To say that 2020 has been a challenging year for airlines would be an understatement. From a shutdown of skies to a complete collapse of demand, airlines that just a few months earlier were counting on growth and international expansion – now are facing threats to their very survival. India’s airlines are particularly at risk, especially because all strategies were based around explosive market growth.
As the globe finds itself at war with the coronavirus that has obliterated aviation demand and led to a fear of travelling, the marketplace changes could very well lead to airline failures.
From pricing pressure to a total collapse of demand
Aviation demand is closely tied to economic growth. As a rule of thumb in growth, markets demand will grow at a factor of 1.4X – 1.7X GDP growth. But with GDP growth in a decline, aviation growth will continue to languish. That is not all, with the market capacity well ahead of demand, India’s airlines were resorting to deep discounting.
The discounting was both for cash-flow and to compete. And it made for a downward spiral. It didn’t help that airlines had fleet orders which they will now find challenging to induct.
With new social distancing norms (which the airlines are vehemently opposing), the pressure on pricing is even higher. As it stands, airlines per aircraft will have 30% lesser capacity which has to be priced in a manner to recover the cost of the flight.
Industry estimates indicate that even with fuel being drastically lower, the ticket prices would have to be twice of previous levels to make for break-even (keep in mind that ancillary sales such as onboard meals are assumed to be nil).
The perception of health risk
The current narrative is that airports and airlines pose contagion risk has set in. And multiple news stories only go to reinforce this narrative. Passengers continue to be apprehensive. Partly because the spread of the virus that has been traced back to aviation, and also because if each unplanned interaction can is classified as a random risk, then the overall travel experience aggregates to significant randomised risk. Add to that the fact that airlines have not quite engaged with passengers.
The ongoing coronavirus crisis will continue impact demand and will take a year or more to recover. This demand suppression will further force airlines across the globe, especially Asia, to drop prices.
What this means is on international segments, India’s airlines will not be able to compete. On domestic segments – whether a passenger is willing to pay twice as much to fly – remains to be seen.
For India’s airlines and airline leaders that have traditionally not engaged with the flying public this will pose a challenge.
Input costs – a decline in fuel is only part of the story
Fuel is forecast to be stable for the remainder of the year. But the dollar is likely to strengthen further (already up 8% against the rupee) causing much pain to India’s airlines. This because lease payments, maintenance payments and financing is in dollar terms, while revenues are in rupee terms. Thus the currency differential leads to greater pressures on expenses. This pressure is likely to continue.
On the financing side, lessors and financiers are demanding additional collateral corporate guarantees. The pressure to stem cash-losses is high and two airlines have already placed majority of staff on “leave without pay.”
Cash balances across six airlines are approx., 12,000 crores with a lease outgo alone of INR 10,500 crore (per month). To fully understand the precarious cash-position of airlines, this take away Indigo from this equation. The cash-balance then across five airlines is 2,297 crores. By some estimates airlines are down to one day’s cash for on-going operations. This simply is not sustainable.
The cash is not coming, and holding on to passenger refunds is a flawed strategy.
Airlines depend on passenger demand as a core component of cash-flow. But with forward bookings frozen, airlines have to look to other sources of cash. The challenge is that given the state of the Indian banking sector and overall negative sentiment towards lending to airlines (banks are still hurting from the INR 8,500 crore bad exposure to Jet Airways), lending is extremely constrained. Furthermore, since the airlines are asset-light (most assets leased) leveraging assets is not a possibility.
Thus airlines are resorting to a flawed and much maligned strategy of holding onto passenger refunds. At most this gives airlines 2,000–3,000 crores which is an estimated figure. Social media has a host of interesting discussions on this topic.
But at the end of the day, customer concern is building and whether the regulator will step in remains to be seen.
Consolidation or collapse
The sad truth is that post-pandemic for the industry to survive, either consolidation or one or more airlines failing is a scenario that helps stabilise the overall industry. Because this alters the supply demand equation leaving fewer airlines competing for already depressed demand.
Currently, Indigo commands a 48% marketshare with the remaining airlines competing for the rest. The truth is that everyone was taking a bit of the pie but the pie was growing. Now everyone wants a bite of the pie but the pie itself is shrinking.
Further, while the airlines are pushing for the skies to be opened, if the situation is one where even the costs of flying cannot be recovered, technically to stem cash-flow some airlines may opt simply not to put planes in the air till volumes recover.
As it stands, if salaries can be seen as signals, airlines that have gone ahead and paid their employees and not resorted to layoffs is a telling sign. As is the fact that corporate travel will pick up prior to leisure travel (thus airlines with large corporate travel bases are at lesser risk).
It is the remaining airlines that are cause of much concern. Whether they will be able to weather the coronavirus storm remains to be seen.