The Indian aviation story finds itself headed towards a hard landing. But that is stating the obvious.

Yet, that is not quite the whole story. Even prior to the pandemic, airlines were flying without fundamentals in place. This was glossed over only because of the promise of significant growth for many years to come. Now with that promise gone, for the time being, a very different picture has emerged.

As it stands today, India’s airlines are collectively sitting on 650-odd aircraft, of which the majority are on lease. This means there is a huge monthly cash-outflow associated with these aircraft. The avenues to deploy these aircraft in profitable routes are few, and given the brittle balance sheets and a banking sector that is totally averse to aviation, credit is nearly absent.

An airline with a monopoly market share of 54 per cent is also the airline best positioned to weather the storm, despite burning through significant cash each day.

A focus on the balance sheet in the past and a focus on trust and credibility have helped while other airlines have been found wanting and are reliant on the parent company backing them or other non-standard avenues to signal some semblance of liquidity — liquidity that may or may not come.

As far as cash flow goes, the yields are being held up by government-mandated price-floors. Even so, occupancy factors are far too low and several airlines find themselves flying flights that generate negative cash flow. This means the airlines burn cash each time the aircraft takes off while the better option ironically is not to mount the flight at all. At current demand forecasts, only about 40 per cent of the fleet is required and the situation is likely to get worse before it gets better.

Ancillary revenue streams are also fast drying up with the exception of cargo where a supply-demand imbalance has kept yields high.

The airlines are also battling on another front and have lost badly in the process. With refund claims mounting, the court had to intervene to force the carriers to pay up. The cash situation shows no signs of letting up; asset-light balance sheets indicate limited assets that can be collateralised or leveraged. Lenders are only lending in the hope that earlier loans don’t go bad.

The airlines, on their part, are cognisant of the cash crunch and are exploring avenues to raise cash. The board of Indigo recently approved a qualified institutional placement for up to ₹3,000 crore while GoFirst (formerly GoAir) is proceeding with an IPO hoping to raise around ₹3,600 crore in what is perhaps the worst time for airlines.

The Tata-owned Vistara and AirAsia have tempered growth plans. In 2020, Vistara saw equity infusions of $65 million and both the airlines are likely to require additional capital infusions. SpiceJet expects to leverage its cargo division and is using other avenues such as merchandise sales to generate cash flow. Amidst all this, Air India continues to wait for a potential suitor while sitting on more than a billion dollars of debt.

All this while international skies continue to be closed, limiting avenues for natural forex inflows. Domestic traffic now only comprises emergency and unavoidable travel while airports are busy with their expansion plans which will obviously lead to rising costs in the near future.

Air traffic has regressed to levels earlier seen in September 2020 which were already significantly depressed. Airlines were counting on a busy summer to shore up some liquidity but now will have to wait until the Diwali season in November to see some semblance of cash flow, assuming that by then a large number of passengers would have been vaccinated for Covid-19.

What is alarming is that some airlines are down to cash balances that can be measured in days. Add to it a scenario that indicates it will take at least one more year before domestic traffic returns to levels that will help cover only the cost of capital while international traffic is not forecast to return to stable levels before 2024.

With the GDP forecast to fall by 2–3 percentage points, an average daily economic loss estimated to be in the range of $200–$300 million, it is hard to construct an air-traffic scenario where 70 per cent of pre-Covid-19 traffic is expected to return in the near-term. If the airlines were built on strong fundamentals, the current situation would not have been as bleak as it is now.

The writer was previously the head of strategy for GoAir

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