Extracts from the CAPA India Airline Outlook FY2022

June 3, 2021by capa-india
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We have run out of words to describe the state of Indian airlines. But as we have repeatedly emphasised, the industry is standing on the edge of a cliff. This is true even for airlines with access to large pools of capital. Click here to know more or order your copy of the CAPA Advisory India Aviation Outlook FY2022.


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  • Massive, perennial losses have created a debt trap which has resulted in most airlines having very limited means of recapitalisation. The Government of India is providing almost no direct support; lenders have by and large closed their doors to airlines, even for restructuring purposes; and lessors will soon have no option but to start applying pressure on defaulting airlines. Simultaneously we are heading into a higher cost environment, while staff morale is declining.
  • Lurching from crisis to crisis has become a familiar story since 2004 because the industry has chosen to pursue profitless growth, resulting in chronic losses for many years. Two major airlines have failed in the last ten years leaving a trail of USD7 billion of liabilities. Yet nothing has changed.
  • The twin waves and sudden impact of COVID have resulted in a high level of solvency risk for most airlines which could impact the entire industry, including airports.
  • This cannot continue. If we are to achieve the Honourable Prime Minister’s vision of affordable connectivity as a critical enabler of economic transformation, the viability of the airline sector must receive the highest level of attention and support from the Ministry of Civil Aviation and the entire industry.
Now or never for fundamental, structural reforms
  • After taking into account the impact of the second wave, our proprietary forecasting model projects domestic traffic of 80-95 million airline passengers in FY2022, up from 52.5 million in FY2021, but well below the close to 140 million passengers in FY2020. This projection does not take into account a third wave. Although our forecast ranges between 80 million and 95 million, and bearing in mind the considerable uncertainty that exists in the market, our guidance based on currently available information is for traffic towards the bottom end of the range at around 80 million. After a massive slump in April and May, we expect to see a moderate recovery in June as activity returns, with an acceleration in traffic from Q2. As was the case in the second half of FY2021, we expect to see rising confidence and continued traffic recovery in the second half of this financial year.
  • International traffic is projected to be in the range of 16-21 million passengers, and again, based on current settings it is likely to be constrained towards the lower end of the range because of border restrictions, market access and other strategic risks. However, international traffic will be particularly sensitive to discrete decisions taken by governments on such matters, which cannot be predicted. As with domestic traffic, the second half of the year is expected to be far more positive. Partly due to the easing of restrictions and the expansion of bubble agreements, but also due to the prospects of increased international capacity deployment by Indian carriers e.g. Vistara is likely to launch routes to North America and other long haul destinations with its fleet of four 787s.
  • We expect that Indian airlines will lose a consolidated USD4.1bn in FY2022, similar to that in FY2021. This will take total losses over two years to around USD8 bn as a result of the two COVID waves. FSCs are expected to contribute USD2.1bn of losses while LCCs would account for USD2.0bn. The projected losses could rise further if necessary recapitalisation comes in the form of debt, for which borrowing costs will need to included. At this stage it is not known how recapitalisation will be funded. Air India and IndiGo combined will represent around USD4.5bn of the approximately USD8.0bn of losses.
  • Airlines are estimated to need closer to USD5 billion of recapitalisation in FY2022 just to survive, including requirements generated through the course of FY2021. Out of this it is estimated that around USD1.1bn is in the pipeline in the form of IPOs, QIPs and other instruments. This does not include additional funding required to achieve solvency. In light of the known recapitalisation plans of Indian carriers, the incremental requirement could reduce to USD3.5 billion. However, it is not currently possible to qualify whether the USD1.5 billion of planned recapitalisation will materialise.
  • The industry is likely heading into a higher-cost environment at a time when it can least afford to. Our projections assume an average oil price of USD70/barrel and an exchange rate of USD1=INR75. It is possible that oil could spike to USD75/barrel and the currency could depreciate to INR77 during some periods.
  • Airport charges are also expected to be a potential challenge. Airport operators have recently invested capex of around USD4 billion in infrastructure development in anticipation of traffic that will not materialise for several years to come. Unless the AERA Act is amended to lengthen the tariff control period from 5 years to 8 years, a very high airport charges regime is inevitable. It is possible in certain scenarios to see a domestic UDF of around INR1000 per departing passenger, and an international UDF of INR2000-2500. The industry unfortunately seems to be largely unaware of the likelihood of a spike in airport charges.
  • Fleet: The industry is expected to induct around 70 aircraft in FY2022. However, more than 80 aircraft are likely to be retired resulting in a slight net contraction of the fleet size. However, as older aircraft exit the outcome will be a younger, more fuel efficient fleet. At the end of FY2021 49.3% of the narrowbody fleet consisted of re-engined Neo and MAX aircraft, which is expected to increase to 60.8% by the end of FY2022. Fleet renewal is a key focus area for airlines, with GoAir, Vistara and IndiGo having made the most progress to date. We expect AirAsia India to accelerate its fleet modernisation plans and SpiceJet is also expected to fast-track its MAX inductions post-recapitalisation.
