The Ministry of Civil Aviation (“MoCA”) is the Ministry responsible for policy formulation, development and regulation of the civil aviation industry in India. The MoCA along with various autonomous and affiliate organizations like the Directorate General of Civil Aviation (“DGCA”), the Bureau of Civil Aviation Security (“BCAS”) and Airports Authority of India (“AAI”), oversees the planning and implementation of growth and expansion programmes in the civil aviation sector, airport infrastructure and air navigation services.
To curtail the spread of COVID19 in India, the MoCA suspended all domestic flights on 24th March 2020. The suspension of flights and the subsequent nation-wide lockdown have taken an unprecedented toll on the airlines in the country. The magnitude of the impact of the pandemic requires the MoCA to actively regulate critical free market components like capacity and fares in order to help the industry survive one of the worst demand shocks it has faced since World War II.
Why the need for regulation?
Due to the financial woes plaguing the Indian economy, Indian airlines were already, prior to the COVID-19 crisis, facing significant challenges. With the full impact of the pandemic now playing out in India, airlines have had to take drastic steps to curtail losses and protect cash. These include sending the vast majority of their employees on prolonged furloughs, pay cuts, retrenchments, fleet restructuring and contract re-negotiations.
The conundrum faced by airlines with reference to reducing their employee headcount was previously detailed in the article titled “Lockdown Woes: to retain, furlough or to let go?”. Similarly, the need to restructure fleets and contracts was discussed in the article titled “Lockdown Woes: Fleet Restructuring, Re-pricing & Renegotiating”.
Considering the present circumstances, industry stakeholders reached out to the MoCA for an economic relief package to tide them through this black swan event. Everything from payroll support, to provisions to defer tax payments, a moratorium for a specified period on interest and principal amounts, reduction in value added tax (“VAT”) on aviation turbine fuel (“ATF”), suspension of landing and parking charges at airports or even direct cash infusion was proposed.
The MoCA on its part, reached out to various Ministries including the Ministry of Finance (“MoF”), with the airlines demands along with its recommendations for consideration. Despite the above, the civil aviation sector did not get any direct relief from the MoF as part of the COVID-19 stimulus package. There were however a series of relief measures announced which were focused around effective airspace management, developing a maintenance, repair and overhaul (“MRO”) eco-system in India and expedited privatisation of six more airports currently operated by the AAI. These measures did not address any of the immediate concerns raised by the industry and left the airlines disappointed.
The collapse of demand for air travel due to the pandemic, the subsequent suspension of flights, the state wise varied quarantine restrictions and a COVID19 induced change in booking behaviour, where booking closer to departure is preferred over booking in advance, have together left all but one of India’s airlines struggling with issues pertaining to liquidity. As a direct result of the liquidity crunch, the cash poor airlines are at a significant disadvantage when compared to the dominant, cash rich airline(s).
Hence, it would be safe to say that the pandemic has created an uneven playing field, thereby making it difficult for airlines to compete fairly without intervention by the regulator.
The IndiGo Factor
Despite posting a loss of INR 871 crore ($ 116.9 Million) for Q4 FY 2020 (Jan-Mar 2020), India’s largest airline, IndiGo’s total cash balance stood at INR 20,377 crore ($ 2.735 Billion) as it entered Q1 2020. In comparison, SpiceJet, India’s only other listed commercial airline with a significantly smaller fleet, posted a loss of INR 807.1 crore ($ 108.3 Million) for the same quarter and had barely INR 42 crore ($ 5.6 Million) in available cash.
Q1 2020 was a complete washout for the Indian aviation industry. For the first time in the history of Indian aviation, not a single passenger was flown within the country on a scheduled domestic flight for the month of April 2020. We detailed the impact of COVID19 on Indian airlines for Q1 2020 and the outlook for Q2 2020 in our article titled “Q2 (July-September) 2020 Outlook for Indian Airlines”.
IndiGo posted a record loss of INR 2,844.3 crore ($ 381.8 Million) which translates to daily cash burn of approx. INR 31 crore ($ 4.1 Million), for Q1 2020. Despite this, IndiGo reported a total cash balance of INR 18,449.8 crore ($2.476 Billion). In addition to this, the board of directors at the airline have approved a plan to raise an additional INR 4000 crore ($ 536.9 Million) by sale of shares to institutional investors.
