42 crore. SpiceJet’s borrowings (other than trade payables, lease and other financial liabilities) as of March 2020 stood at ₹874 crore.

IndiGo has better financial muscle — with cash reserves of ₹20,377 crore and free cash of ₹8,928 crore as of March 2020. However, even IndiGo is feeling the Covid lockdown impact — as of June 2020, its cash reserves had come down to ₹18,450 crore and free cash was ₹7,528 crore.

Flyers not convinced

Though limited domestic flights have been allowed since May-end, the flying public is not very keen to start flying just yet. This, too, has added to the airlines’ financial woes.

“The future is grim until there is a breakthrough with the vaccine. People’s confidence in travelling is the only way to a bright future,” says Nripendra Singh, Industry Principal, Aerospace, Defence and Security Practice, Frost & Sullivan.

ICRA expects FY2021 to witness a de-growth of approximately 41-46 per cent in domestic passenger traffic and approximately 65-72 per cent in international passenger traffic. “The revenues of the Indian aviation industry are expected to witness significant de-growth. The profitability of the industry will also be adversely impacted due to lower revenues and high fixed costs,” points out Kinjal Shah, Vice-President, Corporate Sector Ratings, ICRA.

Some also believe that the government’s decision to extend the cap on domestic airfares till November 24 will hurt the industry. Earlier, the cap was to end on August 24.

‘Delicate ecosystem’

Singh believes that extending the fare cap can prove to be a regressive move when the sector is already struggling.

“The only edge India, China, and North America had was a relatively high percentage of the domestic market than other regions. As a result, recovery across these pockets was expected to be faster than other regions, but India is still lagging. Airlines survive on the balance between demand and supply; if either of them is restricted, it will negatively impact the delicate aviation ecosystem,” he says.

Pointing out that domestic airlines witnessed a rather slow uptick in capacity in July this year despite recommencement of operations over two months prior, Shah points out that airlines operated at a much lower capacity at approximately 27 per cent in July 2020 vis-à-vis their July 2019 capacity, which was a marginal increase over the approximately 25 per cent capacity deployed in June 2020.

IndiGo and SpiceJet are looking at cargo operations and repatriation flights to help them earn some money, but again analysts are not very optimistic. Shah believes that the repatriation flights and cargo operations are running at positive contributions (at the variable levels).

“They would have helped curtail the losses of the domestic airlines. However, these are currently very limited operations and thus may not help in the airlines reporting profits,” she points out.

Singh feels that to say that increased cargo operations would be enough to overcome the losses due to lack of demand would be a step too far. “Cargo revenues merely help in subsidising a part of the losses, a lot of it still is unrecovered. Cargo revenues or uplifts are still below last year’s levels in any given month in 2020 for both airlines, according to IATA (International Air Transport Association),” he says.

Given such bleak projections, all that the two listed airlines can do is hope that a vaccine is found soon or that they are able to restore confidence in flying among their customers.

COMMENT NOW