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Refunds could cost airlines $500 million, says CAPA India

Supreme Court, adds the advisory firm, is likely to ask airlines to refund the tickets, instead of creating a credit shell

May 01, 2020 / 06:33 PM IST

Even as airlines in India prepare to resume operations post the lockdown, the next big test for them lies in the possible Supreme Court ruling on passenger refunds, said advisory firm CAPA India in a report.

If the Apex Court does rule against them, airlines may need to shell out $500 million in refunds; $300 million for domestic tickets, and the rest for international.

A PIL was filed in the Supreme Court in late April against airlines' decision to offer a credit shell instead of refunds, to passengers whose flights were cancelled because of the lockdown. Though passengers could use the credit shell over the next year, there are conditions attached to it.

Even though the government later asked airlines to refund the tickets, these were limited to bookings done during the lockdown period.

While reiterating that airlines are being unfair on customers, CAPA India said this is in "contravention of the Civil Aviation Requirement (CAR) on the refund of airline tickets."


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The crunch

While refunds would add to the financial crunch of the airlines, the problems will not get over even as they resume operations.

The Bureau of Civil Aviation Security has proposed that airlines keep the middle seat in flights vacant, to ensure social distancing. The airlines have voiced against the proposal.

"Even if social distancing is not in place, demand conditions are expected to be so weak that passenger loads are in any case unlikely to be any higher than that. This will naturally increase the average break-even fare," CAPA India said.

There are more challenges. Increased need for cleaning the aircraft means that turnaround time will go up.

"Furthermore, if the fixed costs associated with the sizeable proportion of the fleet that is initially likely to remain on the ground due to weak demand, are allocated to the operational aircraft, the break-even fare will increase further," said the advisory firm.

CAPA India has done an analysis on the break-even fare that airlines will need to have, and it has estimated that the rate will have to increase by 40 percent to 100 percent.

For instance, an average Delhi-Mumbai fare needed to meet variable costs, during normal operations, is Rs 2,700. This increases to Rs 3,900 if social distancing is followed, and further to Rs 5,300 if fleet utilisation goes down.

To meet total costs, the average fare on the route has to be, Rs 5,000, Rs 7,000 and Rs 9,700, respectively.

By all means, it's unlikely that airlines will get this rate given the subdued projection in passenger traffic.

"The second quarter is always an acid test for the sector, with the most difficult trading conditions. This year it will be a make-or-break period," says CAPA India.



Moneycontrol News
first published: May 1, 2020 06:03 pm
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