|
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. |