State of Indian Aviation Industry: CAPA Reports

COVID-19 HAS taken the world by storm affecting lives and having a huge impact on the economy as well. The number of cases of novel coronavirus has crossed 1.3 million across the globe with death toll topped at 70,000. India has reported over 4000 cases.

Based on the number of daily flights tracked by Flightradar24, global aviation activity has declined by 66.8% over the last month. In India, the decline in aircraft movements has been even more dramatic, with the government had suspended all scheduled domestic and international flights until 15-Apr-2020. Given the tremendous uncertainty around the duration of restrictions, projecting how long it will take the economy to normalise is fraught with risks.

According to a report by CAPA India (Centre for Asia Pacific Aviation), the Indian aviation sector is likely to shrink significantly, even if some of the vulnerable airlines manage to survive. CAPA India estimates that there could be 200-250 surplus aircraft for the next 6-12 months. From a point of complete suspension of travel, recovery is likely to be slow. Demand will be suppressed due to economic dislocation; slow or even negative GDP growth; broken supply chains; low consumer confidence; and concerns about lingering outbreaks of COVID-19, especially if travel insurance companies refuse to provide cover for associated medical expenses or travel disruption costs. For India to return to a pre-COVID operational fleet of 650 aircraft is likely to take up to 12 months from the time that restrictions are lifted, and this may be conservative. It assumes that 1QFY2021 will be almost written-off, with traffic limping back during the weak second quarter, followed by a gradual trajectory towards normality during the second half of the financial year.

For industry operators, the suspension of services, although dramatic, was in some senses relatively simple. It was possible to bring activity to a halt overnight. In contrast, the resumption of operations is far more complex, given that the industry will likely have to re-start in an environment in which there will be limited visibility on the outlook for demand. n This is especially true in a market such as India which has a very late booking profile. On top of which, forward bookings for domestic travel in May, June and July are currently down 80% year-on-year and will remain significantly constrained for at least the next 4-6 weeks. This will further impact the more vulnerable carriers that are dependent upon cash generated from advance sales.

In addition, it is as yet unknown whether there will be additional operational considerations to be taken into account when services resume e.g. passenger concerns or even regulatory provisions related to social distancing at the airport and on board; increased turnaround times to enable thorough cabin cleansing after each flight; limitations on inflight service; airport health checks as well as changes to security screening and immigration procedures, which may lengthen processing time. Aside from increasing costs, the impact on the passenger experience may deter some travellers.

There are high expectations from the industry that the Indian government will bail out the sector, but this may be unrealistic. The nature and scale of any support package will have a significant bearing on the outlook for the industry. But despite its best intentions, the Government of India has multiple competing calls on its limited resources. There is only so much that it can offer to the aviation sector given that numerous industries across the economy are under severe stress. And the priority will understandably be on providing a basic health and economic safety net for the most vulnerable segments of society. n As a result, rather than a strategic package involving direct cash infusions and loans, the government may only be in a position to offer more functional relief consisting of waivers and moratoriums on liabilities. Given the massive structural dislocation faced by the aviation sector, this may not be sufficient to rescue operators, particularly weaker companies.

CAPA Advisory continues to believe in the need for the government to provide decisive support to airlines – with Air India and private airlines being treated equally - comprising of three phases, as outlined in our previous update:

● Emergency relief: consisting of wage subsidies to protect employment;

● Survival relief: consisting of waivers and moratoriums on various charges, taxes, and interest obligations;

● Set-up for recovery: bring Aviation Turbine Fuel under the GST framework with a full input tax credit (in the interim, VAT should be reduced to 4%); direct cash injections; the arrangement of credit lines with banks; temporary waiver on airport charges.