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Demand in Indian aviation may dip 50%, govt intervention may fail: CAPA

Indian aviation is staring at grimmer times with demand possibly dipping with the government urging people to cut down on non-essential travel according to a CAPA report

twitter-logo BusinessToday.In        Last Updated: March 28, 2020  | 13:59 IST
Demand in Indian aviation may dip 50%, govt intervention may fail: CAPA
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Indian aviation is staring at grimmer times with demand possibly dipping 40-50 per cent in the near term with the government urging people to cut down on non-essential travel, according to a report by Centre for Asia Pacific Aviation India (CAPA India). "With new advisories and restrictions being announced every day, and with the Indian government urging people to avoid all non-essential travel, demand is expected to weaken substantially, with a drop of 40-50% or quite possibly even higher being possible in the near-term, as is being seen in other markets," mentioned the report.

WHY SUCH A SEVERE IMPACT

It stated that the effects of the coronavirus pandemic has been felt rapidly across sectors, especially aviation and that the situation is more restrictive today than it was a week ago. The aviation body said that the picture would be clearer in early April.

The current financial year started with the crumbling of Jet Airways. On top of that the economic slowdown ensured that there was no growth in the sector in the past 12 months. Closure of the Pakistani airspace due to Balakot, suspension of Boeing MAX aircrafts and the issues with Pratt and Whitney engines on NEO aircraft have basically sent the entire sector spiralling, mentioned the report.

Also read: Coronavirus in India Live Updates: Govt asks 50% of staff to work from home

CASCADING IMPACT

Even before coronavirus came into the picture, Indian aviation sector was going through tumultuous times. While some airlines experienced 5-10 per cent decline in yields, it had accelerated to 12-15 per cent decline in the period between March 1 and 15. Forward bookings are down by 30 per cent since last year, as mentioned by the report. "Yields may also come under further pressure and could deteriorate by 25% or more," stated CAPA.

It also added that based on the latest cancellations, international capacity has dipped by 60-70 per cent year-on-year. This dip has come as India has banned entry of foreign nationals. International flights account for 25 per cent of India's aviation flights.

As the impact hardens, Indian aviation sector might ground around 150 aircraft initially, it said. And, the number could go up substantially. "By extension, the reduced scale of operations could impact the requirement for around 30% of airline staff and up to 50% of ground handling staff. For the first couple of months this could potentially be handled through mandatory leave and leave-without-pay initiatives for 1-2 months," stated the CAPA report.

Naturally, the shrinking of the sector would have a cascading effect. This in turn is likely to impact Q1 results and could possibly extend to Q2 as well, the CAPA report stated. 

Also read: Coronavirus: How countries are bracing up for economic slowdown

GOVERNMENT HELP

Some airlines might suspend operations temporarily due to low demand as operating flights will amount to more losses than suspending them. "Airlines will seek to adjust aircraft deliveries scheduled for Q1 and may cancel some orders. Indian carriers have 50 aircraft due for induction between now and 30-Jun-2020. But delaying deliveries may impact the liquidity of some carriers that are reliant on sale-and-leaseback margins on aircraft inductions to generate cash," stated the report.

The Aviation Ministry is likely to step in to cushion the impact. It might recommend short-term financial assistance to the sector. Additionally, the privatisation of Air India could be delayed, mentioned CAPA. "As a result, the government will need to commit significant and immediate interim funding of USD300-400 million for the national carrier, to ensure that it is able to operate at least in its current condition until such time as the sale transaction is concluded,"  the report further says.

SHRINKING OPERATIONS

It states that even with government intrusion, airlines would have to shrink operations, while the more vulnerable ones might have to shut shop. The aviation value chain would be impacted resulting in job losses across airports, ground handling companies, hotel and tourism sectors. "If there is a virtual cessation of air travel, then whatever support the government offers, there is little that can be done to sustain operations," said CAPA.

Also read: Coronavirus impact: Work from home leads to data speed disruption; firms call for fresh spectrum allocation

HOW TO HELP THE SECTOR

Including aviation turbine fuel under the GST regime could be of some help. Revision of turbine fuel rates on a weekly basis can help in the short-term too. "Implement a short-term moratorium or extended credit terms for payments due to fuel companies and the Airports Authority of India; and similarly for interest and principal payments to banks on working capital loans," said the agency.

Temporary revision of the terms of concession agreements for duty free, retail and food and beverage operators by PPP operators could also be of help. "All of the above may still not be enough, and there could be a requirement for banks to extend working capital loans, secured against future sales or sale-and leaseback incentives," the report mentioned.

"One of the recommendations that CAPA India has regularly proposed is the introduction of a regulatory requirement for airlines to hold cash balances that can support six months of operations in the absence of revenue, in order to be able to both obtain and to renew an AOP," the report stated.

Also read: Coronavirus impact: IndiGo grounds 16 planes; staff to take 10-20% salary cuts

Also read: Coronavirus effect: Railways cancels 84 more trains today; check out the list

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