Falling traffic and rising oil - a deadly combo is back to haunt airlines 

After 59 consecutive days of domestic passenger numbers exceeding 300,000, air traffic dwindled to 285,965 on Tuesday, January 04. Tuesday is usually the leanest day of the week, but the sudden drop seems to be a precursor to times ahead as India battles the third wave of COVID-19.

The drop was led by a drop in flights, which fell to 2,660 departures. The number was 83.54% of the approved winter schedule. Passengers made up 67.26% of pre-COVID numbers. The numbers were also significantly lower than the all-time high of 2,828 departures on December 12 and 393,245 passengers flown on November 21.

A flat December

The sum of passenger numbers declared by the Ministry of Civil Aviation on a daily basis shows that in December 10,783,520 passengers flew across airlines. All airlines together operated 83,717 flights in December.

While sequentially the traffic was up 3.23% and flights deployed were up 3.49%, December had 31 days  against November’s 30. On a per-day basis, traffic dropped marginally, ending the month flat at best.

There were two reasons for this. First, November was filled with festivals, including Dussehra and Diwali. The 2020 Diwali being a washout in terms of travel, more passengers took to the air to celebrate the festival with family and friends or for a holiday. Second, COVID-19 cases in India were very low in November and a new variant was not on the horizon.

Curbs put in place

States have started clamping restrictions as India stares at the third wave. For instance, night curfew is back, a restriction that prompts passengers to opt for flights at other times of the day and airlines to eventually suspend flights in the night to destinations like West Bengal.

Many states that did not earlier require a negative RT-PCR test for fully vaccinated passengers are starting to change the rules and demanding a negative report. This leads to additional costs for passengers and has an impact on travel.

Corporate travel, which had slowly started opening up after Diwali, has beaten a retreat as employee safety becomes the main prerogative of companies, which are moving back to a work-from-home mode and remote management of the workplace by executive leadership.

Passenger traffic not the only pain point

Passenger numbers are expected to fall further, but that is not the only pain point for airlines. An analysis of balance sheets of listed airlines shows that fuel comprises between 37% and 40% of their total expenditure. Aviation Turbine Fuel (ATF) costs1.5 times  its price in January 2021, which recorded an average of 244,000 passengers per day.

The other factor that impacts airlines is the rupee - dollar exchange rate because a high proportion of the cost linked to leasing planes is dollar-denominated. The rupee is weaker by 1.5% when compared to last year, which although not very significant will still have some impact on airline balance sheets.

All this in a weak quarter

Since the pandemic began and air services were restored on May 25, 2020, the usual peaks and troughs have gone for a toss. Instead, the industry has been following peaks based on when the COVID wave subsides and liberal travel restrictions are in place.

Twice in the past, the best quarters were washed out -- October to December of 2020 and April to June of 2021. Airlines found some solace as traffic returned in the last quarter of calendar year 2021 and resumed efforts to stimulate demand by announcing sales for the January-March 2022 period -- considered one of the two weak quarters of the year. The impending wave has the potential to make it worse.

What to look forward to?

India has been late to experience a spike in cases, but very early to put restrictions in place. Empirical data from other countries that experienced a COVID wave led by the Omicron variant has so far shown that the death rate is lower and the wave has a quick peak before subsiding.

How it pans out in India is anybody’s guess; if it behaves in the same manner as it did in other countries, the restrictions could be lifted by April, when the peak season starts and passengers are willing to travel again.

Until then, the silver lining for airlines is a reduction in Value-Added Tax by states, leading to lower taxation of ATF and the eternal hope of a recovery!