India’s Airlines and the lingering challenges

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With the vaccination campaign in full swing, aviation players are looking to the future with more or less optimism. Slowly but surely more and more people are flying and the airlines are increasing the number of flights. However, the fundamentals remain fragile and require corrective action. Otherwise, any recovery will be short-lived at best. The key to the recovery is the restoration of liquidity. On this front, airlines are adopting very different strategies. The proof of success remains to be seen.

Input costs rise

For Indian airlines, operating margins have always been quite slim. This was expertly complemented by new non-operational revenue streams which have helped tremendously. However, the pandemic has impacted most of the non-operational sectors. At the same time, the fuel and financing rates are increasing and the spread between the rupee and the dollar is constantly increasing.

Airport charges are expected to rise steadily for consumers given the economic regulatory model where consumers pay for expansion without the possibility of contribution or appeal. And add to that the overall cost of the trip, including quarantine restrictions, testing procedures, and a tendency for longer trips. Overall, airlines are faced with a situation where costs are increasing, which equates to larger exits. At the same time, cash flow is limited. This in any scenario is unsustainable.

Mitigation of input costs requires measures that are rare. Hedges, volume discounts, depreciation, non-monetary measures and structured solutions cannot be implemented due to various challenges, which leads to a straight-line cost structure. And to a point where the gains are unable to cover the cost of capital.

Arguably, the pandemic is a once in a lifetime event and has surprised several airlines. But even before, Indian airlines struggled for an adequate return on capital. The path to profitability for airlines remains hazy and at some point lethargic liquidity can push some airlines to the brink of collapse.

Sale-leasebacks – not quite what they used to be

Several Indian airlines have placed large orders for aircraft financed through the sale-leaseback mechanism. This mimics the success of Indigo with a similar strategy. Yet the same strategy is now back on the agenda as the market demands liquidity and balance sheet strength. And with the exception of one airline, the others don’t have much to show.

A leaseback flow is also a double-edged sword in that it increases capacity. The capability must then be deployed. And in today’s market, supply exceeds demand – and is only limited by capacity restrictions imposed by the government. As these are lifted, weaker airlines will suffer the consequences.

And while the market has indeed recovered, it is from a lower base. Considering where traffic levels were before the pandemic, there is a long flight path ahead. And no matter how you slice and slice the data, the levels of growth seen previously remain to be seen. This not only because of moderate consumer sentiment, but also because of job losses, macroeconomic issues and technological transitions.

Thus, airlines are faced with a double-edged sword as to whether or not to recruit additional planes. And financing in most cases is no longer profitable.

The rush to raise capital, will it bear fruit?

Most airlines are aware of this situation. All the airlines in one way or another have rushed to raise capital. The forms are varied, including through capital markets or access to additional credit (two airlines have obtained funds through the government’s emergency credit guarantee system) or even direct injections of equity. Yet it is also a fact that the response to these fundraising efforts has been mixed.

The Qualified Institutional Investments (QIP) talks remained exactly that; additional lines of credit do not even cover a fraction of the cash required; and equity injections for the airlines that need it most have proven to be insufficient. Indian airlines are heading towards a reality where all airlines will have negative net worth.
The rush to raise capital is shifting towards stock-based solutions as bankers continue to distrust aviation as a whole. Stand-alone credit risk assessments fail to produce figures that offer any semblance of comfort, as cash flows are lukewarm and volatile at best. And it doesn’t help that in the background there is the Jet Airways fiasco where lenders took straight haircuts and there is speculation about maybe two more debt restructurings or even NCLT deposits. .

This leaves the airlines in a precarious position. When it comes to liquidity, all options are on the table, including renegotiation and even additional aircraft and engine orders. Options that can help unlock cash, but are short-term in nature. Structuring and restructuring solutions are also widely debated.

In the long term, the market should experience some stability, but the short and medium term are not without challenges. Indian airlines continue to head for losses that will exceed around $ 4.3 billion in the year 2021 alone. This despite government-imposed price floors which have helped and are contributing to performance levels. But along with yields, volumes must also increase and costs must be kept down. This competition is in a while.

For airlines, global success is evidenced by margins and for Indian airlines, margins are nowhere near where they should be. Sluggish liquidity and relentless losses continue, and sooner or later it will lead to upheaval in Indian skies.

– Satyendra Pandey is the Managing Partner of Aviation Services Company AT-TV. The opinions expressed are personal.

(Edited by : Ajay Vaishnav)


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