Key Trends in Indian Aviation in FY2022: Impact of Second WaveThe 2nd COVID wave could precipitate a collapse of the sector, without intervention. The extent of the challenge is reflected in airline under-recovery of almost USD70 per pax.
- In early Jan-2021, CAPA Advisory had released a report on ‘Key Trends in Indian Aviation in FY2022’. At that time, a steady recovery in traffic was visible, particularly in the domestic sector. For the next couple of months these encouraging trends continued, while the number of new daily COVID cases declined.
- But since late Mar-2021, there has been a tragic turn of events, with cases and fatalities from the virus surging. The reimposition of formal lockdowns, as well as passenger fear, has seen traffic numbers halve in a matter of a couple of weeks, with the likelihood that subdued demand will continue for several months to come. This will deal a body blow to the industry, crushing the optimism that had been emerging in recent months.
- Most Indian airlines were already very vulnerable prior to COVID, with weak balance sheets and poor liquidity. COVID inflicted massive losses and an increasing debt burden on carriers that were structurally ill-equipped to absorb this impact. The extent of the challenge is reflected in the fact that Indian carriers under-recovered almost USD70 per passenger in FY21.
- The twin shocks of the first and second waves, occurring in the space of a little of over 12 months, will leave a long-term structural impact. Supply-side risks have increased markedly, and were they to eventuate they would likely result in an imbalance in the competitive structure of the industry, possibly creating policy and regulatory challenges.
- In light of the second wave, we have prepared this note to provide an update on the ‘Key Trends in Indian Aviation in FY2022’ report. These will be explored in more detail in the ‘CAPA Advisory India Aviation Outlook Report FY2022’, to be released on 31-May-2021, which will provide critical insights on issues across the sector.
- In the meantime, CAPA India – once again – urges the Ministry of Civil Aviation to create a new policy framework. The original National Civil Aviation Policy (NCAP) released in 2016 was designed for an environment of growth. Post-COVID there is a need for NCAP 2.0 – possibly as an interim measure – to support sectoral emergence from the crisis through the stages of survival, stabilisation, recovery and eventually expansion. In line with the Honourable Prime Minister’s vision, this is the time to take decisions and pursue reforms that will deliver a quantum leap for the sector and the national economy.
Impact of the second wave on key trends for Indian aviation in FY2022
KEY TRENDS FOR FY2022 RELEASED IN JAN-2021 UPDATE AS OF MAY-2021 1 Consolidation is inevitable (as CAPA India has stated since May-2020) and will be strategic in nature. It could result in a 2-3 airline system in the near to medium term. The second wave is likely to accelerate the process of consolidation, and to an even greater strategic level. 2 After almost 30 years of deregulation a largely market-driven sector will finally emerge from 2021, with long term strategic implications for consumers, competition and industry structure. The Government of India’s commitment to privatisation remains. The government’s commitment to the privatisation of Air India and airports is laudable. However, the chances of a successful divestment of Air India may be less certain. The Government would need to at least have a Plan B rea 3 The structure of competition may change in the near to medium term, possibly resulting in a two-horse race in both the airline and airport sectors. We continue to believe that the structure of the industry will change. Supply-side risks have increased sharply as a result of the second wave. If realised, this will create a strategic dilemma for policy markers and regulators. 4 Demand recovery remains uncertain, especially international traffic. Long haul traffic in particular is likely to take some time to repair. Demand uncertainty has been exacerbated by the second wave. Despite a likely washout for much of 1HFY2022, domestic airline traffic for the full year will nevertheless be higher than the approximately 53 million passengers in FY2021. However, the impact will be more pronounced in the international sector which will be seriously impaired by travel bans and advisories announced by several countries on outbound Indian travellers. And it will take significant time to restore the confidence of inbound tourist and business travellers in India as a destination. Pre-COVID traffic is only expected to be restored by FY2024. In FY2021, of the approximately 700 aircraft in the Indian airline fleet, around 300-350 aircraft (200-250 domestic and 100 international) were surplus to requirements. In 1HFY2022 there will continue to be the equivalent of at least 250-300 aircraft grounded. 5 FY22 is expected to be another year of large losses for the entire industry, but especially airlines The entire industry will report serious losses in FY2022, similar in scale to FY2021, with a serious downside risk in the event of a protracted second wave, or the emergence of a third wave. Many operators will struggle to recover from two consecutive years of such massive losses. 6 Lenders and investors will remain wary of the sector (especially airlines) unless the government intervenes in the form of sector-specific policy measures The severity and impact of the second wave will virtually close the door for most aviation businesses in terms of access to lenders, in the absence of government intervention, which is unlikely. 7 The government may be tempted to maintain price floors and caps, at least for the first half of 2021 There is no scope for lifting fare caps and floors in the current environment. They will almost certainly persist for at least the first half of the year, and possibly for most of FY2022. Most of the industry may not be prepared to face market pricing and would likely prefer price regulation to continue. 8 A protectionist bilateral regime is expected to persist as a near-term policy The current ‘bubble arrangements’ are likely to continue for at least the next six months and well into the second half. As and when regular scheduled operations resume, it appears more likely that the government may seek to renegotiate bilateral air service agreements to limit the share and growth of sixth freedom carriers. This may lead to a new international aviation strategy. 9 Air cargo has performed well in FY2021 but designing new businesses on the expectation that this will continue may be risky The strength of cargo volumes has cushioned some of the impact for the industry. The second wave will limit domestic and international passenger belly capacity, which will be positive for cargo yields and freighter operators. IndiGo will induct freighter aircraft into its fleet, and possibly form an alliance with a global integrator. SpiceJet may hive-off its cargo division and use this as a vehicle to raise capital. 10 IndiGo will emerge from COVID significantly stronger relative to the competition, largely due to its very strong balance sheet In light of the second wave the likelihood of IndiGo emerging significantly stronger than its competitors has increased. Nevertheless, despite being better placed to withstand the latest downturn in traffic, IndiGo will also feel a very significant impact.
For detailed strategic insights on issues across the sector, order your copy of the ‘CAPA Advisory India Aviation Outlook Report FY2022’, to be released on 31-May-2021.
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