The domestic aviation industry is likely to recover
With demand coming back and yields being strong, the basic picture is well ready for growth. Strong domestic demand continues and base case estimates call for 135-140 million domestic passengers and another 30 million international passengers to be carried into Indian airspace by 2022.
Many restrictions on aircraft have been lifted and scheduled filings show aggressive combat battles ahead. Collectively, the six largest airlines plan to increase domestic capacity expansion by 29 percent in the Summer 2020 schedule. However, this is only one part of the picture. The cash and credit curfew continues and the turbulent ride awaits – considering input costs, especially fuel, exchange rates and financing. And two other airlines enter this fiercely competitive arena – start-up and airline after bankruptcy. Fair wars, capacity wars and talent wars are inevitable. The jury concluded that all airlines can withstand the summer. Rebalancing is in the process of starting to reveal the clear winners and losers.
Market structure leaning towards Dupoli:
The epidemic laid the wrong-lines in Indian airlines. Like their global counterparts, all Indian airlines have suspended flights, reduced capacity and resumed contracts – with the sole aim of saving money. But this period has been particularly challenging for weak airlines – defined as having fragile balance sheets, no parent company backing and no alternative revenue streams. The sale of the national carrier, Air India, to the Tata Group has further changed the picture and as it stands, there are currently two full-service carriers in the Indian market, Air India and Vistara and four low-cost carriers: Indigo, SpiceJet, Gofast and Air Asia India. Entering the fray is the newly capitalized start-up (Akasa) and the seventh player – Jet 2.0, which is still trying to survive after bankruptcy. Market leader Indigo sits with a monopoly market share of more than 50 per cent, while Tata Group Airlines jointly holds 25-28 per cent domestic market share. Market structure is leaning towards dual realm. Airlines owned by Indigo and Tata are competing on the one hand and the rest on the fringes.
The basic architectural challenges continue
For Indian airlines, the basic structural challenges continue. Because of the growth opportunities, these have been overshadowed as they once were. Heavy aircraft orders and are at the forefront of the financing pack of these orders. Sell-and-leaseback continues to be a major financing strategy for many airlines, but it is a double-edged sword. This is because contract terms have minimum delivery commitments and some weak airlines take flights to unlock sales and leaseback cash flow only to execute profitable capacity. A condition that will never leave.
When it comes to credit, the market is differentiating between strong credit and weak credit. Not in the middle. Parent company backing helps, but for players whose backing is weak or non-existent (usually proven by the lack of equity infusions or failure to engage), the default risks are higher. Stand-alone balance sheets are too weak to provide any convenience to lenders. In fact, asset-light balance sheets, once advertised as management mantras, now have limited assets, either collateral or leverage. Temporary rights over this cash flow are not practicable due to cash flow uncertainty. Policy uncertainty and the upcoming capacity wars will exacerbate the situation. It is forcing lenders to limit losses by insisting on collateral. Deliberately found hostage.
Airlines in India also face a trio of fuel, FX and financing. Fuel, especially jet fuel, because it is taxed as a luxury and regulated as a commodity; FX – because the rupee-dollar spread has risen steadily without signs of stabilization; And financing because capital expenditure is high.
Rebalancing is on the horizon
Indian aviation continues to be a paradise and paradox. This is the market for contrasts. Along with the challenges there are plenty of opportunities. A market with enormous potential, but fundamental challenges; The market with a growing passenger base, however, is rapidly improving road and rail infrastructure, which will reduce demand in the coming period; And many airlines claim a similarly market-flying sea – all different. Currently, the financially strongest player in the market has the highest capacity and market share, but price sensitivity is so high that despite the monopoly market share, it cannot be translated into price force.
Of the six airlines, with 72.7 million passengers, 650 aircraft, over-reliance on the sale and leaseback financing mechanism, weak balance sheets and $ 2.5 billion in losses in the recent financial year, constrained credit and uncontrolled capacity add to the sector’s difficulties. . Something has to be given. And it is likely to happen this year. Indian Airlines ready for rebalancing
Satyendra Pandey is the Managing Partner of AT-TV, an aviation advisory firm based in India.
April 17, 2022