By – Ramesh Vaidyanathan & Mansi Singh
Covid-19 has affected more than 200 countries with more than 100,000 deaths across the world. The pandemic has dealt a crippling blow to the aviation industry, triggering flight cancellations, grounding of aircraft, travel bans and border closures. It is estimated that around 8500 passenger aircraft have been grounded, which account for 1/3 of the total passenger fleet around the world.
It is presently estimated that Covid-19 will lead to losses of approximately USD 90 billion to USD 118 billion in gross operating revenue of airlines in the first half of 2020 with a total of 411 to 535 million passenger reduction in the same period.
Covid-19 and Indian aviation: Straw that broke the ailing camel’s back
Despite riding a high growth trajectory, aviation industry in India was already witnessing turbulence prior to Covid-19. Apart from the closure of Jet Airways last year, the sector had experienced several other operational challenges during the year including the temporary closure of Pakistani airspace that impacted westbound international operations, the grounding and suspension of deliveries of MAX aircraft and continuing issues with Pratt & Whitney engines on NEO aircraft.
The pandemic and the following lockdown have grounded the entire passenger aviation sector in India that accounts for more than USD 70 billion to the national GDP.Covid-19 cases in India have crossed the 10,000 mark and the Indian government ordered the suspension of all air traffic from March 23 till May 3, 2020. The downfall of the airline industry is also leading to a cascading impact across the aviation value chain, particularly on MROs, ground handling companies and private airport operators. Travel and tourism contributes around 8.1% to India’s employment, nearly 42.7 million jobs. As per a KPMG report, it is expected that about 10 to 15 % of these jobs will shrink. 4 of the top 10 countries (China, Germany, US and the UK) that contribute to about 65% of foreign tourist arrivals in India feature among the top 10 countries reporting the maximum Covid-19 cases. Similarly, the top states contributing to domestic tourism are impacted. These states include Maharashtra, Kerala, UP, Rajasthan, Gujarat and Tamil Nadu.
Causes for mounting pressure
There is tremendous pressure on airlines as most of them have to pay timely lease rental to leasing companies whether or not they fly or keep these aircraft grounded. Further, payment of staff salaries and airport charges are ongoing expenses and airlines are also burdened with the refund of sold but unused tickets as a result of massive cancellations stemming from government-imposed travel restrictions.
Cost cutting is the new mantra!
With most airlines having lower than three months of liquidity, most of the airlines may struggle to even survive if the pandemic is not contained soon. As per brokerage firm Centrum Broking, some airlines are in talks with lessors to explore deferment of lease payments, which will support their near term liquidity needs. Airlines are also trimming employee salaries and laying off employees to stay afloat in these trying times. IndiGo announced salary cuts ranging from 5-20%, Go Air has implemented rotational leaves to employees without pay and Air India has suspended the contract of around 200 pilots and reduced certain staff allowances. The government’s plan to sell stake in Air India is likely to be delayed until after financial year 2021. As a result, the government will need to inject even more cash into the ailing airline to keep it afloat. Air Deccan has ceased operations until further notice and all employees have been put on sabbatical without pay.
What does the future hold?
It is ironical that the pandemic first triggered a steep reduction of oil prices, which would have ordinarily brought great cheer to the industry. In this darkest hour of the aviation industry, a financial relief package from the government in the form of interest-free loans, lower taxes, etc. will be critical for the survival of the airlines. Along with government intervention, multiple factors such as the duration and magnitude of the outbreak, containment measures, confidence of the fliers and economic conditions will determine if the aviation industry manages to revive. Even after revival, the industry may not be the same as before for a long time. There are likely to be lasting impacts on demand for air travel. With travel restrictions to curb the ongoing spread of Covid-19, people may hesitate to travel even after restrictions are lifted. Further, the economy has been so badly impacted that demand may simply not be at the level it previously was, for the foreseeable future. Moreover, as a result of the worldwide lockdowns, technology is gradually becoming a more widely used substitute instead of business travel by air.
It may be a long wait before the skies are brighter again and aviation works to bring people together – people who are not supposed to be apart (social distancing)!