As the vaccination rollout gets underway, India’s airlines are hoping against hope that travel demand starts showing some semblance of normalcy. Yet most indicators point that it will be a while before that happens. One or more airline failures cannot be ruled out and the botched bankruptcy of Jet Airways and the much-delayed sale of Air India have only complicated matters. Between a market structure that is tending towards a duopoly and rising input costs, the flight path for India’s airline continues to be unsettled. There are all kinds of elements that have to be navigated.
Macro-economic Fundamentals Point to Continued Stress
The vaccine shortages in the first half of the year combined with the second wave that hit India in April and May this year impacted business and growth drivers. Unlike Europe and America, lack of any job protection scheme or money-in-the-pocket scheme for citizens or airlines meant continued stress. An emergency credit guarantee scheme was extended to airlines towards the end of May 2021, but it was too little, too late. At most, it allows access to a line of Rs 200 crore with stringent conditions. Two airlines have applied and are likely to get through although the amounts that will be sanctioned remain to be seen.
On the economic front, job losses and salary cuts resulted in a contraction of the middle class. It was the middle class and the consumption patterns that were driving aviation. Occupancy factors again took a nosedive and airline revenues dissipated. Even so, some point to the concept of “revenge travel” and large number of tourists flocking to destinations. And while revenge travel is real, these data points are anecdotal and cannot be construed as correlations. Overall, the situation for India’s airlines is extremely dire.
COVID Dealt Two Severe Shocks to Traffic Flows
A system can withstand shocks but starts to weaken significantly with constant shocks. Such has been the case with the airline industry in the wake of COVID-19 and lockdowns, followed by varied protocols for travel. The first shock came with the onset of COVID in March 2019, and the lockdown amplified this. Skies were closed, flights were suspended and airports were eerily silent. As domestic skies opened up from the end of May 2020, albeit with capacity and price caps, there was a trickle of activity. Thereafter, each month showed a gradual improvement. Travel demand rose slowly and steadily and the narrative became one where everyone started believing that the worst was over. That was till the second wave again delivered a shock and forced a reset.
The second wave hit families particularly hard and with a peak in cases, ICUs running to full capacity and social media amplifying messages tenfold, it was unlike anything the country had experienced. Travel once again saw a decline and indeed it was the last thing one thought about. As states finally brought COVID cases to a manageable level, each imposed varied arrival procedures and travel started becoming more cumbersome. Altogether, the second wave was one more shock the airline industry did not need but had to deal with anyway.
Cash-flow is Like Oxygen, Many Are in Dire Need
Airlines consume large amounts of cash due to fixed overheads. They have an inventory that can’t be stored. As such, cash-flow is an all-important measure of the health of the industry. With COVID, India’s airlines burnt through cash and unlike counterparts in Europe and the West, the lack of assets on balance sheets meant that bankers were wary of lending. Employees lost jobs, some lost wages and others were put on leave without pay, which arguably is more unsettling than job losses. By most conservative estimates, approximately 13,000 airline workers lost their jobs between April 2020 and September 2020. And these job losses were across functions, across cities and across most airlines. Uncertainty prevailed. But with cash not coming in, these decisions continued to be taken.
Airlines needed other avenues to raise cash and attempted to do just that. As of now, all airlines in India are on a cash-raising spree. While Indigo and SpiceJet have opted for a method called Qualified Institutional Placement via issuance of shares, GoAir (now GoFirst) has announced an intention to tap public markets via an IPO (which is stuck due to an ongoing investigation). Vistara and AirAsia India continue to rely on the equity infusion and debt guarantees by parent companies and Air India is counting on a suitor to take over and provide much-needed equity. Jet Airways which was looking for a revival is struggling to digest the enormously complex National Company Law Tribunal (NCLT) judgment, which effectively treats the airline as a new startup. On the regional front, airlines continue to suffer due to lack of cash and some are on the verge of collapse.
The Outlook: an Unsettled Flight Path
Looking at near- and medium-term, the bumpy ride for India’s airlines continues. All airlines in India are sitting on more aircraft than required and contraction is the need of the hour. And there is buzz that at least two new airlines are in the works, which means the market will see more competitive pressures.
All this while risk profiles for airlines continue to change. International skies are closed for the most part, domestic travel is patchy at best and the stress on small and medium businesses continues to impact business travel demand. Add to this, each state mandating their own protocols and a growing acceptance for road travel as the preferred mode for vacations.
At current forecast levels, it will be at least two more years before India returns to the GDP levels of 2019 even as the borrowing rate is gradually increasing, fuel costs are rising and the rupee is depreciating. For airlines, this means rising input costs against an environment of weak demand. Unsettling—to say the very least.