We are in unprecedented times with COVID-19 having a lasting effect on every industry. And then there is the aviation industry and tourism industry which has hit rock bottom, and not recovered. Today, we are going to talk about how the Indian aviation industry has fared during these unusual times.
The aviation industry might be facing the worst turbulence in its history. To reduce the spread of the virus, the domestic airline industry came to a screeching halt in March. After a month and a half, the airline’s services were given the nod to continue subject to numerous conditions. Data from DGCA (Directorate General of Civil Aviation) showed that air traffic has plummeted by 85% year-on-year in the month of June. It is expected that the airline traffic in the Asia-Pacific region will be the hardest hit during these times.
Competition based on Price
India had 650 aircraft in service last fiscal year. The industry generated employment for more than 75 lakh individuals. India’s business model in the aviation sector is very different from other countries. Flights like Indigo, Air India or GoAir does not offer a lot of premium services. An average Indian passenger would want to travel from X destination to Y destination safely and at a cheap price. International carriers like Etihad offer more services and charge additional fees for those services. Thus, the Indian airline sector competes on the basis of price and not on the basis of luxury service.
Here comes the component of success for this strategy : Passenger load factor.
Passenger load factor measures the capacity utilisation of an airline. The more the passengers on a flight, the more beneficial it is for an airline. This is because, with the limited number of crew members and no luxury services, the additional cost of adding one more passenger is not much. Thus, the money which comes from additional passenger adds more to the company’s profit. This passenger load factor has decreased to 50%-60% for almost all the airline during the recent months. Last December, this factor varied between 80%-90%. As the number of passengers decreased, airlines failed to break-even and earn profits.
Indigo is the biggest airline in India. It has a market share of over 40%. Their Q1 FY21 was below what market estimated and dismal, to say the least. Their revenue fell by 91% and net losses of Rs 2844 crore were recorded. To get more idea, read here. SpiceJet is yet to declare their results for the first quarter. In Q4 FY20, SpiceJet reported losses worth Rs 807.1 crore and the results for the subsequent quarter is expected to be worse.
The demand for air travel is already very low and reports suggest that the overall demand for air travel this fiscal year might fall by 45%-50%. According to ICRA ( a credit rating agency), India’s aviation sector is losing Rs 75 crore per day. It is further expected that the sector will lose Rs 17,000 crore in the current fiscal year. According to the report of Crisil (an Indian rating agency), this loss might stretch till Rs 25,000 crore for this year.
In order to conserve cash flow, Indigo has already announced 35% pay cuts for its senior employees. This was the second pay cut for the company in as many months as they had announced a 25% pay cut in May. The company has also announced to lay-off 10% of its workers.
Spicejet has not announced any lay off till now, but will not be paying full salary to 92% of their employees. Vistara also announced a pay cut of 5% to 20% for its 40% of employees till the end of this year.
One of the main reasons why the airlines are still able to stay afloat is the low prices of crude oil. Jet fuel is recovered from refining the crude oil. The prices of crude oil have consistently declined over the past 6 months due to a sharp fall in demand amid COVID. This has helped the airline by cutting their fuel expenses sharply and giving some space to their bottom line to breathe.
How can the government help?
The airlines have been forced to cut shifts, ground their fleets and reduce the workforce. Even after desperately trying to cut costs, the industry has been forced to pay for fixed costs with cash. This is a very grim sign for any business.
The airline industry is highly leveraged. It needs heavy investment and regular cashflows so that the company do not default from their payments. Their primary source of cash flows is blocked. Thus, the chances of bankruptcy for the companies belonging to this industry is very high.
One thing is clear that the airlines cannot survive on their own and they need help from outside. This leaves the responsibility on the national government to roll out friendly schemes for the revival of the industry. The national government should look to waive off taxes and other charges of landing and parking. They should also think to let the airlines take loans at a very low rate and ask the banks to be lenient during the restructuring of the loans.
Companies are also pondering over the idea to switch passenger planes into cargo planes as the demand for the latter is higher. SpiceJet also showed their intent to increase the number of aircraft flying (cargo+cargo on the seat) to more than 50%.
Can the situation change any time soon? No one knows till when this pandemic will last. There is a huge uncertainty on how the things will fold for this sector. It is fair to say that airlines are set to continue their struggle for survival. The government and the aviation ecosystem should take this pandemic as a learning event and proceed to build a robust, efficient and viable structure for the industry.