Will aviation sector see revival in FY22?
Gradual recovery in domestic passenger traffic in FY21; hindered by the second wave of COVID-19 in Q1FY22: The Travel and Tourism sector has been the most impacted by the COVID-19 pandemic. Within this, the Indian aviation industry has weathered major headwinds given the sharp contraction in travel demand and a high-fixed cost structure. Collectively, these factors have meant that airlines have been burning a significant amount of cash on operations, thereby resorting to sharp cost-containment measures, besides raising funds. Industrys capacity and passenger growth are significantly impacted by pandemic-related lockdown/restrictions imposed on both domestic and international travel operations in end-March 2020. Post recommencement of scheduled domestic flights from May 2020 at 1/3rd of their capacities, the Ministry of Civil Aviation (MoCA) permitted a gradual increase in capacity to 80 percent from December 2020. However, this was again reduced to 50 percent of pre-COVID levels from June 1, 2021, due to the second wave of the coronavirus pandemic. Domestic passenger traffic in FY2021 stood at ~535 lakh, Y-o-Y decline of ~62 percent, in line with ICRAs estimates. It recovered on a QoQ basis during FY2021, with Q2 witnessing a sequential growth of 292 percent, Q3 at 113 percent and Q4 at 23 percent. However, domestic passenger traffic witnessed a sequential decline of ~27 percent in April 21 and ~63 percent in May 21, indicating averseness of consumers to travel due to rising infection fears. While the scheduled international operations are yet to start, MoCA has permitted international operations under Vande Bharat Mission (VBM) and Air Transport Bubbles. Under VBM, the international passenger traffic (inbound and outbound) for Indian carriers has been ~35 lakh (May 7, 2020 to May 31, 2021). In May 21, it was ~1.4 lakh, a sequential decline of ~61 percent, due to the cancellation of flights to/from India by many countries, citing the increasing coronavirus infections. Currently, both business and leisure travel has been impacted as a result of consumers fears about infections, stringent travel restrictions and quarantine norms. The former is also impacted owing to growing work-from-home trends amongst several corporates. The medium-term impact on the industry would also depend on the economic shock to the global economy. As consumer sentiments remain weak in an adverse economic environment, recovery in air travel will be gradual once the pandemic threat is allayed. The recovery in domestic passenger traffic is contingent on the following factors1) Containment of the pandemic, which is dependent on the successful vaccination programme, 2) Consumers willingness to undertake leisure travel, 3) Macroeconomic recovery and growth, which impacts consumer sentiments and ability to travel, 4) Relaxing of travel restrictions and quarantine norms, 5) Recovery in business travel. The international travel recovery is further contingent on the opening up of scheduled international operations by the GoI, the macroeconomic shock to the global economy; and travel restrictions and quarantine norms of various countries. Industry earnings to be adversely impacted in FY2022: The aviation industry is characterised by high fixed costs comprising ~35-42 percent. Thus, the sectors financial performance is likely to remain weak in the near-to-medium term amidst weak air traffic. Notwithstanding increasing vaccination drive, stringent containment measures taken to curb the rising infections continue to mar recovery prospects. Moreover, the ATF prices have increased gradually since June 2020. While until February 2021, prices were lower on a YoY basis, in March 21, April 21, May 21 and June 21, prices were higher by 3 percent, 59.8 percent, 103.4 percent, and 86.3 percent, respectively, on a YoY basis, attributed to the low base, when the prices declined Y-o-Y due to the pandemic. To ensure that the airlines do not charge excessive fares, MoCA fixed a fare band, the validity of which was extended till February 24, 2021. However, since February 2021, an increase in the fare band by 10 percent-30 percent has been allowed. This has further increased by 13 percent to 15 percent in the lower air-fare band, from June 1, 2021. This will allow airlines to partially recoup ATF prices rise and contain rising losses. Most Indian carriers credit profile is characterised by a weak liquidity position. While some have sufficient liquidity and/or financial support from a strong parent, which will help them sustain over the near term, for others, the credit metrics and liquidity profile have deteriorated. Many have already resorted to cost rationalisation measures, including salary cuts, leave-without-pay option, and employee retrenchment. Some airlines have also sought deferment in their lease rental payments, while some have resorted to sale and leaseback transactions to shore up liquidity. However, until the cash inflows improve, the airlines will require funding support to meet their expenses. In the near term, the credit profile of Indian carriers will remain stressed until their debt burden reduces through improvement in operating performance and/or by way of equity infusion. Government support can aid the sector: Recently, the Ministry of Finance included the sector under Recently, the Ministry of Finance included the sector under ECLGS 3.0 , which provides airlines access to additional funding to the extent of 40 percent of their loan outstanding or Rs. 200 crore, whichever is lower, at attractive interest rates. This will provide much-needed liquidity support to the airlines and manage their cash flows in the near term. Kinjal Shah is Vice President and Co-Group Head - Corporate Sector Ratings, ICRA Limited. Views expressed are personal