The suspension of domestic flights by the Ministry of Civil Aviation (MoCA), India on 24th March 2020 and the subsequent lockdowns by the Government of India, to curtail the spread of COVID19 have taken an unprecedented toll on airlines in the country. April 2020 infamously etched itself in the history book, for being the only month with no passenger movement whatsoever by air. Despite the strict lockdowns, COVID19 cases continue to rise and India now has the third highest number of confirmed COVID19 cases in the world, behind only to the United States of America and Brazil.

Q1 2020 – A complete washout

Q1 along with Q3 are usually the busiest periods for air travel in India. Airlines in India witness robust demand for travel primarily due to the school holidays in Q1 and the vast array of festivals in Q3. These quarters help airlines shore up a cash buffer to survive the rest of the year when selling seats profitably, is an uphill task.

Domestic airlines in India were permitted by the MoCA, to resume operations from 25th May 2020, albeit with caps on fares[1] and capacity[2] leaving airlines with no choice but to operate a third of their capacity for the summer 2020 schedule and have also been bound down to sell seats at regulated prices.

Indian airlines have also had to deal with various other issues since the resumption of flights including ad-hoc quarantine requirements imposed by states across the country and limited airport operations at India’s financial capital, Mumbai, to name of few. These have had a direct impact on demand for air travel, which remains tepid and mostly unidirectional. Load factors on flights have averaged between 40-50% with most passengers booking one-way flights.

The fare caps instituted to protect people from high fares are turning out to be an impediment to revenue managers and sales teams alike, as they are unable to discount unsold inventory on legs which have little demand. This is forcing airlines to fly empty seats resulting in loss of revenue.

Pre-COVID19, all Indian airlines, barring Air Asia India and regional airlines, deployed significant capacity on international routes to South East Asia, China and the Middle East These routes bring in sizeable revenue and much needed foreign exchange for Indian airlines.

India suspended scheduled commercial international operations for all airlines on 22^nd March 2020. Since then, the suspension has been extended multiple times and international operations remain suspended till date. Pre-COVID19, India’s largest airline, IndiGo, deployed almost 30% of its total capacity on international routes. The suspension of these operations continues to impact revenues and it seems unlikely that operations will resume in Q2 2020.

The continued suspension of international operations gave birth to demand for private charters and repatriation flights operated under the Vande Bharat Missions. These flights have helped bring in some additional revenue for airlines but in no way make up for the large shortfall in revenue caused by the pandemic.

All of the above will impact Q1 earnings greatly and will translate into record losses for all Indian airlines in a quarter which is usually characterised with record sales and improved margins. India’s largest airline, IndiGo, reported its highest ever profit after tax of Rs. 1,203 crores ($ 161.47 Million) in Q1 2019 due to strong passenger revenue and sharp improvement in cargo operations. Similarly, SpiceJet reported a standalone net profit of Rs 261.7 crore ($ 35.12 Million) in Q1 2019, the highest ever for the airline.

Brokerage firm Centrum Broking, estimates IndiGo will report a loss of Rs. 2,670 crores ($ 358.38 Million) for Q1 2020. It is forecasted that SpiceJet too will report a loss of around Rs. 1,000 crores ($ 134.2 Million).

The Directorate General of Civil Aviation (DGCA) permitted airlines to operate 45% of their approved schedules as on 26th June 2020. It remains to be seen if airlines will add any more capacity given the circumstances.

As India continues to add record number of COVID19 cases on a daily basis, forcing cities and states across the country to mandate ad-hoc lockdowns, demand for air travel will continue to remain muted in Q2 2020.

COVID19 induced change in booking behaviour

The pandemic has significantly altered passenger booking behaviour, resulting in a majority of travel being booked only a couple of days before travel. This trend was first noticed in China once restrictions on domestic travel were relaxed. A report[3] by the International Air Transport Association (IATA) details that “more passengers are booking their travel within three days of the travel date” than ever before. This trend has been noticed in India too.

Unlike China, domestic flight operations resumed in India when the country was starting to see the real impact of COVID19 post the lockdowns. Certain states in the country have been impacted more than others, forcing them to implement stringent quarantine requirements for passengers entering their states by air. Quarantine measures vary greatly depending on the state. While the state of Maharashtra, one of the worst effected states in India, requires arriving passengers to home quarantine for a period of 14 days, those arriving in Bihar, do not have to go through any quarantine whatsoever. The West Bengal government recently went a step further and imposed a complete ban on flights arriving at Kolkata Airport from cities which are COVID19 hotspots i.e. New Delhi, Mumbai, Pune and Chennai from 6^th to 19^th July 2020.

The other significant issue which has impacted booking behaviour, is the lack of transparency from airlines with regards to refunds for tickets booked for travel during the lockdowns. Most airlines placed refunded fares in credit shells despite Clause 3 (f)[4] of the Civil Aviation Requirements (CAR) Section 3 – Air Transport Series ‘M’, Part II, Issue I, Dated 22^nd May 2009, Rev. 2, dated 27^th Feb 2019, issued by the Directorate General of Civil Aviation (DGCA) clearly stating that “the option of holding the refund amount in a credit shell by the airlines shall be the prerogative of the passenger and not a default practice of the airline”.

