Is Indian aviation set for a COVID-induced growth coma?

July 3, 2020by capa-india

26 June 2020

CAPA India has been tracking the progression and impact of COVID since Jan-2020, and in significant detail from Mar-2020 onwards. In four detailed updates we have evaluated the impact on the entire aviation sector, with a particular emphasis on likely scenarios for post-COVID recovery.

These updates have also highlighted the need for appropriate policy responses to ensure that government and industry are together able to mitigate risks through active collaboration.

Our research has been supplemented by a series of valuable, high-level webinars focusing on the need for industry operators to re-invent their business models, in order to emerge from COVID with more sustainable cost structures and leaner organisations.

CAPA India has made a number of projections in our industry updates since Mar-2020, as summarised below.

CAPA India’s projections for the impact of COVID on the aviation industry are mostly aligned with likely outcomes

CAPA India’s Earlier Projections Likely Outcome

Domestic traffic in FY2021 will decline to 55-70mn

Full-year traffic is expected to be towards the lower end of this range.

International traffic in FY2021 will decline to 20-27mn

International traffic is yet to resume but we continue to maintain this projection.

Indian airlines will have a surplus fleet of 200-250 aircraft over the next 6-12 months

At the end of 12 months the projected surplus is expected to be 200-250 aircraft.

Indian airlines may terminate and return 100+ leased aircraft

This remains likely based on indications from airlines to date.

1QFY2021 will be a washout for the industry

Domestic traffic in Q1 is estimated to have only reached around 2.5mn passengers, compared with 34mnn for the same period last year. Scheduled international operations were grounded for the entire quarter.

Indian airlines will lose USD1.50-1.75bn in 1QFY2021

Although some moderation in losses is likely due to waivers and deferrals on lease rentals and supplementary leases; salary cuts; and staff being sent on leave without pay, losses are expected to be close to the projected range.

India’s largest airline, IndiGo, may need to boost liquidity given the unprecedented nature of the crisis

IndiGo is likely to raise USD400-650mn by monetising its aircraft and engine assets.

The workforce employed in Indian aviation may be reduced at least 30%

This remains the likely outcome.

Consolidation is inevitable unless there is significant recapitalisation. The industry – excluding IndiGo – will require USD2.5bn.

Our earlier funding estimates may prove to be conservative. Revised requirements are now likely to be in the range of USD3.0-3.5bn.

Demand-related risks are now much higher than when our earlier estimates were released
  • Since the resumption of domestic operations on 25-May-2020, demand has been weaker than expected, with the industry achieving a load factor of around just 55% in Q1, and that too whilst limited to 30% of capacity.
  • Last year there were close to an average of 400,000 daily domestic airline passengers in the month of June. This year traffic has averaged around 70,000 daily passengers, a year-on-year decline of around 80%.
  • The outlook remains soft. Recent traffic has mostly comprised of essential repositioning traffic, with passengers that were stuck in the wrong place when the lockdown was announced, returning to their home base. Discretionary travel has been limited, as reflected in the fact that more than 90% of bookings have been for one-way travel, compared with 40% prior to COVID.
  • The pent-up demand for traffic has proven to be less than expected, largely due to inconsistent and confusing state-wise quarantine requirements, which have regularly changed. And with the number of daily new COVID cases in India accelerating, consumer confidence is weakening.
  • Traffic between metros has been impacted more significantly than non-metro traffic, primarily because metros have seen the largest outbreaks of the disease and are considered to be higher risk.
  • The temporary imposition of fare caps and floors by the regulator is impacting demand. This pricing restriction means that airlines have less flexibility to offer lower fares to stimulate the market. The impact may be even greater in Q2 as demand is historically weak during this quarter. Continuing with price controls beyond August would be a strategic mistake by the regulator which could further harm airline financials.
  • Yields are averaging around INR4200, which is towards the lower end of the permitted fare band, suggesting that there is high sensitivity to fares.
Based on current indications, CAPA’s near term assessment is that demand will remain very subdued until at least the end of 2QFY2021, with no certainty of revival in the second half
  • Domestic traffic in 2QFY2021 is expected to reach 100,000-125,000 daily passengers.
  • Airlines have recently been given permission to operate 45% of their capacity, up from 30% earlier. While this is welcome, given the weak demand outlook until the end of August, airlines may be reluctant to increase capacity as this could actually increase risks and losses.
  • International operations may resume in Aug-2020, but are not expected to reach any meaningful scale until Q3.
  • Latest key findings from CAPA India’s exclusive Traveller Sentiment Tracker indicate that the second quarter is increasingly looking like a washout. The outlook for Q3 will depend upon how fast the infection curve can be flattened so that consumer confidence is restored. But at this stage, the public does not appear to be in any rush to return to the skies, especially when it comes to international travel.