  • In the domestic market, fare and capacity regulation are expected to continue for a large part of FY2022. But removing caps may be more challenging than it was to introduce them. Opening up capacity and pricing to market dynamics in a relatively weak environment will very likely place downward pressure on yields and increase industry losses. Such risks are likely to increase for a period of 3-6 months after lifting constraints. The government may need to develop a framework for conducting a financial stress test of carriers prior to removing price and capacity regulations.
  • International operations to/from India are expected to continue under air bubble agreements (rather than traditional Bilateral Air Services Agreements) for much of FY2022. However, the capacity available under these bubble agreements is expected to increase, possibly from Q3, through a combination of increasing seat entitlements under existing agreements and through the conclusion of agreements with additional markets. The emphasis on 3rd/4th freedom traffic has resulted in Indian carriers significantly increasing their share of international traffic from 34.2% in FY2020 to an estimated 53.0% in FY2021. However, the Government of India must take a long-term view of existing BASAs and not seek to renegotiate them post-COVID with the objective of protecting Indian carriers.
  • Having made a valuable contribution to airline financials in FY2021, cargo will remain an important segment in FY2022. Carriers are expected to achieve a 15% year-on-year increase in cargo revenue. Cargo made a particularly important contribution to SpiceJet in FY2021, which carried the highest volume. It is the only Indian passenger airline that has dedicated freighters in its fleet. However, based on our research and data, IndiGo demonstrated exceptional leadership, achieving the highest yields and revenue, followed by SpiceJet. IndiGo’s plans to launch a dedicated freighter operation, possibly in a JV with a global integrator, remain likely to proceed.
  • We continue to believe that there will be strategic consolidation in the Indian airline sector once the COVID umbrella has lifted. If there is no consolidation (although such a scenario appears unlikely) and if the privatisation of Air India does not proceed, then the Indian aviation sector may emerge from COVID with more airlines than it went in with, as it is possible that 1-2 start-ups may launch, resulting in 8-9 carriers in total. Under other scenarios we could be left with just 3-4 carriers. Every airline’s business case will be impacted by the different competitive dynamics under each of these diverse scenarios. The next few months will be key to determining the long term outlook.
  • The Government of India remains committed to the privatisation of Air India, showing strategic resolve to conclude the transaction as a priority. However, the reality is that the second wave has increased industry challenges significantly and will potentially increase the liabilities of Air India to around an estimated USD20 billion by FY2025. Taking into account estimated losses in FY2021 and FY2022, Air India’s liabilities will amount to over USD16 billion. Aside from the existing liabilities, the airline is likely to incur closer to USD4 billion of losses during FY23-FY25. Hence, the equation from an investor’s perspective is a potential liability of around USD20 billion before the business turns around. The government must therefore keep this massive financial burden in mind and consideration should be given to making changes to the terms and conditions.
  • The government’s intention to exit Air India is the right strategy and must be pursued aggressively. It would be highly unfortunate if the government has to continue to support the national carrier when there will be so many high priority health and social infrastructure projects post-COVID, towards which public funds would be better directed. But as it stands, short-listed bidders may find it difficult to prepare a bid in the current challenging environment. It is therefore not certain at this stage whether the privatisation will succeed unless changes are made to the offer. We believe that the Government of India must have a Plan B for Air India in place now, which can be immediately operationalised if required. Ideally the transaction will go through successfully, but the government should not be left scrambling for answers at the time should that not be the case. Closing Air India would not only be extremely challenging politically, but will have a notable impact on the market, especially in the international segment.
  • The government must provide immediate fiscal relief to the sector. This could start with bringing aviation turbine fuel under the GST framework; rationalisation of fuel excise to 4% as it was earlier; and a reduction in GST on aircraft spares. This may generate investor interest and assist airlines in successfully recapitalising. Without these measures it will hurt any remote chance of recapitalisation.
  • The Ministry of Civil Aviation must introduce best practice regulation with respect to financial fitness. Airlines should be subject to solvency tests to be able to renew their AOPs, including mandatory liquidity equivalent to 20% of annual expenses. Similarly, start-ups should have sufficient cash to maintain six months of operations with no revenue, as a condition of being granted an NOC. The current requirement to have just INR500 million paid-up capital to apply for an AOP is simply too low a hurdle. Limiting market access to serious, well-funded operators will curb exuberant expansion without capital.
  • Simultaneously, long overdue reforms of the Directorate General of Civil Aviation and the Bureau of Civil Aviation Security should be initiated, along with the development of a new business model for the Airports Authority of India.
  • And the delays experienced by passengers in receiving refunds during COVID (as well as the USD1.5+ billion they lost when Kingfisher and Jet Airways exited) has highlighted the exposure that consumers have to a fragile airline system. Mechanisms to institutionalise refund protection (e.g. along the lines of the Air Travel Organiser’s Licence in the UK) should be considered.

Click here to know more or order your copy of the CAPA Advisory India Aviation Outlook FY2022