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Indian aviation, hit by Covid-19 pandemic, trying to take off again

In FY21, airports are likely to lose $1.5 billion and other segments about $0.5 billion, says CAPA India’s Varun Kumar

Varun Kumar, Team Leader, Consulting and Research, CAPA India
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Varun Kumar, Team Leader, Consulting and Research, CAPA India

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Aviation industry has been adversely hit by the Covid pandemic as passengers are avoiding air travel as a safety precaution. With this, airlines suspended operations on several sectors. Discretionary travel segments such as leisure and business are critical demand drivers for domestic airlines. Based on currently available information, the recovery is realistically not going to take place until mid-FY22 or even until Q3FY22. Although regular scheduled operations are yet to resume on international routes, Indian and foreign carriers have been operating repatriation, charter and bubble flights. In an exclusive interview with Bizz Buzz, Varun Kumar, Team Leader, Consulting and Research, CAPA India, a consultancy major for aviation sector, talks about the adverse impact of Covid-19 on Indian aviation and its airports

The government could support the aviation industry via direct equity infusion, loans or extend lines of credit, according to the industry. However, given the low priority of the industry and the limited resources with the government, it is unlikely that such measures will be taken

Airlines have been cutting costs by controlling employee cost, deferring aircraft lease and returning old aircraft. Their network decisions have been extremely dynamic since the pandemic emerged. They are likely to operate flights to an evolving set of destinations, including those they may not have served before the pandemic

When do you reckon that regional airlines will recover from the pandemic?

Discretionary travel segments such as leisure and business are critical demand drivers for regional airlines. A genuine recovery in discretionary travel is only likely to occur once there is large-scale rollout of a vaccine. Based on currently available information, the recovery is realistically going to take until mid-FY2022 or even until Q3FY2022.

The majority of RCS and regional fleet is operated by mainline carriers, which are struggling with operating cost due to significantly reduced load factors of around 65.0 per cent. The fact that the unit cost of producing seats (CASK)on a regional aircraft is higher than that on a mainline aircraft further compromises airline profitability.

Which constraints are preventing international airlines from accelerating their recovery from Covid-19?

Although regular scheduled operations are yet to resume, Indian and foreign carriers have been operating repatriation, charter and bubble flights. As on November 18, 2020, India had entered into air bubble agreements with 22 countries. The revival of overseas travel is likely to be slower and more challenging than domestic travel. International traffic comprises inbound, outbound and transit passengers. Although foreign business travellers and OCI cardholders are once again permitted to enter India, the country remains closed to leisure visitors, VFR travellers (unless they are NRIs or OCI cardholders) and medical tourists. From a border control perspective, only 60 per cent of the pre-Covid-19 traffic can enter India as of now, of which the majority is expected to defer travel in view of risks and inconvenience associated with international travel.

Similarly, in the case of outbound travel, discretionary business and leisure travel account for an estimated 56 per cent of overall departures. These segments are likely to see limited activity. VFR, employment and education account for about 44 per cent of traffic and may be slightly less affected, but here too we estimate that demand may be down by up to 70 per cent.

What has been the impact of the drop in aviation traffic, both domestic and international, on Indian airports?

Indian airports are in a grave situation due to the Covid-19 pandemic, as both aeronautical and non-aeronautical revenue streams have taken a hit. Aeronautical revenue streams are directly affected due to the dip in capacity deployment by domestic and international carriers. On the other hand, non-aeronautical revenue streams, which contribute to the bottom line, have been hit the worst.

India's international traffic in FY21 is estimated to be around 8.8 million, down 86.5 per cent y-o-y. The fall would have a major impact on duty-free revenues, especially those of PPP airports. Recent studies indicate that a change in buying behaviour, along with a reduction in passenger demand, may affect airport revenue from categories such as F&B and retail. The only silver lining for airport operators could be revenues from cargo concessionaires as cargo volumes are likely to reach the pre-Covid-19 levels much earlier than passenger traffic. In September 2020, international cargo volume was down just 13.6 per cent y-o-y and domestic cargo volume was down 20.0 per cent.

We have projected a loss of about $1.5 million of airports in India for FY2021. There is a $1.0 billion capital funding requirement from Indian airports to survive and navigate the crisis.

What are India airlines doing to stop the rot?

Airlines have limited control over the situation, and the best they can do is to control costs and maintain liquidity. Airlines have been cutting costs by controlling employee cost, deferring aircraft lease and returning old aircraft. Their network decisions have been extremely dynamic since the pandemic emerged. They are likely to operate flights to an evolving set of destinations, including those they may not have served before the pandemic. We have not seen the implementation of cost-restructuring programmes by most carriers so far, probably because serious restructuring may require funds, which most carriers do not have. Indian airlines will need $3.0–3.5 billion to survive and navigate through the Covid-19 crisis. But funding is limited as banks and private equity firms are reluctant in view of high uncertainty about existing market demand and deteriorating credit fundamentals of carriers.

What is the attitude of passengers now when it comes to flying?

The number of discretionary travellers are extremely low now. Business, institutional, MICE and leisure travellers, along with foreigners travelling on the domestic network, accounted for an estimated 55 per cent of the market before Covid-19. A large portion of this traffic is not expected to return until the pandemic is under greater control or a vaccine is out.

As far as passenger behaviour is concerned, safety and hygiene are of the utmost importance. Frequent changes in travel guidelines by State governments often add to the anxiety of passengers. During the recovery phase, we may see passengers having a higher preference for nonstop point-to-point flights to avoid the risk of higher exposure to Covid-19 at hubs.

What can the government do to boost the aviation industry?

In the short run, the government could support the aviation industry via direct equity infusion, loans or extend lines of credit, according to the industry. However, given the low priority of the industry and the limited resources with the government, it is unlikely that such measures will be taken.

The government must use Covid-19 as an opportunity to make long-term structural reforms. There is a need for NCAP 2.0, possibly as an interim measure, to support industry emergence from the crisis through the stages of survival, stabilisation, recovery and eventually expansion. Policymakers can immediately address critical issues such as enhancing corporate governance, setting minimum cash reserves limit (for better liquidity management), reinventing BCAS as technology-focused instead of people-focussed and improving training infrastructure.

The government has shown its positive intent by reducing the GST on direct MRO contracts to 5 per cent from 18 per cent along with a full input tax credit. This measure will enhance the competitiveness and viability of Indian MROs and lead to more in-country maintenance.

What has been the impact of the slowdown of the Indian aviation industry on the Indian economy?

The Covid-19 pandemic has had an unprecedented negative impact on the aviation industry. The industry (after excluding airport concessionaires and other ancillary industries) is likely to register a loss of $6.0–6.5 billion for FY2021, with Indian airlines incurring $1.50 billion–$1.75 billion in Q1FY2021 and $4.0 billion–$4.5 billion in FY2021.

In FY2021, airports are likely to lose $1.5 billion and other segments about $0.5 billion. The workforce employed in Indian aviation may be reduced by at least 30.0 per cent.

Vincent Fernandes
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