Covid Crisis: Why India’s Airlines Sector Must Brace For Impact


India’s airlines have been historically challenged on many fronts. Structurally the market is not conducive to success. The reasons are multifold. They are ranging from the price of jet-fuel to the currency risk, to the extreme price-sensitive behaviour of the market where a 150 rupee increase in airfares can lead to a 5% drop in demand. 

Yet for the last decade, India’s airlines were able to navigate through the challenges. This was enabled because of the support of leasing companies and suppliers. And despite weak balance sheets, unstable management and eerily similar business strategies – the airlines continued to cruise. 

But Covid-19 has changed all of that. Aviation stakeholders across the board are witnessing a sea of red. Management exits are frequent, layoffs are a given, liquidity is thin, and revenues are weak. And across the board, aviation stakeholders are bracing for impact. 

India’s airlines: different but similar

India’s airlines often leave the industry watcher confused. And this is in no small part fuelled by how similar they are yet how different they claim to be. Seven airlines are chasing the same passenger base with similar offerings and different cost structures. Also, there is the issue of the Indian consumer – who is now anchored to a price point that makes viability a tough sell for many airlines. 

It is famously said that to be successful, a product should be exceptionally good or exceptionally cheap. Market realities have forced India’s airlines to focus on the latter. Yet the debt structures, cost of capital and cost of operations do not support that strategy. 

On a foundation of growth, the narrative was that at some point in time, the market would saturate. If not by passenger volumes then by the sheer lack of infrastructure. At that point, the supply-demand imbalance would cause airfares to rise. And airlines would taste the ever-elusive feeling of profitability. 

Yet that is now a dream deferred. Because traffic has not only fallen; it has evaporated. Current traffic levels are ones that were seen 15 years ago. And the recovery may take a few years. That for some airlines is a challenge as their forward sales and cash on hand is measured in days. And when it comes to bolstering liquidity – the avenues are few and far between. 

Why the liquidity challenge?

The roots of this liquidity challenge trace back to how the industry has evolved. The ownership, intention and financing of India’s airlines are as varied as can be. Over-reliance on debt, limited equity and negative returns on capital were glossed over, and the current situations are very telling. 

Jet Airways in operations since 1991 is now in bankruptcy court; Vistara established via a joint venture with the Singapore Airlines group in 2005 has been bleeding; Indigo a runaway success by any measures has a promoter discord and some interesting filings in their most recent annual report; SpiceJet and GoAir were recently served cash-and-carry notices; Air India – the national carrier – is up for sale, and AirAsia India a joint venture with AirAsia Berhad has bled since inception. 

The regional market has challenges to the point that they warrant a separate note in itself. 

India’s airline sector no doubt saw exponential growth from 2005 until 2019. But at the heart of this was profitless growth. As airlines competed on discounting the race to the bottom continued. This reached its zenith with “Rail-Air parity” which pointed to the fact that railway fares were at or above airfares became a talking point when they should have been a cause for alarm. But at the time, profits were supplemented by a financing mechanism which in turn was dependent on bulky aircraft orders and the availability of cheap capital. Yet this depended on growth and financing short term working capital with long-term asset sales has now come back to bite. 

The much-touted aircraft orders are an albatross for airlines.

Collectively India’s now has 900 firm orders for aircraft ordered directly from Boeing and Airbus. Another 40 aircraft have been ordered via aircraft lessors. However, in the current scenario, airlines will not be unable to induct the same volume of aircraft. This is a direct contradiction of contractual clauses. Mandate minimum deliveries are being pushed, and airlines cannot walk away so easily. 

A standoff is in the offing. 

If that wasn’t challenging enough, the financing method for most of the aircraft operating in India has been predominantly sale and leaseback (“SLB”). Over the last few years, SLBs became a mechanism for working capital and the SLB profit except for one airline was not used to strengthen the balance sheet. Instead, it was used for operational expenses. Now in an environment where airlines are looking to shrink towards survival, that cash-flow stream has also dried up. 

Concurrently, the aircraft financing market is experiencing its own set of challenges – including liquidity drying up; declining lease premiums; supply-demand imbalances and the inability to place aircraft. 

That’s not all. For India’s airlines, liquidity options are few and far between. Asset-light business models, multiple liens on assets, sophisticated and irrational financing structures, unstable revenue streams and declining liquidity on aircraft have aggravated the situation. India’s airlines are found wanting for cash without many avenues. And with the government taking an unequivocal stance, the only remaining options are equity infusion or bank lending. And bank lending at this point isn’t looking very promising. Neither is the appetite of most owners for equity infusions. Rapid descent is likely to ensue for some airlines.

Stakeholders are best advised to brace for impact

Collectively, India’s airlines stand to lose between USD 3.5 billion – USD 4 billion in 2020. Arguably 500mn dollar spread is not even a forecast, but it is the only one that holds in the current market. As of this writing, unpaid dues and bills are mounting for stressed airlines; the revenue streams are weak at best, and the bleeding continues. 

The airlines that make it through will have to shrink their way to success while also ensuring adequate liquidity that takes them through for at least 18 months. 

Notwithstanding significant capital infusions or comprehensive payment holidays, the failure of one or more airlines is imminent. An overall market correction is in the offing. Stakeholders are best advised to brace for impact.