09 June 2020 12:16:06 IST

Bailout vs instant monetary injection: What ailing airlines really need

The aviation sector needs instant liquidity relief to survive the crisis caused by the Covid-19 pandemic

Nearly two months after India faced a nationwide lockdown, air travel started again, from May 25.

The aviation industry has been one of the worst affected sectors during Covid-19. As per a report by IATA, the global industry will lose $252 billion in 2020. Air passenger volumes will decline by 50 per cent, and recovery to the 2019 levels is expected to happen only by 2023. The domestic revenue passenger kilometres (RPKs) will likely fall by 40 per cent, and the international RPKs will decline by 60 per cent. As per reports, the Asia Pacific region will witness the largest fall in revenues.

The Indian aviation market is the third largest in the world. More than 2.93 million jobs in the aviation sector are at a risk. Airline companies in India were already facing problems because of high fuel prices and the volatile rupee-dollar exchange rate. Apart from the macro issues, a few airlines like Indigo and GoAir had faced challenges due to issues arising out of Pratt and Whitney PW1100-G engines. The nationwide lockdown exacerbated the situation for a sector already facing headwinds. Most airline companies are cash-drained as revenues are virtually nil because of the lockdown exceeding more than 60 days.

The sector, already surviving on wafer-thin margins, stands crippled and is expected to fare worse as we head deeper into the Covid crisis. The fixed, semi-fixed and salary costs are mounting, lease rentals are pending, and the liquidity position of the airlines has deteriorated. As per the Centre for Aviation, the Indian aviation sector is expected to incur a loss of $3.3-$3.6 billion in the June quarter of 2020 and at least a couple of airlines may file for bankruptcy.

Measures only for the long term

In March, Finance Minister Nirmala Sitharaman had announced bailout packages for the Civil Aviation industry. As part of the measures, the government aims to ease restrictions on the utilisation of Indian airspace. Currently, aircraft take longer routes as only 60 per cent of airspace is freely available. The longer flying time burns more fuel and leads to long journeys for passengers. This move will benefit the industry by ₹1,000 crore per annum.

The government proposes more world-class airports through the public-private partnership (PPP) model. Investment by private players in 12 airports in the first and second rounds is expected to be around ₹13,000 crore. Another six airports will be put up for the third round of bidding.

The third measure announced by the Finance Minister was to have a rationalised tax regime for an MRO (maintenance, repair and overhaul) ecosystem. Most Indian airline companies send their planes abroad for component repair and aircraft maintenance, which increases the cost of the airline companies. This measure aims to encourage major engine manufacturers in the world to set up repair shops in India. It also aims to benefit both Defence and civil MRO by bringing down maintenance costs.

Though the announced measures are good from the long-term perspective and may help create a sustainable aviation ecosystem, in the current scenario, it seems like a mere rearranging of the deck chairs on the Titanic after its iceberg impact, while the water continues to gush in. As per reports, countries like Australia, New Zealand and Singapore have announced relief packages of $460 million, $360 million and $82 million respectively. In the US, the Trump administration has agreed to a bailout of $25 billion for its major airlines.

Liquidity injection

The ailing Indian airline companies require instant relief. According to ICRA, liquidity injection is required as the airline companies are suffering a loss of ₹75-90 crore on a daily basis. For any airline to be profitable with a fleet consisting of Airbus A320 or similar aircraft, it is necessary to fly the entire fleet, with no aircraft grounded, for approximately 11 hours a day with a low turnaround time of 30-45 minutes and a passenger load factor (PLF) of 65-67 per cent.

Now, due to social distancing and other hygiene norms, around 40 per cent of the fleet will be grounded, one-third of the seats will be vacant, turnaround time is expected to be more and aircraft will fly for around eight hours. This will lead to the collapse of airlines. The break-even ticket prices in this scenario would be sky-high. The Civil Aviation Ministry has issued caps on airfares, anticipating a sharp surge in fares. The times ahead will not be easy for the aviation industry.

Ficci has urged the Indian government to provide immediate cash support to the Indian carriers to pay salaries for the period of the government-ordered grounding, and is seeking government-backed credit lines or loans to help airlines get back in the air. The aim should also be to reduce their cost so that it is not passed on to the customers in the form of high airfares.

Initially, after the lockdown ends, people will be afraid to travel, conferences will be online and tourism will be disrupted. Though fuel prices are low, airline companies will benefit only if the Central and the State governments reduce tax on the ATF (aviation turbine fuel). The landing, parking and navigational charges should be waived for some time. A moratorium for the next 12 months on all interest on the principal amount of loans is required. Also, taxes on import and movement of spare parts should be removed.

These measures will help airline companies remain afloat and not face an existential crisis in the post-lockdown environment. Bailing out the aviation sector should be the government’s priority as it is a vital sector and supports several critical sectors of the economy. A healthy aviation sector will ensure a steady recovery in the economy.

(Mohak Malhotra is a Flame Scholars Programme Student for 2019-20; Barun Kumar Thakur is Assistant Professor, Department of Economics, Flame University, Pune)