It’s been five months since domestic air travel has resumed, and yet, the aviation industry is still to fully emerge from the shadow of the pandemic. Only 50% of daily flights are operational, while daily passenger traffic hovers around 40% of what it used to be a year ago, according to various industry estimates. Also, for international air travel, the numbers are woefully low, which at present is regulated by repatriation flights and country-specific air routes. Clearly, Indian aviation continues to fly through heavy turbulence as the late surge in Covid-19 cases in the country comes as a strong headwind to the sector’s recovery.

Given the situation, airlines have axed jobs and furloughed employees, while some airline failures and consolidation aren’t being ruled out. This, even as the Indian government provides indirect help to the sector with so-called “protectionist” policies. “In an industry where profitability is always a challenge—even in normal times unless both oil price and exchange rates are favourable—airlines are continuing to bleed,” says Sanjiv Kapoor, the former chief operations officer of SpiceJet, and former chief strategy and commercial officer at Vistara. “Any positive contribution from reduced operations is insufficient to cover the fixed costs.”

IndiGo—the biggest airline in the country—reported a staggering loss of ₹2,844.3 crore in the April to June period, while its nearest rival SpiceJet reported a loss of ₹593.4 crore in the same quarter. Both IndiGo and SpiceJet had reported profits of ₹1,203.1 crore and ₹261.7 crore, respectively, in the corresponding period last year. Flight operations were suspended for the most part of the April to June quarter; domestic operations resumed only partially on May 25. “The weak demand thereafter was a reminder of the significant problems that this pandemic has resulted in,” said Ajay Singh, chairman and managing director, SpiceJet, in an earnings statement in mid September.

At present, only very essential air travel is happening. “A lot of the tickets being bought are for one-way journeys—either people returning home or heading back to the bigger cities,” says Vinamra Longani, head of operations for Sarin & Co., an Indian law firm specialising in aircraft leasing and finance.

Longani adds that because train services are yet to resume properly, a chunk of air traffic is composed of immigrant labour. “Business and factory owners are paying for immigrant labour to return via flights,” he says. “There are flights out of Bihar to cities like Delhi and Bengaluru which are packed because of this.” The International Air Transport Association (IATA) has warned that the global airline industry will burn through $77 billion in cash during the second half of 2020—almost $13 billion a month or $300,000 per minute, despite restarting operations. It added that the slow recovery in air travel would see the airline industry burn through cash at an average rate of $5 billion to $6 billion per month in 2021.

Also at stake are 4.8 million jobs in the aviation sector, globally. “Because each aviation job supports many more in the broader economy, the global impact is 46 million potential job losses and $1.8 trillion of economic activity at risk,” read an IATA statement in October, while reaffirming that government support was the need of the hour.

In India, IndiGo—which still has the strongest balance sheet—reduced its employee costs by 17.5% in the June quarter, as compared to the preceding one. The airline’s management has stated that it would end the current fiscal year with about 30% lower employee costs from the pre-Covid levels of FY20.

Invisible Hand

According to IATA, governments around the world have provided approximately $160 billion in support, including direct aid, wage subsidies, corporate tax relief, and specific industry tax relief, such as fuel taxes. In India, too, the aviation industry has requested for similar measures. “The government has made it clear that there will be no direct intervention, and the taxpayer cannot bail out firms which have deep solvency risks, says Kapil Kaul, CEO and director, CAPA South Asia, an aviation research, advisory, and consultancy firm.

But the government has supported the industry, albeit indirectly. It has capped fares and capacity and has created a somewhat level playing field for both, the cash-rich and cash-strapped airlines. “Every airline is assured of a certain amount of money for a seat which isn’t good for the consumer,” says an aviation industry insider. After all, Indian consumers are used to discounted seats offered by budget airlines, such as IndiGo—a practice that had given the aviation sector a fillip in the country.

“If there weren’t any capacity and fare caps, IndiGo would have flown its entire fleet and all other airlines would have gone bankrupt in a week’s time,” adds the industry insider. Yet, even with a 60% cap on capacity and subdued demand for air travel, IndiGo, given its sheer size, has been able to grow its market share by about 10 percentage points to 59.4% in August, as compared to 48.1% at the end of the March quarter. “What these caps have done is, it gave some breathing room to airlines that are cash poor,” says Longani.

Consider SpiceJet. On the back of its first quarter losses, the airline company’s net worth has fallen further—from a negative of ₹1,579 crore in FY20 to a negative of ₹2,170 crore as of June 2020. Such a situation, according to the company’s auditor, S.R. Batliboi & Associates, “indicates the existence of a material uncertainty that may cast significant doubt about the company’s ability to continue as a going concern.”

That said, SpiceJet recently announced the launch of new international flights from Mumbai and New Delhi to London’s Heathrow airport. This was thanks to the government’s air travel arrangements (called air bubble) with the U.K., which only allows passenger traffic from origin to destination. Through such agreements, sixth freedom flights— which allow international airlines to carry passengers through their home base (e.g., an Emirates flight from Mumbai to London via Dubai)—are suspended. “SpiceJet going to London is free publicity; everybody has been talking about it. It’s a positive buzz for an airline that is struggling to survive,” adds Longani. In August, another Indian airline, Vistara, began operations to London’s Heathrow from New Delhi.

A Good Move?

But some in the aviation industry argue that the air bubble policy is a “protectionist” measure, whereby the government has ensured that Indian airlines stand to benefit by way of non-stop international flights. Although a temporary measure, “it serves as protection from sixth freedom carriers”, CAPA’s Kaul points out. However, Kapoor strikes a note of caution. He argues that these air bubble flights are operating half-empty; hence, there are doubts whether the airlines would be able to recover the total costs on the basis of this.

A more compelling worry for Kaul is that India seems to be the only place where airlines which are technically bankrupt go for expansion. In his opinion, the government should initiate reforms that restrict airlines with no cash and reserve funding to operate and expand. “There is significant, and in some cases, extreme stress in the aviation sector,” says Kaul. “We need to know the depth of this stress and how it will impact long-term growth and competitiveness.”

The jury is still out on the way the government has gone about opening up air travel in the country, and whether the positives outweigh the negatives is something time will tell. But the need of the hour is clear. “Any action the government can take to increase the feeling of safety when flying, as well as reduce often complicated and changing quarantine requirements that vary from state to state, will be very positive,” says Kapoor.

(This article appeared in Fortune India's November, 2020 issue)

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