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Coronavirus impact: Airlines now have another problem after international travel restrictions

The airlines are left with unused aircraft. And, it is a double whammy of sorts.

March 12, 2020 / 07:37 PM IST

With key international markets closing doors on fliers, Indian airlines are staring at a new challenge amidst the spread of coronavirus: unused aircraft.

It is a double whammy of sorts. Apart from loss of business, airlines have to continue paying rentals and parking charges on these aircraft.

While airlines, including Air India and IndiGo, have already suspended flights to China, where the virus first broke out, operations to key markets including Singapore and Thailand have been truncated.

Added to the list are Qatar and Kuwait, which have barred fliers from India in an attempt to limit the spread of the virus.

While the loss of operations in China was not a big dent, all the other markets - Singapore, Thailand and Qatar - are among the most popular routes for fliers from India. For instance, Doha is among the busiest routes and over a million passengers fly between the Qatar capital and Indian cities in a quarter.

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All this means that airlines, which also includes SpiceJet, Vistara and GoAir, have additional aircraft to deploy on other routes.

What are the options?

One of the most obvious things is to deploy these aircraft on domestic routes. After all, the Indian domestic market is among the largest in the world and is the fastest growing.

"The capacity curtailed on international flights will need to be deployed on domestic flights,” says Shakti Lumba, an aviation professional and former Executive Director Airline Operations (Alliance Air) and Vice President Ops (IndiGo).

Domestic fliers are already seeing aircraft, which usually fly on international routes, being used on the domestic circuit.

Unfortunately though, domestic travel too has taken a hit. The trend has become clearer after fresh cases of those infected with coronavirus started seeing a daily increase in India. The number of confirmed cases has crossed the 40-mark in India.

The occupancy in flights has dropped by 15 percent, Business Standard reported. Fares have plummeted on routes connecting metros. Now one can fly from Chennai to Bengaluru for just Rs 1,000.

There are other options too.

"Airlines need to decide if they want to keep the aircraft on ground using them less, or if they foresee a long term issue, then return them to the leasing company. All depends on the contracts," says Amit Singh, an industry veteran and Fellow of London's Royal Aeronautical Society.

"During the last economic downturn in 2008, Spicejet and GoAir decided to return aircraft, but IndiGo decided to go on an accelerated growth bringing in more aircraft and took over slots at the airports," he adds.

As of now, it is not clear if the airlines will opt to return the aircraft, or if the lease contracts have such a clause.

At the same time, companies are contemplating if they could use the force majeure clause to avoid the lease agreement, says Nitin Sarin, Managing Partner of Sarin & Co, which specialises in aviation law.

Or, he adds, "the lessor and lessee can always enter into an arrangement in these circumstances to mitigate the lessees losses."

Airlines are sure to negotiate with their lessors, especially because parking an aircraft can be an expensive affair in itself. While parking charges vary according to the aircraft type and airport, the charges are high. For instance, a Boeing 777 costs about Rs 1 lakh a day to be parked in Delhi airport.

The bottomline is this. "The fleet utilisation will go down. Total costs will increase inspite of oil prices going down. Lease/interest payments will become difficult to meet. Cash strapped airlines will most likely face closure,” adds Lumba.

Hope not.
Prince Mathews Thomas heads the corporate bureau of Moneycontrol. He has been covering the business world for 16 years, having worked in The Hindu Business Line, Forbes India, Dow Jones Newswires, The Economic Times, Business Standard and The Week. A Chevening scholar, Prince has also authored The Consolidators, a book on second generation entrepreneurs.
first published: Mar 11, 2020 11:30 am