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Further consolidation likely in Indian aviation on slow demand rebound

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Global airline industry likely to make profit of $29.3 bn in 2020: IATAMumbai, Aug 26 (IANS) Weak liquidity position of some Indian airlines is likely to force them to curtail operations and allow stronger rivals to enhance their presence in the domestic aviation sector, Fitch Ratings said on Wednesday.

Accordingly, the ratings agency cited that a higher market share, apart from cost-cutting measures, will allow airlines such as market leader IndiGo to improve their performance after a sharp drop in earnings in 2Q20, even though overall travel demand is unlikely to rebound quickly.

“We think IndiGo is well placed to further consolidate its market position in the coming months due to the liquidity pressure at rival airlines. Its share of domestic passengers has already risen to 60 per cent by end-July 2020 from 48 per cent in 1Q20,” the agency said in a statement.

“IndiGo reported a large EBITDAR loss in the quarter ended June 2020 after cutting back its operations significantly in April and May to cargo and chartered flights. The company’s capacity as of end-June was around 25 per cent of its capacity before restrictions were put in place to curb the spread of the coronavirus.”

As per the statement, the company mitigated the impact of an almost 90 per cent fall in revenue by focusing on lowering its fixed costs for aircraft and engine leasing through capacity optimisation and re-negotiating lease terms with lessors, and employee expense through a mix of measures such as salary reduction, leave without pay and retrenchment.

“IndiGo also plans to boost its liquidity, which is robust as it has a net cash position after excluding capitalised operating lease liabilities, through measures such as the sale and leaseback of its unencumbered assets and equity raising,” the statement said.

“IndiGo’s position contrasts with that of SpiceJet, which had the second-largest domestic market share of 16 per cent as of July, but is facing liquidity-related challenges. SpiceJet’s standby letter of credit facility remained unpaid for more than 30 days as of end-June 2020 and the company asked the market regulator for a delay in the reporting of its financial results for the year ended March 2020 to July, from end-June.”

Another carrier, GoAir, which is privately held, has been asked by the Airports Authority of India to clear its unpaid dues and pay upfront for utilising airport services, it said.

Furthermore, the agency said: “The Tata group may also be consolidating its presence in the Indian aviation sector with a bid for state-owned Air India.”

“The group, which already has 51 per cent stake in low-cost carrier AirAsia India and full-service airline Vistara, is evaluating whether to place a bid for Air India before the 31 August 2020 deadline.”

Earlier, bidding rounds to privatise Air India, which was owned by the Tata group before nationalisation in 1953, have been unsuccessful.

However, the terms for potential buyers have been improved in the latest round, it said adding that the government is now offering 100 per cent divestment, including Air India’s real-estate assets. The airline’s large debt burden will also be split and 60 per cent will be retained by the government.

The Indian government allowed domestic flight operations to resume from May 25, 2020, two months after they were prohibited.

However, capacity restrictions and fare brackets remain in place. The government initially allowed carriers to deploy only 33 per cent of their capacity in place before March 25 and this was increased to 45 per cent in late June.

Fare brackets were also put in place to prevent price spikes and help airlines cover their costs. These restrictions have been extended until November 24.

“The fall in domestic air travel demand has been much sharper than the capacity cuts imposed for the industry. Domestic passenger traffic dropped by 82 per cent YoY in July and most airlines reported passenger load factors of 50-60 per cent, compared with 80-90 per cent last year. The pick-up in domestic passenger volume since end-May 2020 has been slow, with traffic increasing by only 6 per cent in July from the previous month,” the statement said.

“We think volume growth will remain in the single digits over the next few months, as the pandemic continues to spread in India and people forego non-essential travel.”

–IANS

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