India’s commercial aviation sector faces a challenge far greater than its traditional nemesis of high fuel prices. Buffeted by two waves of the pandemic, it is uncertain if India’s domestic airlines can weather the third wave without significantly impacting their operations which are gradually recovering to normalcy. At the best of times, the sector operates in a highly challenging environment with heavy taxes on Aviation Turbine Fuel (ATF), spares and maintenance and a regulatory regime that hinders efficiency while adding to operating costs.
Aviation advisory firm CAPA India presents a rather grim picture in its annual outlook for the sector. In its ‘India Airline Outlook FY2022,’ it warns that massive, perennial losses have created a debt trap resulting in most airlines having very limited means of recapitalisation. Moreover, the Government of India provides no direct support and by and large closed its doors to airlines, even for restructuring purposes; lessors will soon have no option but to start applying pressure on defaulting airlines.
CAPA India has forecast consolidated losses for Indian carriers to the tune of $ 4.1bn in FY22 (similar to that in FY21). This will mean that two waves of the pandemic have delivered $8 billion in losses. Airlines worldwide face extremely high costs when their fleet is grounded, or large numbers of their aircraft are not flying due to low demand, as the expenses related to retaining pilots, training of pilots and cabin crew, maintenance of aircraft and associated infrastructure are pretty high. This causes losses to rapidly balloon, often affecting the viability of many airlines, causing them to either reduce operations or cease operating altogether.
Challenging environment
Airlines operate on razor-thin margins, and rising fuel prices will further impact Indian operators, with CAPA India expecting crude oil prices to be averaging at $ 70 per barrel in FY22. This will lead the industry into a high-cost environment, and the predatory ticket pricing tactics of Indian carriers leave them with little headroom to increase fares to improve profitability. CAPA India has called on the Government to provide immediate fiscal relief to the sector, including ATF under the GST framework and rationalisation of fuel excise back to 4%. A reduction in GST on aircraft spares will also help Indian carriers save on aircraft Maintenance Repair and Overhaul (MRO) costs.
Despite burgeoning air travel, the high operating cost environment and tough competition in the sector (amongst other reasons) have led to Kingfisher Airlines and Jet Airways falling by the wayside, resulting in liabilities worth approximately $7 billion. In addition, national carrier Air India has been put on the block, but it remains to be seen if bidders want to proceed with its acquisition in such a challenging and uncertain environment for the aviation sector, especially with the depressed market for international air travel.
Return of air travel demand vital for revival
Indian carriers will be hoping for a limited impact of the third wave of the pandemic, and a resultant recovery in air travel will be vital for a revival in their fortunes. Domestic air travel is expected to recover at a quicker pace as compared to international air travel. CAPA India has forecast domestic traffic in FY22 to increase to 80-95 million airline passengers, up from 52.5 million in FY21. This is still almost 40% lesser than 140 million domestic passengers in FY20. However, the aviation advisory firm states that keeping in mind the considerable uncertainty in the market, its guidance for FY22, based on currently available information, is for traffic towards the bottom end of the range at around 80 million domestic passengers.
The return of demand for international traffic is expected to take longer, and CAPA projects air travel here to remain in the range of 16-21 million passengers. There still remains an opportunity for carriers to deploy their longer-range and higher capacity A321s on some of these sectors. Full-service carrier Vistara will also benefit from its fleet of four Boeing 787 Dreamliners for long haul travel.
Cargo operations will continue to remain an important source of revenue for Indian carriers in FY22, with CAPA forecasting Indian airlines to achieve a 15% year-on-year increase in cargo revenue. SpiceJet remained the only Indian passenger airline with dedicated freighters in its fleet and benefited immensely from this capability by carrying the highest cargo volume in FY21. IndiGo demonstrated exceptional leadership, achieving the highest yields and revenue, followed by SpiceJet, states the CAPA report.
Fleet renewal to continue
Indian carriers will continue to induct new, more fuel-efficient aeroplanes, with an estimated 70 new planes to be inducted by GoAir, Vistara, SpiceJet, Air Asia and IndiGo. CAPA also forecasts that this sector will see the removal of over 80 older aircraft from service. “At the end of FY21, 49.3% of the narrowbody fleet consisted of re-engined Neo and MAX aircraft, is expected to increase to 60.8% by the end of FY22,” the advisory firm forecasts.
Vistara purchased 50 Airbus A320neo family jetliners, including A321neos, in 2018 and took delivery of the first A320neo (powered by CFM LEAP engines) in May. Vistara’s new A320neo aircraft have an increased 77-tonne Maximum Take-Off Weight (MTOW), affording the jetliners with higher range capability to fly longer regional international routes without payload restrictions. In addition, SpiceJet inked a Memorandum of Understanding (MoU) with Avenue Capital Group, New York, in March for sale and lease-back of 50 new planes it plans to order. Avenue as the lessor will assist with placing SpiceJet’s new aircraft portfolio, including sale and lease-back of and assumption of ownership of potentially up to 50 of these aircraft.
NB: Photos are representational.