Aviation sector slump: Govt support needed to arrest downward spiral

Though domestic air services resumed on 25th May, 2020, airlines capacity in July 2020 was hovering at merely 30% of July 2019 levels.

By Isha Chaudhary and Elizabeth Master

India’s aviation players are staring at potential revenue forgone of Rs 1.2-1.4 trn across fiscals 2020 to 2022 as the Covid-19 pandemic has shrunk air travel to a speck. We expect domestic air passenger traffic to drop 55-60% on-year to 60-65 million passengers in fiscal 2021 (similar to fiscal 2014 numbers). Fares are expected to decline post end of the capping period (November 25, 2020 onwards), leading to a 60-65% fall in airline revenues. And despite the 35-40% decline expected in fuel costs, the hit to revenues will translate into operating losses for the current fiscal.

To boot, the second quarter is seasonally weak and some revival is expected only from the third or fourth quarter with the advent of the festive season. That depends, of course, on how the pandemic pans out. Some amount of business traffic is expected to be lost permanently, with tectonic shifts in the way of business and work. Leisure travel is also expected to take a backseat.

Though domestic air services resumed on 25th May, 2020, airlines capacity in July 2020 was hovering at merely 30% of July 2019 levels. Following a spike soon after resumption, passenger numbers settled down at merely 18-20% of July 2019 levels, as people fly now only if essential. The ever-rising Covid-19 caseload, banning of flights by states from highly affected zones, varying quarantine requirements of different states, and re-imposition of lockdowns in cities are not helping either.

All this is fueling a downward spiral. Airlines are operating a skeletal network, depressing system load factors to 55-60% in July 2020 compared with 85-87% a year ago. The resumption is just about aiding airlines cover their variable costs and generate upfront cash.

The pandemic will also affect the net fleet addition for Indian carriers this fiscal. As of March 31, 2020, ~900 aircraft were on the order list. But traffic is unlikely to rebound to even fiscal 2020 level in the medium term. In this milieu, fleet additions are likely to be limited to replacement of older generation leased aircraft.

If not a bail-out, a balm would help

Globally, economies with a higher share of tourism, better airline networks and higher contribution of aviation to the country’s GDP have announced special packages for the sector. For instance, the United States offered up to $50 billion support in the form of part-grant/part-loan to its private carriers, Germany made an equity investment of 9 billion euro in Lufthansa, while France and Netherlands offered up to 10 billion euro loan assistance to the Air France-KLM group.

India has not seen much direct support from the government yet – given the limited fiscal space and pressing humanitarian priorities. However, it could provide immediate respite to airlines in the following three ways. One, reduction of excise duty charged on aviation turbine fuel (ATF), which is currently 11%, or inclusion of ATF under Goods and Services Tax, would allow airlines the full benefit of input tax credit. Fuel forms a considerable 30-45% of an airline’s cost base.

Two, the temporary suspension/watering down of route dispersal guidelines till the end of current fiscal would aid airlines deploy capacity only on profitable routes. Three, an increase in private carrier participation in the Vande Bharat Mission on short and medium haul routes till scheduled international airline services remain suspended, would help private carriers recoup some losses, as VBM routes are profitable.

These small but significant steps could go a long way in giving a leg up to the industry, which once flew.

Isha & Elizabeth are Director & Associate Director, respectively, Crisil Research