25 March 2020

The shutdown of aviation until at least 15-Apr means that 1QFY2021 is looking increasingly like a washout

The extension of the domestic lockdown until at least 15-Apr-2020 is the right decision by the Government of India. However, it has ensured that aviation will be seriously impacted by COVID-19. The April-June quarter, traditionally one of the stronger quarters of the year for Indian airlines, is increasingly looking like it will be a washout.

This will have consequent implications for Q2 (usually the weakest quarter) and for the rest of FY2021. The severity of the impact could possibly lead to a structural reset of the airline sector in India, with a strategic shift in terms of traffic growth, fleet expansion, pricing, costs and business models. Although it is too early to come to a firm conclusion, what emerges on the other side may be a smaller, consolidated industry.

The already-weak Indian airline sector is not equipped to deal with a shock of the magnitude of COVID-19

As stated in our earlier update dated 18-Mar, India’s airline sector was already vulnerable even prior to the advent of COVID-19. This was despite the fact that the suspension of operations by Jet Airways in Apr-2019 (which was one of India’s largest airlines), combined with moderate oil prices should have created a more favourable competitive environment over the last year.

Most Indian airlines have not structured their business models to be able to withstand even regular shocks, such as elevated fuel prices or economic downturns, let alone once-in-a-century events.

With few exceptions, Indian carriers have weak balance sheets and precarious levels of liquidity. Airlines have generated cash to stay afloat through advance sales or sale-and-leaseback margins (and government infusion in the case of Air India), but with no cushion to be able to withstand downward cycles.

Although it has become trite in recent days to use the term “unprecedented” in relation to COVID-19, this is undoubtedly accurate. With global aviation almost grinding to a halt – and for what could be an extended period – this is a state of affairs that will heighten risks for even the strongest carriers in the world. Meanwhile, several weaker airlines are likely to exit.

India’s airline system is certainly not prepared for such a severe systemic shock, and this will have an impact on the entire aviation value chain, including:

• airport operators;
• duty free, retail, food & beverage, and other airport concessionaires;
• ground handlers;
• MROs;
• inflight catering companies;
• not to mention travel distribution, which will be devastated.

The entire sector is now in a state of crisis which will certainly impact FY2021 and quite possibly well beyond.

India’s aviation sector could incur losses of USD3.3-3.6 billion in 1QFY2021

CAPA India has developed preliminary estimates for the potential sectoral losses in 1QFY2021 as below, assuming that all domestic and international operations remain grounded until 30-Jun-2020. Even with some partial resumption of services in May and June, the financial outcomes may not change significantly.

CAPA India preliminary estimates for industry losses in 1QFY2021

 

Sector of the industry	Estimated loss in 1QFY2021
Airlines	approx. USD1.75 billion
Airports and concessionaires	USD1.50 – 1.75 billion
Ground handlers	USD80 – 90 million
TOTAL	USD3.3-3.6 billion

Source: CAPA India research and analysis

In order to minimise long-term damage to the aviation sector – which will have wider implications for the ability of the national economy to repair itself – urgent government intervention is required.

There is a need for a coordinated national aviation industry response which addresses the requirements of all elements of the aviation industry and not just airlines, which tend to have the highest profile.

This should consist of three phases as outlined below.

CAPA India recommendations for 3 Phases of support for airlines

Industry Support Plan	Description
Phase 1: Emergency relief	Cash infusion to support part-payment of salaries up to a certain grade for 3-6 months, so that redundancies can be averted, as is currently being discussed with the government.
Phase 2: Survival relief	Moratorium on outstanding payments for a period of 3-6 months for: Airport charges at all airports; Aviation turbine fuel; GST and other tax payments. Rescheduling interest and principal payments on working capital loans for 3-6 months
Phase 3: Set-up for Recovery	Bring Aviation Turbine Fuel under the GST framework, which will provide for full input tax credit. In the interim, until ATF is brought under GST, sales tax should be reduced to 4%. Provide a waiver on airport charges as and when services resume, for a period of 3-6 months. Ensure that appropriate credit lines are available from banks on attractive terms to support the revival of the sector. Depending upon the severity of the impact, the possibility of a direct cash injection by the government in the form of grants. This would be the first such instance of public funds being infused into private Indian carriers, but may be required in the event of an extended shutdown.