Responses to question: How long after international flights resume are you likely to travel overseas for leisure, business or to visit friends and relatives?

 

 

 

 

 

 

 

 

 

Source: CAPA India Traveller Sentiment Tracker

  • Price may have a limited impact on stimulating travel as passengers relative to the perception of safety of their destination.

Responses to the question: Which will be the most important criteria that will influence the selection of your next overseas holiday destination?

 

 

 

 

 

 

 

 

 

 

Source: CAPA India Traveller Sentiment Tracker

  • This is further confirmed by the fact that respondents indicated that discounts would be unlikely to entice them to travel soon.

esponses to question: Will discounted travel encourage you to travel?

 

 

 

 

 

 

 

 

 

 

Source: CAPA India Traveller Sentiment Tracker

The impact of COVID could trigger market consolidation and deliver a record consolidated Indian airline industry loss of at least USD3bn, and possibly closer to USD4bn in FY2021, based on current estimates
  • Domestic traffic in 1HFY2021 is expected to reach just 15-20 million passengers, compared with 68 million in the same period last year. CAPA India’s latest full year projection is for around 55 million passengers, which would be at the lower end of our earlier forecast of 55-70 million. This compares with close to 140 million passengers in FY2020. The decline in international traffic may be even greater than for domestic.
  • With Q2 increasingly looking like a washout, CAPA India has revised upwards our estimates for the recapitalisation requirement of the industry – excluding IndiGo – from USD2.5bn to USD3.0-3.5bn in FY21. Based on the current risk outlook, the capital requirements could increase further should Q3 and Q4 perform below already relatively weak expectations
  • The holding power of most Indian carriers has been completely eroded and a weak Q2 will only exacerbate the situation. Delaying recapitalisation may inflict further damage (including in the case of Air India) and could serve as a catalyst for consolidation.
  • Consolidation is looking more likely and will result in a very significant change in the structure of the industry. India may be headed for a 2-3 airline market if timely recapitalisation does not happen.
  • IndiGo’s domestic market share is likely to cross 70%, even if it does not expand its operations. This threshold will have been reached because of possible airline exits.
  • Based on current estimates, Indian carriers could lose USD3.0-4.0 billion in FY2021, and more likely at the upper end of that range. This would be by far the largest loss in Indian aviation history.
Who will grow the market when conditions normalise? If airlines are unable or unwilling to expand, this may result in sustained damage to connectivity in India, with structural implications for the economy.
  • In recent years IndiGo has been the primary driver of growth. But the carrier has stated that its next 120 neo aircraft deliveries will be used for replacement of ceos rather than for fleet expansion (although this strategy may change).
  • If Q2 is a washout as expected, and Q3 and Q4 remain soft due to a combination of weak customer confidence and economic distress, market exits are inevitable. Strategic consolidation may result in India being a 2-3 airline market, with IndiGo having a domestic share of greater than 70%. The other surviving carriers may be relatively weak. What business case will they have? Will they be able to compete and to grow?
  • If the remaining players in Indian aviation are unable or unwilling to grow, this will significantly impact growth dynamics as and when the market recovers. This may result in sustained damage to connectivity in India, with critical structural implications for the economy. Is India set for a COVID-induced growth coma? Will the government need to step in?
  • What will the government’s competition policy be once IndiGo reaches a 70% market share, as is likely based on current estimates? Especially as IndiGo would have achieved this position entirely through organic expansion and simply pursuing its business plan. The industry needs to know this in order to be able to plan accordingly.
  • Do the government and the industry have a plan for post-COVID recovery, stability and growth? The deep structural impact of COVID necessitates an urgent policy intervention.
  • The Honourable Prime Minister has urged that we leverage COVID to implement structural reforms across the economy that will deliver a quantum leap forward. Inspired by this call, CAPA urges the Ministry of Civil Aviation to provide a clear strategic direction to the industry.

These are some of the key issues that CAPA India will address in our forthcoming business plan for the recovery of Indian aviation post-COVID.

Please contact us on enquiry@capaindia.com to place your advance order.