The lockdown restrictions have been eased, albeit in a staggered manner, allowing individuals to get back to work. However, few of the industries, sectors, and individuals will see a prolonged impact due to temporary change in customer behaviour and consumption patterns. Travel and hospitality being the worst impacted sectors, the authors in the present piece have analysed the impact of the ongoing pandemic on the airlines business.

As a precautionary measure, Director General of Civil Aviation banned all international commercial flights to land in India w.e.f. 22.03.2020 followed by the nationwide lockdown grounding the domestic flights as well. Therefore, except a few cargo and special flights, the majority of the aircrafts were grounded leading virtually to zero cash flows for the airlines during this period. To pertinently note, even before the lockdown and restrictions, the demand for air travel started to plummet, with airlines reporting a high double-digit drop in load factor and even cancellation & consolidation of a few flights. 

Air travel in India has seen rapid growth in the last decade with domestic passenger traffic registering a Compounded Annual Growth Rate (CAGR) of 13.53% during 2008-09 to 2018- 19. The growth in demand at 13.59 % (CAGR) for domestic travel has outpaced the capacity extension at 10.24% (CAGR) during the same period. To elucidate, the capacity here is determined by multiplying the number of seats available and total number of kilometres those seats were flown which is known as the Available Seat Kilometre (ASK) whereas the demand is determined by the total number of passengers multiplied by total distance flown, Revenue passenger Kilometre (RPK) as is commonly known in the industry.

The profitability for airlines is directly proportional to Passenger Load Factor (PLF) which is a measure of the occupancy rate of an aircraft. It is measured as:

Load Factor(PLF) =   Number of passengers carried x Distance (RPK)  x 100 %                  Number of seats Available x Distance (ASK)

Typically, the airline operates on thin margins and requires higher PLF to remain profitable. Most of the aircrafts are not owned by the airlines and are only on lease and lease payments forms usually around half of the fixed cost for airlines. All the aircrafts except freighters and a few passenger aircraft carrying cargo had been grounded making the airlines to reach out to their lessors for waivers and relaxations. On the other hand, due to this abrupt disruption, the lessors are aware that in case of termination of the lease by the airlines it would not be easy to lease the aircrafts again given the sharp slump in demand. Legally, the lease payments are governed by the Lease agreements and relaxations, if any, would only be governed by the same. Considering the fact that it is not the first time the airlines are in the eyes of the storm, many of them are expected have included the force majeure clauses in their lease agreements.

The Domestic aviation market is already very volatile given the higher tax incidence and fluctuation in oil prices. The current crisis could eventually lead many of our highly leveraged airlines into bankruptcy in the absence of external support and capital infusion. Air India, the For Sale beleaguered national carrier’s financial position would further deteriorate and the government may find it difficult to find a potential investor. However, given the government’s backing, the airline is expected to tide over yet another crisis.

Going ahead, a sudden surge in demand is expected when the air travel resumes as people who are stranded will struggle to get back their places but the same will be short-lived. On the capacity side, until a vaccine is developed, social distancing measures are here to stay for a long time and airlines would have to adjust accordingly by making sure adequate gaps in between the passengers and minimum interaction.

While the underlying want of humans to travel remains the same, but the demand for air travel is expected to remain induced by a change in consumer behaviour and consumption patterns. The uncertainty around job security and fear of recession would cause a dent in tourism travel which forms a large chunk of airlines revenue. The business travel demand is also perceived to remain subdued as it is argued that the crisis has led the businesses to embrace the technology and video-conferencing and digital meetings will eliminate the need to travel. But in view of the authors, digital meetings do not allow personal rapport as in the case of face to face meetings. Therefore, the digital meetings are not expected to take away a larger pie of business travel but in the short to medium term, the cash-starved organisations would also cut down of the expenses and avoid travel wherever possible.

The inefficient airlines which require high PLF to break-even will find it difficult to tide through the crisis as the social distancing requirement coupled with a slump in demand would limit the Load Factor making it unviable for inefficient airlines. Considering the higher price sensitivity of the consumers, the price rise may further aggravate the problem.

Thus, the revenues for the airlines are expected to remain muted for another few months but their fixed cost remains the same. Fixed Cost per month for Indigo, GoAir and Spicejet is around Rs. 1480 crores, Rs. 178 crores and Rs. 490 crores while the cash reserves are around Rs. 9700 crores, Rs. 380 crores and Rs. 85 crores, respectively. Out of these three airlines, SpiceJet is worst placed to withstand a prolonged crisis as its cash balance is inadequate to cover its fixed costs while Indigo’s cash reserves cover fixed costs for a period of more than 6 months. Also, Indigo as recently reported, has already recorded a loss of Rs. 871 cr. during Q4 due the air travel disruption. Similarly, SpiceJet has recorded a loss of Rs. 807.1 cr. and GoAir along with losses has sent its employees on furlough.

The International Air Transport Association (IATA), an industry body, earlier estimated that globally airlines could lose upto $ 113 billion in 2020 because of the current pandemic, the actual number could be even bigger. Amongst others, USA has already announced a USD 50 billion stimulus package aimed at supporting the airlines and to avoid job losses and Singapore has announced a massive USD 13 billion stimulus for Singapore Airlines which shows the massive impact of the deadly novel coronavirus on the airlines.

In India, with zero to now little revenue, few of the airlines have already implemented organisation-wide pay cuts and are sending employees on leave without pay, which prima facie is against the government advisory to pay salaries and not to retrench the employees, but given the precarious condition, it seems to be the only way out to avoid default.

On 16.05.2020, in the fourth tranche of the Rs. 20 Lakh Crore economic stimulus package, the Finance Minister announced various structural reforms like freeing up of more airspace for civil aviation; privatization of six more airports; and making India a Maintenance, Repair and Overhaul (MRO) hub. Although these reforms will have a positive impact on the airlines & aviation sector as a whole in the long term, the package failed to address the immediate needs of the airlines. Further, the Government allowed the domestic airlines to recommence their operations from 25.05.2020. Along with, the Ministry of Civil Aviation has in general interest exercised its power under sub-section (1) of section 8B read with clause (ab) of sub-section (2) of Section 5 of the Aircraft Act, 1934 (22 of 1934) and has issued fare bands depending on the approximate duration of flights. The Government also issued Standard Operating Procedure whereby the Government has allowed commencement of 1/3^rd of operations. This will be augmented in a calibrated manner. However, the Directorate General of Civil Aviation, keeps the international flights suspended at least till 31.08.2020 except for air bubble agreement countries ex. the USA, UK, France, Germany and UAE.

Opening up of the domestic travel by the DGCA, though, definitely brings in the much-required relief for the cash-starved domestic airlines, yet with additional operational costs with respect to screening of passengers, regular disinfecting, maintaining social distancing amongst other things, and expected de-growth in demand, the approach of the individual States largely remains to be seen with respect to the protocols for incoming passengers. Mandatory quarantine of 14 days or alike imposed by different countries on international travels though in interest of public health yet it discourages people from travelling and availing airline services.

Thus, due to this unprecedented prolonged crisis, most domestic airlines are likely to require external support either in form of equity infusion by the promoters or government support in the form of moratoriums, restructuring and tax holidays amongst other measures to avoid default, job losses, and to fly past this turbulent time.

[The authors are advocates practicing in various courts and tribunals at Delhi.]