India Ratings' Abhishek Nigam says sustaining air passenger traffic to pre-COVID-19 levels will continue to be a challenge for the sector.
The struggles of the Indian Aviation sector are likely to continue with domestic airline traffic and international airline traffic likely to remain muted till 2022-23 (Apr-Mar), Associate Director at India Ratings and Research Pvt Ltd Abhishek Nigam said.
In an interview with Moneycontrol, he said that while passenger traffic may see a boost around Diwali and New Years', sustaining air passenger traffic to pre-COVID-19 levels will continue to be a challenge for the sector.
He added that while air passenger traffic remains muted market leader IndiGo will continue to have an operating edge for the next two-three quarters.
Q: Due to the outbreak of the second wave of COVID-19, what are your expectations of revenue losses for both airlines and airport operators in the last few months?
A: Airlines wise I don't have a number but of course, it's a significant decline in the first two months. So we did a study where we looked at the traffic that is handled by the top six-seven metros. So the top six-seven cities handled about 50 percent of total airport traffic.
And there was a fairly big spread of the virus in Delhi, Mumbai, Bangalore, Chennai, so, in that sense, there is a considerable impact on the revenues of airlines.
Q: By when can we expect domestic air passenger traffic and international air passenger traffic over the Indian skies to return to re-COVID-19 levels?
A: Air passenger traffic returning to pre-COVID levels could take some time. However, we may see a pickup of air passenger traffic in the next few months due to a phenomenon called revenge tourism, because, nobody has traveled or visited friends and family for a while.
So we could see a temporary surge, it could come around Diwali or New Years. But a more sustained traffic flow will probably require us to go in the fourth quarter of 2021-22.
For international air passenger traffic to return, the first thing as required is a significantly high vaccination coverage in India, as well as across the world. Right now, what we're seeing is that only the US is anywhere close to 70 percent coverage. And, their initial estimate was July to cover 70 percent of their population, but now that has been pushed back to probably August or September.
India will probably be able to vaccinate 70 percent by maybe in early 2022. And then there are countries like Singapore, Australia, UK, Europe where the pace of vaccination is not that high. So for international air traffic, I think a reasonable recovery will only happen next year.
Q: What would be the current daily cash burn for domestic airlines in India?
A: I mean, broadly, I can talk about cash burn. So airlines have taken a sleeve of measures to diminish cash flow that ranges from letting go of their pilots and support staff, sending people on leave without pay, and negotiating with lease rental on their aircraft, and negotiating with respect to paying their fuel dues.
So the hope is that airlines have kept their cash burn in check for up to three months, April, May, June and from July onwards, probably things will open up.
Q: Since June 1, the government has once again lowered the cap on capacity utilization to 50 percent and has increased the cap on prices for domestic flights. Until when do you expect the government to keep coming out with these caps on the domestic price as well as on prices?
A: Yeah, so capacity. The 50 percent cap is, I think, okay, it's not a huge impact, honestly. Right. Because even before the second wave the cap was at 80 percent. But nobody was really flying at 80 percent capacity utilisation on the ground.
I think only Indigo came close to 70 percent, but even that was fairly brief. So I don't think that the issue right now is that the capacity limit is not a constraint. The main constraint is getting people to fly.
On the price controls, so my sense of those price controls will stay, at least for the next six months.
Q: Smaller players like SpiceJet, GoFirst, Air Asia India have lost market share in the past two months because they have been forced to operate at low capacity to reduce the cash burn. Do you see this trend continuing?
A: So one of the things right now is that everybody has limited capital, and they only want to focus on the best routes. So at least for the next six months or so, my sense is that that situation will remain.
However, there is something that could change the current trend, one is that GoFirst has filed for an IPO. So if that comes in at a good valuation and then they will be well-capitalized to sort of expand and take on market share.
The second is when Jet Airways is able to make a comeback. But my expectations are that IndiGo will continue to have the upper hand for the next two three quarters.
Q: Do you think the disruption in the aviation sector will have an impact on the valuation of Air India?
A: So obviously, it's not a great environment for airlines right now, a couple of challenges in India, so the first is that there is no traffic visibility with all the subsequent waves of the pandemic and nobody really knows how long that’s going to last.
The second thing that has happened is profitability has been crushed by rising fuel expenses. Crude prices have almost doubled in the last couple of months.
However, the good thing right now is that if you look at the market, there's only one well capitalized player, which is Indigo. GoFirst’s financial health will depend on their IPO and SpiceJet doesn’t have a good balance sheet.
And if you look at India, compared to say, China, we are still growing slower in terms of per capita income, as well as the number of aircrafts flying in the domestic market.
If you look at the trend for domestic airlines, traffic has grown at a rate of 12-13 percent for the last 10 years or so, that's a very good number.
So, the good thing is that if somebody comes in with a longer term view of Air India and understands that the airline has a good big fleet, has good market share, they have good airport slots, and good brand recall.
That could help the valuations of Air India. But otherwise, the operating environment right now is quite tough.
Q: A number of domestic airlines have adopted a leave without pay policy for its employees, till when do you expect airlines to continue the current trends downsizing operations in order to conserve cash on their books?
A: It all depends on if there are subsequent waves of COVID. But my sense is that most people are on the backfoot and they want to be conservative. So I would think airlines would want to be conservative, they would want to retain their core people, but also where possible, they might have a staggered pay system without a system.
Q: Do you expect domestic airlines to work towards increasing their share of revenues from their cargo operations going forward? How is this expected to affect their aircraft leasing/buying policy?
A: The cargo thing is hyped because it makes up only about 15-20 percent of an airlines’ overall and overall revenues.
During the pandemic some airlines converted some of the older planes into cargo planes and started operating those planes, which was a fairly reliable way to make up for some of the lost revenues.
But once things normalize, I don't think cargo will go beyond 15-20 percent of overall revenue.
Q: What would be the long term impact of the outbreak of COVID-19 on the Indian aviation industry?
A: I think one thing that has been happening for the last couple of years is that as technology is evolving, some aviation demand gets lost forever. As video-conferencing picks up, more and more people are working from home, more meetings are happening digitally. So some demand will last forever, I would say.
I think the second thing that has happened is that because of the pandemic people are starting to prefer direct flights to international destinations rather than stopping over at certain hubs. So international traffic hubs like in Singapore, Dubai, London, Doha etc might see a fall in traffic.
Because of customer’s preference is shifting to prefer direct flights, Indian domestic airlines are better placed as they have direct flights to destinations like Tokyo, Melbourne, New York.
This will lead to regional players like Qatar Airways, Emirates, Singapore Airlines losing out on some of the passengers flying from India.
Because earlier, if a customer would take a stopover flight in Doha, Dubai or Singapore, the second leg of their flight would be with those regional players.
So that could be one long term change that the hub and spoke model for international routes might take a hit.