Sky is Limited

Airlines have taken to the skies after two months. But their pain is far from over

Photograph by Rajwant Rawat Photograph by Rajwant Rawat

There was a sense of self-assurance and desperation in his voice. When Business Today spoke to one of IndiGo's pilots about his experience of flying during the Covid pandemic, he said much has changed in the aviation business since May 25, the day the Ministry of Civil Aviation (MoCA) allowed airlines to restart flights.

From the pilot's perspective, the airline is flying a lot less passengers, and taxiing and take-off time has been substantially reduced, he said, on condition of anonymity. In addition, he doesn't have to take a breathalyser test before every flight because of risk of spread of the virus. His savings have been hit as his salary has been slashed by 15 per cent but the 38-year-old pilot does not have any grudges. "I have operated just four flights since the reopening. The airline is doing its best to limit the risk of exposure. Load factors are low. But it's good that we are flying again after sitting idle for two months," he says, adding that his flight hours per month have gone down considerably - from 80 hours before to 15-20 hours now. He hopes that the salary cuts could be reversed if IndiGo could fly more. "A 15 per cent cut is manageable. It's a question of overhead expenses. I don't own a luxury car, nor am I paying EMI for a big apartment like some other pilots. For me, the salary cut has translated into lower savings," he says.

In March, just before the first lockdown, IndiGo had reduced staff salaries by 5-25 per cent across pay grades with senior management taking the steepest cut. This was followed by another cut in May (between 3 per cent and 12 per cent) in the form of leave without pay, ranging from one day to five days a month. Other airlines like SpiceJet, GoAir, Vistara and Air India have also slashed salaries.

Not just its staff, IndiGo's management also believes the only solution out of the crisis is to fly more. But with capacity restriction of 33 per cent, imposed by the government till August, and decision on international flying likely only in July, there's a limit to which airlines can fly.

Traffic Tales

In a recent conversation with Business Today, IndiGo's CEO Ronojoy Dutta said contrary to popular belief that demand in the initial days would be high before dying down, his airline is witnessing a sustained upward demand trajectory. IndiGo started with about 220 flights a day in late May and went up to 350 in middle of June.

Dutta says he's hoping the government will allow 50 per cent capacity as underlying trends support that kind of number. "Once it gets to 50 per cent, will we say, go to 70 per cent? I dont know. We will decide then. But at this point, all arrows are pointing up, and we want to add capacity," he says.

However, analysts say it's only a matter of time before demand crashes. "The key drivers of demand are not going to pick up over the next three-six months," says Kinjal Shah, Vice President at ratings agency ICRA. ICRA says passenger traffic will remain under pressure till September with some recovery likely only after that. On a full-year basis, airline traffic is estimated to decline by 45-50 per cent.

"It's not a question of real demand. What we are seeing is scare demand," says Amit Sinha, Partner at Bain & Co.

Dutta, however, feels the bottom end of the market is likely to sustain traffic growth even if corporate demand is muted. "There are more virtual meetings, Zoom calls and all of that. So, people won't travel (for work meetings) because of the enabling facility of these technologies. In India, it is not easy to navigate if you want to go from point A to point B. So, it is a train versus plane issue. Remember, airline travel has become affordable," says Dutta.

Even as Dutta is optimistic, the May data released by regulator DGCA (Directorate General of Civil Aviation) shows traffic has come down to a trickle. In the seven days in May, it was 2.81 lakh, down 98 per cent from May last year.

To make it more complicated, the traffic is uneven. There's more traffic towards Eastern India. On routes like Mumbai-Patna, Mumbai-Dibrugarh, and Delhi-Kolkata, the load factor (seats occupied as percentage of total) is above 80 per cent, whereas on Patna-Delhi, it is in the region of 40-50 per cent.

In order to capitalise on this traffic imbalance, Vistara has deployed its wide-body aircraft Boeing 787-9 Dreamliner on the Delhi-Kolkata sector. "The traffic is quite directional. Some flights are doing 100 per cent load factors. We are seeing more people moving out of Mumbai. Our network is being constantly reviewed," says Vinod Kannan, Chief Strategy Officer at Vistara. The Tata Group-owned airline is operating at 25 per cent capacity as against 30 per cent for IndiGo.

The load factor at top five carriers stood between 44.1 per cent (Vistara) and 57.2 per cent (SpiceJet) in May. This is fairly low compared to the pre-Covid period. But airlines think this is partly due to fare bands introduced by the MoCA for three months till August. Based on flying hours, it has set seven fare bands. Airlines can take bookings for Goa-Mumbai between Rs 2,000 and Rs 6,000 per ticket. Similarly, fares can vary between Rs 6,500 and Rs 18,600 on a Delhi-Coimbatore flight. Airlines think that they have lost the flexibility to offer lower fares on routes with low load factors.

The domestic aviation sector is extremely price-sensitive. Even FSCs (full-service carriers) like Vistara cannot charge a large premium over LCCs (low-cost carriers). Consumers typically prefer price over value. For instance, Jet Airways couldn't survive the cut-throat competition as its cost structure was that of an FSC while fares were closer to those charged by LCCs.

Managing the Crisis

Despite a steady start, there are four factors that continue to haunt airlines: Economic slump affecting demand, safety risk, lack of clarity on international flights and state-specific restrictions. For example, people travelling from Maharashtra to Karnataka have to undergo a mandatory seven-day institutional quarantine. Mumbai, which used to have 915 flights a day, is seeing 100 per day. Each state has own quarantine rules for passengers coming from other states. These are forcing people to postpone or shelve travel plans.

