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$252 billion. That is the amount that airlines globally can lose in passenger revenues due to the COVID epidemic according to the International Air Transport Association, threatening the very survival of the industry
Aviation is among the worst-affected sectors amidst the Covid-19 crisis. Indigo, an airline that was focused on international expansion last year, pulled out of China early in February 2020. DGCA delivered a body blow to the industry when it banned all domestic passenger flights in the country till May 3rd on March 27. In today's post, we look at the state the airlines find themselves in now, the steps they plan to take to deal with the issue at hand, and try to look for a silver lining amidst the mess.
Bleeding Cash
The April-June period, traditionally one of the stronger quarters for Indian airlines, has been worsened by the crisis. The demand for passenger airlines is zero and unlikely to pick up soon. Cash reserves of most airline companies are running low and many are almost at the brink of bankruptcy. Idle planes cost a lot of money in terms of lease rental - an A320 Neo costs Rs 3 crore and a Boeing 787 costs Rs 7 crore every month.
Plugging the holes
So how are the firms trying to navigate their way through these times?
Pay cuts and layoffs have been on the rise. On April 5, regional airline Air Deccan ceased operations and sent its staff on an indefinite sabbatical without pay. Vistara sent 30% of its 4,000 employees on mandatory leave without pay between April 1 and April 14 to curb costs. Air India announced a 10% reduction in salaries for all employees. Around 200 pilots who were re-employed on contract after retirement have been relieved of their services till further notice as a cost-cutting measure.
Some leased equipment, particularly those aircraft approaching the end of their lease terms, maybe returned early to lessors. Spicejet even stopped paying 2 of its lessors which forced them to take over the leased planes from Spicejet. Indigo stopped refunds for canceled bookings on March 25th, with other airlines following suit. The airlines are holding the amounts, estimated to the tune of Rs 8000 crores, in credit shells which customers can use for booking flights for the next year. Some airlines, particularly low-cost carriers, are not even returning the advance money given by travel agents which can be as high as Rs 10 lakh.
Is there a Silver Lining?
On April 1, India’s aviation watchdog, the directorate general of civil aviation (DGCA) allowed carriers to use passenger planes to ferry cargo as part of the government’s Lifeline Udan initiative. SpiceJet operated the country’s first “cargo-on-seat” flight carrying vital health care and medical supplies on April 7th thus earning revenue on idle assets. Emirates, Qatar Airways, and Air India have already launched passenger cargo-only flights. The national carrier has been operating special cargo and evacuation flights to Europe, Israel, Japan, and China since Jan. 31.
Air cargo is booming, with demand far outstripping supply. Asset utilization of pure-play freight operators and cargo planes have been peaking with an urgent demand for medical and essential supplies. The rates on some of the routes have increased by more than 400%. The cost of jet fuel has continued to fall aiding margins.
Domestic carriers have requested the center for a relief package, a moratorium on outstanding payments for a period of 3-6 months, bringing aviation turbine fuel (ATF) under the GST regime and defer aviation-specific taxes to deal with the crisis.
When the lockdown does open, higher fares, fewer routes, empty middle seats, preflight health checks, higher baggage charges, and less free food may become common as airlines reassess their operations and look to emerge from the crisis
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About the Author: The post is written by our EZPP Partner Abhirup Roy with relevant edits from our editorial team. Abhirup is a graduate from IIM Ahmedabad and works with Zolo Stays.
Kindly correct: "banned all domestic passenger flights in the country till March 3rd on March 27"