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Interview | Indian airlines are burning cash of Rs 50 crore-Rs 60 crore daily, says ICRA’s Kinjal Shah

It may take a few more months before domestic aviation returns to levels of February this year, although business travel may take longer to recover.

June 29, 2021 / 09:59 PM IST
Kinjal Shah, vice president & co-head, corporate ratings, at ICRA.

Kinjal Shah, vice president & co-head, corporate ratings, at ICRA.

Indian airlines are spending Rs 50 crore-60 crore every day during the second wave of COVID-19 as they operate at very low capacity since March due to lockdowns and restrictions in various states, said Kinjal Shah, vice president & co-head, corporate ratings, at ICRA.

In an interview with Moneycontrol, Shah said domestic airlines lost a sizable portion of their revenue as domestic air passenger traffic fell in April and May and it will take at least another few months to reach February 2021 levels. Edited excerpts:

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?

There have definitely been revenue losses in the past few months, but if one looks at various parameters that determine the revenues of airlines, it is actually very difficult to project the revenue losses, one can project cash burn that can happen, but revenue losses are difficult to predict because it depends on the number of passengers carried, the route flown, the fare on that route, etc.

With the second wave of COVID-19 coming in, domestic passenger traffic in April 2021 saw a sequential decline of around 27% when compared to March. May was another 63% fall.

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So the sequential decline in the domestic passenger traffic, which we've seen with the second wave of COVID definitely indicates the revenue loss will be sizeable, but quantum of the revenue loss is difficult to estimate.

What would be the current daily cash burn for domestic airlines in India?

Prior to the pandemic, around 35 to 42% of the airlines’ expenses were fixed in nature. Thus, at the start of the pandemic, last year, ICRA had estimated that the industry (aggregate of six airlines – Air Asia, India, Air India, IndiGo, GoFirst, Vistara, and Spicejet) was incurring an operating loss of Rs 75 to 90 crore per day of the shutdown of operations.. This was when the domestic operations were also fully shut down for the two months from March 25, 2020, to May 23, 2020.

Now, what is different during the second wave of the pandemic is that currently there is no shutdown of domestic operations, though, obviously, the airlines are operating at limited capacity because of the limited demand.

And second, over the past year, the industry has taken several cost rationalization measures, like salary cuts, leave without pay, negotiations on lease rentals, let go of certain crew and pilots, etc.

So, overall, if one was to combine the impact of the aforementioned steps, we could see around 30 percent positive impact on the losses as compared to last year.

So then it can be estimated that the aggregate operating losses of these six airlines would be around Rs 50 to 60 crore per day currently, as against the Rs 75 to 90 crore at the start of the pandemic.

Since June 1, the government has once again lowered the cap on capacity utilisation to 50 percent for domestic flights and has increased the floor on prices of domestic flights. Until when do you expect these caps to be prevalent?

The cap on the permissible capacity deployment at 50% doesn't really have any impact on the passenger traffic, in our view, because the demand for domestic travel itself is very low due to the rise in COVID infections.

In any case, the airlines are flying at much lower capacity or passenger load factors. So this reduction to 50% with effect from June 1, is not expected to have any material impact on the airline operations.

However, last year, when the government resumed domestic air travel operations, it initially started with allowing 33% of the capacity with effect from May 25th, and then there has been a gradual increase in the permissible capacity deployment to 80% with effect from December 3rd.

This has been done considering that the number of COVID cases was reducing and the demand for air travel was consequently increasing.

Similarly on the fare front also, the government allowed an increase in the fare band by around 10% to 30% in February 2021, and a further increase in the lower airfare band by 13 to 15%, is allowed with effect from June 1, 2021.

This has been done to partially allow the airlines to recoup the rising ATF prices so that they can contain their rising losses.

We expect that the government will continue to take such decisions even this year. As we see a decline in the number of COVID infections and consequently a rise in passenger demand, the permissible capacity deployment caps and the fare bands could be waived off gradually.

Smaller players like SpiceJet, Go First and 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?

As mentioned earlier, its not that smaller airlines have been forced to operate at a low capacity, but overall passenger demand itself is very low over the last two months because of the rise in infections.

And if an airline flies at lower capacity and passenger load factor, it will result in higher cash burn and because of the sequential decline in the passenger traffic that we've seen, definitely it would impact the credit metrics of these airlines.

