Is ECLGS 3.0 just the lifeline struggling airlines need?
Premium- What weighs aviation down is that the number of travellers is rising but higher input costs due to an adverse exchange rate and steep ATF prices are negating that benefit.
On October 4, the Department of Financial Services, Ministry of Finance, modified the Emergency Credit Line Guarantee Scheme (ECLGS) to raise the maximum loan amount eligibility for airlines under ECLGS 3.0 to 100 per cent of their funds based on the non-fund-based loan outstanding as on the reference date or ₹1,500 crore, whichever is lower. Of the ₹1,500 crore, one-third (or ₹500 crore) will be considered based on equity contribution by the owners.
However, the jury is still out on what these modifications to the ECLGS mean for the airlines. Do they mean good news for carriers which are already hobbled by financial losses or do they mean that the water will be muddied for the smaller and newer players on the domestic aviation scene?
SpiceJet has welcomed the move. While being appreciative of the fact that the government continues to appreciate the importance of the airline sector, start-up airline Akasa has pointed out that strong transport links are essential for the growth and vibrancy of any economy. Akasa also hopes that the government support will extend to start-up airlines as well as they are operating in the same environment and they will be competing against carriers that are getting government-supported funds.
While some carriers are trying to figure out the implications of these modifications in ECLGS, the only clarity at the moment is that SpiceJet is expected to receive ₹1,000 crore which will help it settle all its statutory dues and lessor payments, induct new MAX planes, and operate a younger fleet which will increase operational efficiency and support cash-profitable operations. In addition, with SpiceJet’s promoters indicating that they plan to raise another $200 million, ECGLS 3.0 could be the kind of lifeline that the airline is looking for. Others who have welcomed the announcement include the stock exchanges, with shares of SpiceJet and IndiGo both moving northwards.
There is little doubt that several things need to be looked at in detail in the modified ECLGS. Like the fact that under the scheme the monies lent will become a debt on an airline’s books and the airline’s promoters will also have to pump in money. Besides, what has been given under the scheme will have to be repaid in six years.
Here the key question is what happens if an airline is unable to repay the money after the specified time period? Will the government write off the loan or take other measures to recover the loan like selling off assets of the company?
Related to this is another important issue. For making the repayment on the credit line, the airlines need to start making money. Currently, the two listed airlines, IndiGo and SpiceJet, have been reporting huge losses despite domestic passenger traffic reaching pre-Covid levels. The financial situation of the other airlines like Vistara, GoFirst and AirAsia is not officially known but all the airlines are operating in the same environment so their financial situation can hardly be expected to be any better.
What is ailing the airline sector is that while passenger demand is increasing input costs like an adverse exchange rate and ATF prices are negating the increase in the number of air travellers.
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Making the situation worse for airlines is the fact that the cost of borrowing has disproportionately increased in recent times with the RBI hiking up repo rates and the Fed increasing its rates which has resulted in higher interest rates. Further, banks are generally averse to lend to the aviation sector, especially airlines as they have burnt their fingers supporting Kingfisher and Jet Airways.
Kingfisher is in particular a case study in the banks' non-performing assets blow-up saga of the last decade, with bank officials that approved its controversial loans on the basis of just its brand value facing enquiries, and its promoter Vijay Mallya fleeing the country after defaulting on the loans, even as the Supreme Court was hearing pleas from the consortium of banks that had lent to the airline on why he ought to be barred from leaving the country. The cases are dragging on, including for his extradition from the UK.
In such a scenario, any relief to the aviation sector at below-market cost of borrowing, like ECLGS 3.0, is welcome, though a limited impact is expected from such relief measures. The main cost heads for airlines like ATF and the adverse impact of exchange rate have still not been addressed by the government and till that happens airlines will continue to bleed financially.
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