With respect to all of the initiatives outlined above, Air India and private airlines should be treated equally, with no picking of winners or preferential benefits for the national carrier.

CAPA India recommendations for sectoral support

Industry Support Plan	Description
PPP Airports	The revenue share payable to the Airports Authority of India should be deferred for 3-6 months. In the event of a very severe impact (and in order to enable airport operators to be able to bear concessions on aeronautical charges offered to airlines), part of the revenue share may in fact need to be waived. Alternatively, direct cash assistance could be offered. Moratorium on interest and principal payments for 3-6 months. Moratorium on GST and other tax payments for 3-6 months.
Airports Authority of India	In light of the support measures outlined in this document, the Airports Authority of India may experience a very serious impact with both aeronautical dues and revenue share payments being deferred or waived. However, the AAI should not be penalised as a result of its status as a government entity and should, therefore, receive cash assistance as appropriate to absorb the proposed initiatives.
Ground Handlers	Revenue share/royalty payments due to airport operators should be deferred, temporarily reduced or even waived. Ground handlers employ a very large workforce. Cash injections may be required to avoid wide-scale redundancies. Moratorium on interest and principal payments for 3-6 months. Moratorium on GST and other tax payments for 3-6 months
MROs	This segment will be reviewed in our next update.

Although the initial focus will be on addressing the current emergency and near-term survival, it is critical that the support package recognises that recovery is arguably the most important phase. Otherwise, we may simply be deferring a problem.

In the United States, despite the fact its major airlines have had several consecutive years of record profits, US carriers are seeking a bailout package of around USD58 billion. In contrast, Indian carriers are facing this situation from a far weaker position. They will require substantial assistance for revival and to return to some semblance of normality.

A substantially different aviation sector will emerge

• The impact of COVID-19 will be so severe that even the stronger carriers may not be immune. In the event of a 3-month shutdown, the two listed carriers alone – IndiGo and SpiceJet – could report combined losses of USD1.25-1.50 billion across 4QFY2020 and 1QFY2021. IndiGo’s hitherto enviable free cash reserves may almost be wiped out by the end of 2QFY2021. Smaller carriers may exit.
• There is a strong likelihood of aircraft orders being deferred or even cancelled. Some leased equipment – particularly those aircraft approaching the end of their lease terms – may be returned early to lessors.
• Tata Sons may be strategically compelled to operate just one rather than two airlines (AirAsia India and Vistara). This may be the right time to rationalise its airline portfolio.
• Air India’s privatisation is unlikely to proceed in FY2021 and may be postponed beyond. The government must prepare a back-up plan which will require it to make a renewed commitment to operating the national carrier, and to brace the exchequer for long term capital infusions. In the short term alone, Air India could conservatively require financial assistance of over USD1.5 billion to survive.
• Although the duration of the lockdown is as yet unknown, if the first quarter is subject to continued and extensive disruption, with a rolling impact on the remainder of the year, it is possible that both domestic and international traffic could decline by 30-50% year-on-year in FY2021. However, we strongly caution that this is very much an indicative figure only, in what is a highly uncertain and fast-moving environment and should not be considered a projection.
• Given the expected decline in traffic, both Delhi and Mumbai airports are expected to consolidate their operations in a single terminal in the near-term, as and when service resumes.

The industry needs a strategic response which supports revival and not simply survival

Post COVID-19, the movement of passengers and cargo by air will be critical for the economy to repair itself. In recognition of the strategic role that aviation will play in national recovery it is essential that the government’s response supports the revival and not simply the survival of aviation. However, if the government is able to provide swift and meaningful assistance, it will also be incumbent upon the promoters of private carriers to play their part and collaborate by bringing in additional funds.

You may also be interested in our other blog posts on the impact of COVID-19 on Indian Aviation:

18-Mar-2020 | Impact of COVID-19 on Indian aviation

23-Mar-2020 | Shutdown of scheduled domestic airline operations in India

06-Apr-2020 | COVID-19 & the State of the Indian Aviation Industry