Similarly, the international segment, which accounts for about 30 per cent of overall traffic, has been shut for nearly three months. Though there has been some movement on the international front through the MoCA's Vande Bharat Mission, which has flown over 2.5 lakh citizens home, Airlines do not make much money from such relief flights.

Mumbai-based Centrum Broking has estimated that sliding revenues on a high cost base will result in two largest carriers - IndiGo and SpiceJet - posting losses in FY21. Market leader IndiGo, for example, is expected to record losses of Rs 1,401.6 crore, while SpiceJet is expected to report a loss of Rs 1,030.7 crore.

CRISIL says the entire aviation sector is expected to lose Rs 25,000 crore revenue in FY21; this includes Rs 17,000 crore losses of airlines and Rs 5,500 crore of airport operators.

To fund these losses, airlines will need additional funding of Rs 35,000 crore - in the form of debt and equity - that will push up the total sector debt to Rs 46,500 crore by 2021/22, says ICRA.

In spite of severe headwinds, airlines are trying their best to stay afloat. Because of limitations on demand, almost all airlines have gone back to the drawing board where they are looking at each cost carefully. Fixed costs are employee salaries, aircraft rentals, etc. Variable items are fuel, landing and parking charges, maintenance, in-flight catering and ground handling.

For most airlines, 40 per cent costs are fixed. Even after reducing salaries, fixed costs are likely to fall by about 7 per cent for the full financial year. This means they will have to do a lot more in other areas to minimise losses.

IndiGo has converted its 10 aircraft into freighters carrying 17-20 tonnes of cargo per flight as against six-nine tonnes carried in the belly of a regular passenger flight. SpiceJet also recently converted three Bombardier Q400 passenger aircraft into freighters, taking its all-cargo fleet to eight. But what's the idea behind starting all-cargo operations? One, demand for transportation of medical and essential supplies and e-commerce is robust. International cargo rates have jumped nearly three times of late, which has improved profitability.

Both Spicejet and IndiGo have also started offering private charter services for individuals and groups who are willing to pay a price for flying alone. "There's a lot of demand and they are good revenue generators for us. We are doing about 10 charters a day," says Dutta.

But adding new revenue streams is just one part of the effort. Airlines have approached vendors and lessors to bring down cost of services like hotels, transportation and information technology. IndiGo has been able to freeze supplementary rentals for nine months since a large part of its fleet is grounded. "We continue to engage with partners. These are protracted discussions," says Vistara's Kannan.

So, while airlines are making efforts to slash costs, prices of ATF (aviation turbine fuel), which accounts for 30 per cent of their costs, have moved up significantly after staying at record lows during the initial lockdown phase. This will impact bottom lines of airlines and bring down incremental margins that airlines will make by adding capacity in the days to come.

The International Energy Agency has said that air travel is down 70 per cent globally this year, and since airlines are facing an existential crisis, demand for oil, particularly ATF, will be impacted until at least 2022. "This should be good news for airlines as low oil demand will translate into weak ATF prices provided the government doesn't interfere (with higher taxes) to make up for its revenue shortfall," says an aviation consultant.

A New World Order

A recent analysis by UK-based travel data provider OAG shows the pecking order of the largest airlines in the world has undergone a complete change. The new order is dominated by Chinese carriers with three airlines (China Southern Airlines, China Eastern Airlines, Air China) in the top five list. IndiGo, which was the tenth largest carrier in the world in January, is nowhere to be seen.

Dutta says airlines globally are being supported by their governments, but that's not the case in India. He says lack of support has led to issues with refunds. When domestic and international flights got cancelled during the lockdown, airlines issued credit shells against bookings. The shells, which are essentially a note from airlines against cancelled tickets that can be used for future bookings, were not liked by passengers, who demanded refunds in cash. This created a huge ruckus between airlines, travel agents and passengers. In mid-June, the Supreme Court directed airlines and the MoCA to find a way out to issue refunds to passengers whose flights were cancelled during the lockdown.

"The government asked us to shut down all flights. Then, they said don't take future bookings. If we dont have future bookings, how do we pay for those refunds? We got caught in a bind as did the global industry. However, all US airlines, Air France and Air Canada got huge amounts of money from their governments. We got zero. We want to get out of this credit shell issue as quickly as possible. The best way of doing that is to put more flights in the air," says Dutta.

Last month, the government did announce a slew of measures to support the aviation industry, including freeing up more airspace, boosting MRO (maintenance, overhaul and repair) services and auctioning of six more airports. But these have not found favour with the industry. Some have criticised the move saying this is not the right time to auction airports since the airports economics has changed. In fact, there are reports that the Adani Group is seeking more time to take over three (Lucknow, Mangalore and Ahmedabad) of the six airports it had won in an auction last year due to uncertainty created by the pandemic.

Nevertheless, the crisis has also opened a door for airlines to buy distressed assets at a cheaper valuation. Chile-based LATAM, Colombia's Avianca Holdings and Australia's Virgin Australia Holdings have filed for bankruptcies in recent months. IndiGo's parent company InterGlobe Enterprises expressed interest in buying Virgin Australia but fell out of race.

Back home, airlines are still holding on but it seems consolidation is inevitable. The government has already put Air India disinvestment on the back burner but the national carrier continues to bleed. This will swell its debt further and make its resale process tougher in the future.

"There will be consolidation in the industry. Its highly unlikely that IndiGo will participate in it. We are a standalone airline, and we are happy with what were doing," says Dutta.

While it's too early to believe domestic airlines will emerge stronger from the crisis, no matter how hard they emphasise that they will, the next few quarters are going to be painful for carriers.