Budget 2021 expectations | Structural reforms to continue in aviation; industry awaits cost breather

Ground staff work next to a parked Air India passenger plane at an airport in Madurai

The Indian aviation industry’s capacity and passenger growth have been significantly impacted since the COVID-19 pandemic. The industry’s financial woes have been only accentuated by the pandemic. The deteriorating financial health of the industry has raised expectations of tax sops to help reduce their high cost and debt burden, especially lowering taxes on aviation turbine fuel (ATF), which comprises 30-40 percent of the total cost of an airline, and the prices of which are 45-50 percent higher in India, compared to international prices. The industry also requires aid in terms of reduction in other levies, which include among others, airport charges, parking and landing and navigation charges. Furthermore, since the airlines have to currently follow a fare band as per the directives of the Ministry of Civil Aviation (MoCA), which is constraining their ability to charge higher fares, they want relaxations in terms of the fares they can charge.

The government is expected to reiterate its focus on improving regional connectivity through its Regional Connectivity Scheme (RCS) or UDAN (Ude Desh ka Aam Nagrik) and making flying affordable to the masses by providing a favourable eco-system. With continued thrust of the government on infrastructure creation and development, the Budget is likely to focus on upgradation of airports in Tier 2 cities through the public-private-partnership (PPP) route. Furthermore, reiteration of the focus on setting up new airports and expansion of existing airport capacities at some key airports to help address the current airport infrastructure constraints faced by the airlines, and to improve connectivity with the underserved / unserved airports and thus boost tourism, would help.

There could also be some focus on the maintenance repair overhaul (MRO) sector. In line with the government’s increasing thrust on Atmanirbhar or Make in India scheme, the Budget could focus on incentivising the MRO sector to retain the MRO activities in the country.

The Budget is also expected to prioritise the privatisation of Air India Limited, which has been facing roadblocks over the last several months.

The government is also expected to increase focus on tourism development in India and undertake measures to boost tourism. Focussed efforts to preserve India’s heritage cities, improve visitor experience, and upgrade sanitation and supporting infrastructure, would help drive tourism. Also, the government is likely to develop more iconic tourist destinations to further improve tourism, and thus support the growth of the Indian aviation industry. There is also an expectation of expansion of the E-Visa scheme to additional countries.

Overall, the industry expects financial aid and reduction in levies and taxes in the immediate near term to revitalise operations and boost passenger traffic, while in a longer time frame, the government needs to address India’s aviation infrastructure requirements, to strengthen the foundation for growth in the coming years.

ICRA has a Negative credit outlook on the Indian aviation industry. The profitability of the industry has been adversely impacted in FY2021 due to lower revenues and high fixed costs. ICRA estimates the Indian aviation industry to report a significant net loss of ~Rs. 210 billion in FY2021, against a net loss of Rs. 127 billion in FY2020, with the industry debt level increasing to ~Rs. 500 billion (excluding lease liabilities) over FY2021-22 and the industry requiring an additional funding of Rs 350-370 billion over FY2021 to FY2023.

While some of the airlines have sufficient liquidity and/or financial support from a strong parentage, helping them sustain over the near term, there are other airlines, which are in financial stress, and are now facing several issues. Furthermore, even for the former, the credit metrics and liquidity profile have deteriorated. Many airlines have already undertaken several cost rationalisation measures. These include salary cuts for their employees, including leave-without-pay options and laying off pilots and crew members to cut costs. Some airlines have also sought deferment in their lease rental payments. However, until the cash inflows improve, the airlines will require funding support to meet their expenses. The credit profile of domestic airlines will thus weaken materially over the near term.