However, in June atleast, we have seen a sequential revival in the daily passenger traffic and as passenger traffic improves with a lowering of the COVID infections, improving vaccination, etc, we should start seeing this trend to reverse of the small airlines’ losing market share.

It is all currently a function of the passenger traffic demand and the airlines’ financial muscle.

There is a balance which any airline has to see whether if they operate flights, will they be able to recover the variable costs or they will be losing out even on that variable contribution margin.

By when can we expect domestic air passenger traffic and international air passenger traffic over Indian skies to return to pre-COVID-19 levels?

The recovery of domestic air passenger traffic is contingent on five key factors.

One is the containment of the pandemic, which is entirely dependent on the success of the vaccination program.

Second, the consumers’ willingness to undertake leisure travel.

The third is the macroeconomic recovery and growth which in turn impacts the consumers’ sentiments and their ability to travel.

Fourth is the relaxing of travel restrictions and quarantine norms by the various state governments.

And fifth is the recovery in business travel.

Currently, we have seen a lull in both leisure and business travel. But if you were to look at a couple of months back, when we started seeing a revival in domestic passenger traffic that was more to do with increase in leisure travel.

Business travel continues to remain impacted because of the work-from-home situation by various corporates across the country.

So recovery in business travel definitely is going to take more time. But if the pandemic is getting contained, leisure travel definitely will pick up.

But it will definitely still take several months, because we need to see the increase in the passengers’ willingness to travel.

And if that happens, then the government would have gradually increased the permissible capacity deployment from the current 50% cap.

Do you think the disruption in the aviation sector will have an impact on the valuation of Air India?

We refrain from commenting on specific airlines, but overall aviation has been the most impacted sector because of the pandemic.

Collectively due to a number of factors, airlines have been burning a significant amount of cash on operations. So, the credit profile of the industry has worsened significantly.

In any case, it was already characterized by a weak liquidity position. Some airlines do have sufficient liquidity or financial support from a strong parent, which will help them sustain over the near term, but for many others, the credit metrics and the liquidity profile have already deteriorated. While they have taken these cost-containment measures, until the cash inflows improve, the airlines will require funding support to meet their expenses.

And we expect that the credit profile of the Indian carriers will remain stressed until their overall debt burden reduces through either an improvement in operating performance or by way of equity infusion.

Since the outbreak of the second wave, a few airlines have reverted to a leave-without-pay policy. Do you think that this will continue to remain a phenomenon for the foreseeable future?

Salaries had been cut last year and obviously, they have not resorted to any increase in salaries because they are not seeing that pickup in demand. So airlines will have to resort to cost containment measures and leave without pay is one option which the airlines had resorted to last year as well. And if there is no revival foreseen in the near future, most airlines could continue to do so.

You just mentioned that airlines will continue to resort to cash and cash-containment measures. Do you think that this is affecting the overall willingness of people to join the aviation industry?

At least in the near future, there may be some aversion because unless you see a revival happening in the industry, the prospects of salary and career growth look very bleak in such an industry.

So new people would be unwilling to join the aviation sector, but for those who are already part of the sector and as the entire economy is impacted as such, they will not have significant opportunities to move out. So they may have to continue in these situations.

Do you expect domestic airlines to work towards increasing their share of revenue from cargo operations? How is this expected to affect their aircraft leasing/buying policy?

There are a few things that have contributed to the rise in cargo operations. Last year when passenger air travel was shut, the only way for the airlines to monetize was to run the cargo operations.

What initially started is that many airlines used their in-cabin space to load the cargo. They would put those nets, etc, and load cargo. So that once the air travel resumes, they could again revert to the passenger-carrying operations.

Many airlines continue to do that because some of their aircraft remain grounded because there is no demand.

So in order to utilize the aircraft efficiently, because they are anyways incurring fixed costs of lease rentals, etc, many airlines are still carrying out cargo operations, which have turned out to be profitable.

Last year during the first wave of COVID-19 because road and water logistics were impacted because of the lockdown, air freight rates had also risen significantly.

Some airlines have made significant money because of those cargo operations.

But as we understand, if you were to use the entire aircraft only for cargo operations, there is a certain kind of lease agreement that you are required to enter into, because the current aircraft that the airlines have are for carrying passengers and not for cargo.

So if the airlines want to permanently convert those passenger aircraft into cargo, they would have to seek permission from the lessors. But since cargo operations have turned out to be very profitable for the airlines, going forward, it is possible we could see a higher share of airlines’ revenues coming from cargo operations.

Yaruqhullah Khan