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Erratic policies, health fears, fare bands major hurdles in aviation revival

Instead of a sudden contraction in demand, airlines have been caught in a range-bound demand cycle which could be lethal for their survival

twitter-logoManu Kaushik | July 9, 2020 | Updated 21:46 IST
Erratic policies, health fears, fare bands major hurdles in aviation revival

KEY HIGHLIGHTS

  • All airlines are flying at 30% capacity even though the government has permitted 45%
  • Underlying factors - fear of flying, fare bands, and inconsistency in state government policies - are dragging down demand
  • Demand expected to remain low, at least in short term
  • Only 0.003% of the air passengers contracted COVID-19

There's an unsettling trend that has started to worry the bosses at domestic airlines. Soon after domestic flights resumed on May 25, the air traffic began to expand consistently. This was on the expected lines since there was a lot of pent-up demand for people who got stuck before the first lockdown. Airlines and sector experts believed that once this kind of demand gets fulfilled, there would be a sudden contraction in traffic. That didn't happen. Instead, the airlines have been caught in a range-bound demand cycle which could be lethal for their survival. Most airlines have deployed just 30-35 per cent capacity at the moment. This is despite government allowing airlines to deploy 45 per cent capacity from July 1 - an increase from 33 per cent allowed previously.

Their load factors (seats occupied as percentage of total seats) also linger between 50 per cent and 60 per cent. Even more worrying is the trend in the flow of the traffic which remains uni-directional - more people flying out of metros to the east of the country - even after more than 45 days of reboot.

ALSO READ: IndiGo loss likely at Rs 2,670 cr for Q1, SpiceJet's at Rs 1,000 cr: Report

A 30-35 per cent capacity deployment is still better than the seven days of May when it was lower than 20 per cent. For instance, all domestic carriers are flying about 70,000 passengers a day now as compared to 24,000 a day in May. But staying in that zone when international flights are still banned could hurt the airlines' topline and bottomline. Given that 40 per cent of their costs are fixed, and ATF (aviation turbine fuel) prices are on a rise, airlines need to quickly ramp up their capacity to return to profitability. But they can't do it because of a host of issues: the general fear of flying, no flexibility to play around with fares, and huge inconsistency in state regulations.

Above all, the passengers' confidence in air travel remains a key for airlines. Though airlines and government have been trying to allay fears by putting out data and publicising their new safety protocols, the rising number of COVID-19 cases have deterred people from travelling.

As per Usha Padhee, joint secretary at Ministry of Civil Aviation (MoCA), out of the total domestic passenger traffic of around 4.7 million (in about 37-38 days), just 800-odd cases have been found positive. "That's 0.003 per cent. Out of that, contact tracing has been done in every case. We can produce proof that air travel is the fastest and the safest," she said at a recent webinar.

ALSO READ: Vistara in talks with planemakers, lessors to delay aircraft delivery

To deal with health fears, the airlines are continuously highlighting the stringent safety protocols at the airports and how safe the air cabins are.

"Inside an aircraft, the air quality is fantastic because there are HEPA (high efficiency particulate air) filters which are used in hospital surgical rooms. For a virus of this size (0.06 to 0.14 micron), 99.99 per cent of them are cleared by HEPA filters. In a typical aircraft cabin, the air is fully changed 20-30 times per hour. The changes in our health protocols are akin to the changes in safety protocols after 9/11," said Sunil Bhaskaran, CEO and MD at Air Asia India.

Not just that, SpiceJet is facilitating insurance for passengers in case of COVID-19 hospitalisation - first airline to do so. Its chairman Ajay Singh has recently said that these are massively challenging times, and the worst he has ever seen during his time in the sector. In 2004, Singh acquired SpiceJet and revamped the airline.

Though airlines are trying to downplay the safety risks, they are particularly irked with the state regulations when it comes to flying. Over the past one month, state governments have been fairly inconsistent in terms of rules for flights in their respective states. For instance, West Bengal government reportedly sought a ban recently on flights to Kolkata from Delhi, Mumbai, Pune, Nagpur, Chennai, Indore, Ahmedabad and Surat till July 16. The flip-flop on flight schedules to Kolkata is detrimental for airlines like Vistara who have been using its widebody Boeing 787-9 Dreamliner so that it can carry for passengers.

ALSO READ: Domestic airlines may need $3.5 billion funding: CAPA

"If we had a situation where all state governments were behaving the same way, we would have seen an improved situation. It will take 3-4 weeks before we see state governments align to a common protocol. That will push the demand," said Sanjay Kumar, chief strategy and revenue officer at IndiGo in a webinar.

Airlines like IndiGo and Vistara have already expressed their dissatisfaction with fare bands. In a recent interaction with Business Today, IndiGo CEO Ronojoy Dutta had said that he's not able to stimulate demand by lowering traffic because of these fare bands imposed by MoCA.

Fare bands have both cap and floor rates. For instance, fares on Delhi-to-Patna flight can be priced in the band of Rs 3,000-9,000 per ticket. "That's part of the problem with this band and I hope the government takes it away in August as promised because we need a little more flexibility to play on this unidirectional traffic, and bands somewhat come in the way of that," Dutta had said.

As per some estimates, the passenger traffic in June was just 16 per cent of the corresponding month last year (12.03 million). In the first week of July, it was slightly better. In June, ratings agency ICRA said that traffic recovery in a meaningful manner is expected towards FY22, and that FY19 passenger traffic levels of 345 million are likely to be surpassed only in FY23.

Even as the airlines remain hopeful of the domestic demand pick-up, and re-opening of the international segment, the underlying factors will continue to keep the demand low at least in the short-term.

ALSO READ: Domestic air traffic to fall up to 46% in FY21 due to coronavirus pandemic: ICRA

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