IndiGo’s robust liquidity profile is a direct result of its efficient cost structure, sale and lease back deals and more importantly, its relentless focus on delivering the basics consistently i.e. offering competitive fares, great service and clean aircraft which get you where you want on time. While other airlines in India struggled to match IndiGo’s grandiose vision and lean cost structure, IndiGo continued to grow at an astounding pace. The airline added one hundred and five aircraft to its fleet between 30th June 2018 and 30th June 2020. That is a remarkable feat, given the inherent challenges of operating an airline in a high cost and low yielding market like India.
Rating agency ICRA Limited, recently reaffirmed IndiGo’s long-term rating at A-plus with a negative outlook but downgraded short-term rating by one notch from A1-plus to A1. It attributed the downgrade of the airline’s short-term rating to the unprecedented disruptions caused by COVID-19 pandemic and its consequential impact on the global and domestic demand for air travel.
Cash rich IndiGo vs cash starved competition
The MoCA permitted domestic airlines to resume operations, in a calibrated manner, from 25th May 2020. Airlines were permitted to operate a third of their capacity for the summer 2020 schedule as per the capacity caps [1]put in place. Airlines were also bound by fare caps [2]which ensured seats were sold at regulated prices with a lower and higher limit for seats sold on all routes.
The fare caps make it economically viable for airlines to operate services during the pandemic when demand is muted. They also ensure the common man is protected from extortionately high fares. These caps were initially meant to be in place only till 24th August 2020.They have however been extended till 24th November 2020 due to tepid demand for air travel within the country. The MoCA has however, permitted airlines to operate up to forty five percent of their approved summer 2020 capacity from the initial one third.
More importantly, the fare and capacity caps instituted by the MoCA protect cash poor airlines from the cash rich airlines, who could theoretically with their significant cash reserves, aggressively add capacity and offer rock bottom fares to drive competition out of business. Such a predatory move would come at a cost – however, it would be a small price to pay to eliminate altogether, within a span of days, at least one airline which is currently struggling with liquidity.
Despite the caps, IndiGo witnessed a jump in its market share from 52.5% in June this year to 60.4% in July 2020 as per data made available by the DGCA. IndiGo’s market share has grown at the expense of other airlines as they are being extremely cautious about the routes and frequencies they operate. The rule of thumb being not to operate any flights which do not cover the cash operating costs. This helps contain cash outflow which is of primary concern in these uncertain times.
Conclusion:
Regulating fares and capacity is far from ideal and the government should refrain from such measures unless absolutely necessary.
The current restrictions imposed, level the playing field which is currently skewed in IndiGo’s favour because of its size, cash reserves and the ability to raise cash during the pandemic. There is no certainty however that IndiGo would go after the other airlines if the caps were to be removed. However, as they say, all’s fair in love and war and if IndiGo’s aircraft orders and ambitions are anything to go by, it is clear that they have their eyes set on dominating air travel in India.
Moreover, when airlines compete with each other, consumers get the best possible prices and services. Competition also keeps peers in the industry on their toes and fuels innovation. Hence, it is the need of the hour to protect cash poor airlines from immediate collapse, resulting in thousands of job losses, so that they are around to compete when demand for travel returns and advance bookings, which provide airlines with much needed interest free cash, resume.
Domestic air traffic for July 2020 was down 83% year on year with only twenty-one lakh passengers taking to the skies compared to one hundred and nineteen lakh a year ago. If these numbers are anything to go by, the pandemic has set us back by almost fourteen years as these traffic numbers are similar to those from the year 2005/2006.
It is without a doubt that all Indian airlines, much like their global peers, have to restructure their operations in light of the pandemic. Cash poor airlines have their work cut out as they must downsize fleets and reduce costs. Simultaneously, they must also find cash to maintain skeletal presence in the market till the situation improves. The caps imposed however give them a much-needed breather with one less thing to worry about, being wiped out by a cash rich competitor.
However, their survival largely depends on their promoters infusing much needed cash. Without this, the current caps only delay the inevitable failure of one or more of India’s airlines.
[1] Order No. 01/2020 dated 21st May 2020 from the MoCA which elaborates further on the capacity caps – https://sarinlaw.com/wp-content/uploads/2020/06/MoCA-Capacity-Cap-21.05.2020-1.pdf
[2] Circular No. 4/1/2020-IR dated 21st May 2020 from the Directorate General of Civil Aviation (DGCA) which provides more information on fare caps – https://sarinlaw.com/wp-content/uploads/2020/06/DGCA-Fare-Cap-21.05.2020-1.pdf
Photo Credit: Praveen Sundaram – http://www.photoyogi.com
