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Future lockdowns, tepid corporate travel challenges to aviation sector recovery

Analysts believe that airlines are currently operating at 50-55 per cent capacity on the domestic segment, and they are hoping that by the end of 2020, the domestic capacity should reach 75-80 per cent

Government has allowed carriers to deploy 70 per cent of their approved capacity Government has allowed carriers to deploy 70 per cent of their approved capacity

On Wednesday, Aviation Minister Hardeep Singh Puri allowed the carriers to deploy 70 per cent of their approved capacity in the domestic market. This is the third time the government has revised the capacity constraints which will allow airlines to put more seats for sale as the demand has started to pick up for business and leisure travel.

Analysts believe that airlines are currently operating at 50-55 per cent capacity on the domestic segment, and they are hoping that by the end of 2020, the domestic capacity should reach 75-80 per cent. The numbers are even more encouraging on the PLF (passenger load factor) side which has climbed up to over 70 per cent - highlighting that the airlines are flying more passengers per flight despite the fare bands restrictions.

"Towards the end of September, demand has picked up for the air travel. The industry has been banking on the domestic market which is showing signs of revival. China is exhibiting a growth of 1-2 per cent, and is back to the pre-Covid levels on the domestic side. India is heading towards that direction," says an aviation analyst with a leading brokerage.

Airlines are trying to be more efficient to increase revenues and reduce costs. This includes a series of measures such as inducting more efficient planes in the fleet, increasing the cargo operations, focussing on the profitable charter services business, reducing discretionary spending, and renegotiating contracts with vendors and suppliers.

SpiceJet, for instance, has emerged as the largest cargo operator in the country during the pandemic. "SpiceJet continues to focus on managing cash flow by exploring new networks and revenue model (charter, cargo), deferring payments to vendors including lessors, reducing unit costs by renegotiating rentals and maintenance contracts, cutting down discretionary and employee costs. Likely return to service of Boeing 737 Max (more fuel and cost efficient) by January-March 2021 will further aide operations," said brokerage Prabhudas Lilladher in a recent report.

An improvement in the aviation sector also bodes well for state-run Air India which is currently in the process of disinvestment. Recently, the civil aviation ministry modified the sale rules for the national carrier to allow the potential bidders to decide on the quantum of debt (estimated at over Rs 69,000 crore) that they are willing to take over as part of the deal.

"The journey has been encouraging so far. The confidence of travellers is coming back. The corporate travel, especially on the SMEs [small and medium enterprises] side, has picked up as well. The major cost element for airlines - aviation turbine fuel - looks favourable. With the global aviation demand not reviving till 2023/24, the crude prices will unlikely go back to $80 a barrel," says the aviation analyst quoted above.

But even as the sector makes strides, some concerns continue to hamper the process towards full recovery. The biggest risk for the sector is yet another lockdown in case there's a second wave of infections. Currently, some European governments are re-imposing stricter lockdown rules after the easing of norms led to spike in COVID-19 cases.

The other big issue is the readiness of the airport infrastructure to handle the pre-COVID air traffic with social distancing norms. "Even if the airlines are willing to deploy more capacity, the question remains in terms of how ready we are when it comes to airport terminals if we have to maintain new safety protocols," says an aviation consultant.

Then, there's a firm belief within the sector that despite the eradication of COVID-19 in the future, the pre-COVID levels of corporate travel is not coming back ever because companies have adopted virtual (and cost-effective) ways to meet and work. With international travel segment operating at just about 25 per cent of the pre-COVID levels for the domestic carriers due to international travel restrictions in India and in other countries, a sizeable revenue source for the airlines has been badly affected.

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