India reported nearly 316,000 COVID19 cases on 22^nd April 2021, with as many as 2,100 COVID19 related fatalities. This is the highest single day spike in cases and fatalities reported in the world since the beginning of the pandemic last year.

This deadly second wave of COVID19 has forced States across the country to impose restrictions on the movement of people to curtail the spread of the virus and to prevent the already overburdened medical infrastructure from collapse. While the human impact of the resurgence of the virus is visible now, the economic impact would only intensify in the coming weeks.

Indian airlines have made significant gains in traffic since the resumption of operations on 25^th May 2020. As per data made available by the Directorate General of Civil Aviation (the “DGCA”)[1], around 7,822,000 domestic passengers took to the skies in March 2021. This roughly translates to 252,000 passengers daily. Pre-COVID19, this number was approximately 350,000 a day.

While robust domestic demand for flights has helped Indian airlines survive the pandemic so far, the situation today is vastly different from what it was when the pandemic originally hit.

Pandemic Proof Demand for Domestic Travel

As Indian airlines prepared to resume operations in May 2020, they worked tirelessly with various industry stakeholders, inter alia, the Ministry of Civil Aviation (the “MoCA”) to overcome logistical challenges posed by the pandemic, to assure passengers that flying was a safe mode of transport. We detailed some of these challenges in our article titled “Lockdown Woes: Getting India Back in the Air”.

Furthermore, the MoCA instituted capacity and fare caps, which continue to remain in place till date, to ensure a level playing field existed among Indian airlines. More importantly, these measures prevented passengers from being subjected to extortionate last-minute fares. We detailed these measures in our article “Regulating Domestic Air Travel in India During COVID19”.

During the first wave, COVID19 cases peaked just short of 100,000 cases daily in the month of September 2020 and dropped significantly in the following months to less than 10,000 cases a day in February 2021. Falling COVID19 cases encouraged holiday starved Indians to take to the skies. Passenger numbers peaked in March 2021 with the highest passenger count per day recorded at 313,668 in March 2021. The lack of enforceability of COVID hygiene and discipline on the railways also contributed to the rising demand for air travel.

While corporate executives continued to avoid travel unless necessary, the Visiting Friends and Relatives (“VFR”) and leisure segments were far less sceptical. Demand for flights and hotels at popular vacation spots like Goa went through the roof during the Christmas / New Year period in 2020. This trend continued in the new year. At one-point for example, Indian airlines collectively were operating up to 20 flights a day between India’s capital, New Delhi, and the seaside resort town of Goa in February 2021 to cater to holiday makers.

Historically flights packed with leisure / VFR passengers are associated with poor yields. However, fare caps instituted by the MoCA prevented airlines from offering deep discounts which in turn ensured reasonable yields.

To summarize, these passenger numbers are proof that India’s domestic aviation market is well placed to avoid the long-term effects of the pandemic and that once this wave of COVID starts to subside, passengers will return to the skies.

Sale & Lease Back Induced Fleet Woes

Most aircraft operated by Indian airlines (close to 80%) are leased from foreign lessors. This is because Indian airlines largely use sale and lease back transactions to acquire aircraft. While this asset light model has successfully fuelled the rapid expansion of Indian airlines in the last decade, acquisition of aircraft has also been a big drain on their COVID stricken finances.

Essentially, airlines are contract bound to remit lease rentals to foreign lessors even though most of the aircraft in their fleets are currently either underutilised or unutilized i.e., placed in long term storage, due the lack of demand for air travel because of the pandemic.

When the pandemic hit, given the global nature of the crisis, foreign lessors had little choice but to work with defaulting Indian airlines to defer lease rental payments or work on other settlement plans. Depending on past payment history and their relationship with the lessee i.e., the airline, it is learnt that some lessors went to the extent of waiving part of the lease obligations too. This was largely due to the lack of opportunities to place aircraft elsewhere in the world due to the pandemic. This in turn, helped Indian airlines maintain their fleet, avoid repossession of aircraft, and survive the first COVID19 wave despite defaulting on lease rental payments.

Today, while India grapples with the second, more deadly COVID wave, its cash poor airlines worry if lessors will be as forgiving this time around. Narrow body jets operated by Indian airlines (mainly the Airbus 320 and the Boeing 737) are bound to be in demand as large domestic aviation markets like the United States and China regain lost momentum.

Moreover, given the current restrictions on International travel, domestic travel will take centre stage and airlines are bound to expand their domestic offerings to cater to this demand. This is already visible in the US market for example.

Given the week financial position of some Indian airlines aggravated further by the resurgence of the virus, the mounting deferred lease rentals, and the possibility of being able to lease the aircraft elsewhere, unless reassured, there is no knowing whether lessors may throw in the towel, terminate contracts, and take back their aircraft.

While some may argue that this may be a blessing in disguise for Indian airlines as they struggle with overcapacity and depressed demand, any such action taken by a lessor may have a domino effect as other lessors may quickly do the same.

While the above may be cause for some concern to cash poor Indian airlines, some like India second largest low-cost airline, SpiceJet have been able to induct aircraft through power-by-hour lease agreements from other airlines which continue to be impacted by the pandemic in their home markets. This seems like a reasonable short-term fix however the light at the tunnel seems to be quite far off.

What lies ahead?

The second COVID19 could not have come at a worse time. Historically, Q1 (April-June) is one of the two profitable quarters for Indian airlines, (the other one being Q3). Given the timing of this second wave, it is safe to assume that Q1 is likely to be a complete washout.

What is also evident is that survival of cash poor airlines will largely depend on the promoter’s ability to infuse capital as large public sector banks and financial institutions are weary of investing in Indian airlines. Hence, it is down to the promoters to take centre stage and rescue their airlines. This particularly applies to two privately owned airlines which are staring at a serious liquidity crisis.

Simultaneously, it is imperative for airlines to cut costs and engage with all stake holders and creditors including foreign lessors in these difficult times. No lessor would like to pull the plug, so to speak, on an airline and repossess assets unless they are left with no other option.

It is however safe to conclude that there is an established pattern of demand for air travel in India despite the pandemic and that the current capacity caps and fare caps will enable cash poor airlines to survive. However, without infusion of capital from the promoters, this may not be enough to provide comfort to the creditors and lessors.

[1] Traffic Data – March 2021 – https://sarinlaw.com/wp-content/uploads/2021/04/Traffic-Report-March-2021.pdf