Airlines’ dilemma - consolidate or contract to fly out of COVID turbulence

But capital raising is not enough to sustain loss-making operations beyond a point. Airlines need viable operations in the medium term, which is a challenge because passenger traffic is still low and air travel still has many restrictions, particularly on international routes.

Industry insiders are therefore debating whether consolidation or contraction is the way forward although analysts say both options have pitfalls.

Talk of consolidation began when the pandemic struck, and the consensus was that airlines would have to tie-up with each other or turn to mergers and acquisitions to survive. It was also feared that the smaller airlines would fall by the wayside in this struggle for survival.

A year and a half later, some like aviation advisory CAPA still maintain that the second COVID wave is likely to accelerate consolidation in the domestic aviation industry. It says consolidation would be deeper if there is no significant recapitalization.

CAPA does not expect recapitalization to be sufficient to prevent consolidation. It has estimated that the sector needs $5 billion in recapitalization which is not coming its way.

Piyush Bansal, Operations Lead (India Aviation), ICF Consulting India says consolidation of airlines has always been complicated and difficult to execute even in the best of times. “In current times, it is hard to contemplate airlines, which are extremely guarded about their cash positions, willing to commit time, money and efforts to merge with another airline,” he says.

Nripendra Singh, research director for aerospace & defence practice at Frost & Sullivan adds, “The consolidation of airlines in India is unlikely soon, given their financial state. Consolidation happens when the airlines see for themselves that they are in some trouble and need a bailout. That kind of situation has not developed in India as yet. We do not see anything in the market which vindicates consolidation.”

According to Satyendra Pandey Managing Partner AT-TV it is not consolidation but contraction that is required. “Contraction - at current and forecast demand levels -- means that you need far fewer seats in the market and a rethink on the nature of airport capex,” Pandey argues.

This means that airlines and airports need to look at the new ground realities and plan accordingly. With flying numbers going down, Pandey says “Why pay for something that adds, and then integrate, when the goal of the hour is to contract?”

Bansal is of the view that until traffic returns, survival is key pointing out that on the one hand, it is challenging to lower fixed and semi-fixed costs of operations, however now is a good time to restructure and renegotiate. “While contraction offers short-term benefits, airlines should be ready for normalcy, whenever it returns. Airlines in the US, for example, have struggled to ramp up operations quickly this summer to keep up with resurgent passenger demand,” Bansal adds.