Budget 2022 | Allocate more to reduce turbulence in aviation sector

The aviation industry has been in turbulence since the onset of COVID-19, grappling from a confluence of factors starting from pandemic-related travel restrictions, swing in demand conditions from the leisure segment, ongoing subdued demand from the business segment to continuing ban on international travel, etc. This apart, the sharp spike in ATF prices further played spoilsport, impacting the earnings of industry players.

Following the outbreak, domestic passenger traffic contracted by ~62 percent Y-o-Y in FY2021, while international passenger traffic nosedived by ~85 percent. International traffic since May 2020 has been supported by the Vande Bharat Mission, and the Air Transport Bubbles. (The numbers are arrived at on the basis of data collated from various sources including the MoCA, the DGCA, and ICRA’s internal estimates).

While the drop in COVID-19 cases, and easing restrictions on air travel supported a temporary relief, the second wave of pandemic sharply curtailed the recovery in Q1 FY2022. Though the increasing rate of vaccination, and resumption of leisure travel rebooted the recovery in Q2 and Q3, the domestic passenger traffic continued to remain much lower than the pre-pandemic levels. Also, as oil prices remained at elevated levels, the earnings profile of industry players continued to be affected.

With the current Omicron strain and the consequent restrictive policies, the recovery momentum has again dampened. Travel bookings have dropped sharply in the recent weeks with deferral of leisure and corporate travels, with domestic passenger traffic for the first 15 days in January down by ~31 percent compared to same period in December.

In the last two years, the industry had resorted to several cost rationalisation measures, including salary cuts, lay-offs, deferment in their lease rental payments, etc. To boost liquidity, domestic carriers had also entered into sale and lease back transactions, and also raised funds by way of debt and/or equity. As the pandemic variants continue to delay the demand recovery, the industry is unlikely to revert to pre-pandemic levels of traffic until FY2024.

Low-capacity utilisation of aircraft fleet, elevated ATF prices (which represents around one-third of operating costs), and fixed costs continue to stretch the financial profile of Indian carriers and accordingly necessitate continued funding support.

In this backdrop, it is expected that the budgetary allocation to the industry will be higher than in the past. The frequency of pandemic variants and governments’ policies will continue to determine the pace and extent of demand recovery. To accelerate the recovery and support the industry in the interim, it is also an ongoing ask from the industry players to consider favourable measures, including rationalisation of duties, focus on continuing improvement in regional connectivity through a regional connectivity scheme (RCS) or Ude Desh ka Aam Nagrik (UDAN). Setting up new airports and expanding the existing airport capacities at some key airports is important, to help address the current airport infrastructure constraints faced by airlines, and to improve connectivity with the underserved/unserved airports to boost tourism.

It is also expected that the government’s measures towards boosting tourism to continue, such as developing more iconic tourist destinations and expanding the e-visa/visa-on-arrival scheme to more countries. In line with the government’s increasing thrust on ‘Make in India’, Budget 2022 could also focus on incentivising the maintenance repair overhaul (MRO) industry through a greater push towards MRO activities in India, and push for building requisite infrastructure for promoting aircraft leasing companies/business domestically.

Shamsher Dewan is Vice President & Group Head – Corporate Ratings, ICRA Limited. Views are personal, and do not represent the stand of this publication.