The ad-hoc nature of the restrictions and quarantine requirements imposed by states across the country, often at very short notice, coupled with arbitrary refund policies adopted by the airlines, have forced people to book flights closer to the date of departure. While this may provide a certain amount of comfort to the flying public, it greatly impacts cash flows at Indian airlines.

Airlines by nature, offer a service which is more often than not, sold well in advance and fulfilled at a later date. Essentially, receipts from advance bookings are as good as interest free loans. These help airlines generate important cash flow to tide over present day cash crunches.

As various clusters across India continue to go into lockdowns, advance bookings for flights will remain impacted. This trend looks like it is likely to continue in Q2 2020. As this source of interest free cash has dried up due to the pandemic, airlines in India are unfortunately left with no choice but to cut costs further and recapitalize in order to survive this black swan event.

Cut costs further / Recapitalize

All Indian airlines have implemented cost cutting measures since the suspension of domestic travel in March 2020. These include pay cuts for most of their employees, deferring capital expenditure, renegotiating contracts with vendors, seeking deferrals of lease rentals from lessors and negotiating early return of fuel inefficient aircraft.

All Indian airlines initiated pay cuts for a section of their employees at the beginning of this crisis. Pay cuts and leave without pay (LWP) days at the Wadia group owned airline, GoAir and SpiceJet were comparatively larger than the other airlines. India’s largest airline, IndiGo, despite announcing pay cuts, paid all employees their full salaries for the month of March. In April, everyone barring the senior executives, was once again paid their full wage despite the airline not having flown a single passenger all month.

What seemed like a smart move back then and one which was widely applauded by staff at the airline – was one which back fired as the airline clearly underestimated the impact of the pandemic and the time it would take for the airline to return to pre-COVID19 capacity levels. The airline corrected course quickly and implemented a 20-25% pay cut for all senior staff including pilots from May in addition to graded LWF for all employees until July. This was followed by additional LWP days for pilots in order to curb payroll costs. The airline has communicated to its staff that going forward, decisions regarding pay cuts will be reviewed on a monthly basis and further changes are likely.

In order to bring staffing levels in line with projected demand for air travel and more importantly to reduce payroll burden, IndiGo has also started laying off staff. Initially, this was achieved by conducting assessments and reviewing files for staffers who have had disciplinary issues in the past. Going forward the airline will make redundant staff who have a clean record and have consistently contributed towards making IndiGo the success story it is today.

Simply put, no business can afford to maintain staff on payroll when they have no work for them to do. The quantum of layoffs will only intensify across airlines in Q2 2020 as the virus continues to spread across the country. IndiGo because of its sheer size, which was once its advantage over competition, may be the most impacted by these measures.

Conclusion

IATA estimates airlines in India are staring at $ 11.6 Billion in lost revenue in 2020 vs 2019. Despite a loss leading Q1, a challenging Q2 and a painful recovery, we have not seen a single airline go bankrupt yet. Creditors continue to support and work closely with the airlines despite the severe cash crunch and delayed payments.

Lessors too have been negotiating payment deferrals with airlines and not one aircraft has been forcefully deregistered and repossessed from India despite some airlines defaulting on lease rentals. Of the 650 aircraft operated by Indian airlines, 78% are narrow body jets (mainly the Airbus 320 and Boeing 737) with the balance split between 8% widebodies and 14% regional aircraft. Interestingly, a majority of these ~80% are on lease as compared to the global average of 41%.

At this stage, it seems, every airline is waiting for one or more airlines to go belly up. CAPA India estimated refunds, if ordered by the Supreme Court of India, could cost airlines as much as $500 million. If mandated, the refunds could leave some airlines with no choice but to either recapitalize immediately or liquidate.

Which one, if at all, would go down that route is anyone’s guess however two airlines grappling with significant cash flow issues come to mind.

The sector is also ripe for M&A activity and depending on how things go, promoters who may want to exit the aviation business once and for all may sell their stakes at vastly discounted sums.

With the current trends and with the COVID19 curve nowhere close to flattening, it seems evident that Q2 2020 will bring more misery and no cheer whatsoever for airlines in India. This is the one instance, where we hope that our predictions are wrong.

[1] 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

[2] 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

[3] IATA report dated 22^nd May 2020 detailing shift in passenger booking behaviour in China – https://sarinlaw.com/wp-content/uploads/2020/07/IATA-China-booking-pattern-May-2020.pdf

[4] DGCA CAR regarding refund of airline tickets – https://sarinlaw.com/wp-content/uploads/2020/07/CAR-Refund-of-Airline-tickets-to-passengers-of-public-transport-undertakings..pdf

Photo Credit: Praveen Sundaram – http://www.photoyogi.com