India’s airlines face collapse as Modi government refuses to rescue billionaire owners

Close to 3 million jobs and more than US$11 billion in revenue could be lost in India this year because of the pandemic’s effects on aviation
Airlines suffered a total collapse in demand from March to May and need as much as US$2.5 billion just to keep flying until the end of this year

India

Bloomberg

Published: 9:47am, 1 Jul 2020

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With tiny airfares, high fuel costs and taxes on top, India’s aviation market was already one of the toughest around – but the coronavirus pandemic could be the final straw for some of the country’s airlines.

Indian carriers need as much as US$2.5 billion to keep flying, CAPA Centre for Aviation in Sydney says, and that may only last to the end of this year if they’re lucky. Airlines suffered a total collapse in demand from March 25 to late May as India banned commercial passenger flights as part of its virus lockdown.

Chaos and cancellations at India’s airports as domestic flights resume

Governments in Europe, the US and elsewhere have provided US$123 billion to support airlines through the Covid-19 crisis. But Prime Minister Narendra Modi’s administration, facing a widening fiscal deficit, has not doled out funds to individual industries or airlines backed by private businesses and, in some cases, billionaires.

The country’s airlines need significant investment or one or more will fail, said Satyendra Pandey, an independent consultant and former head of strategy at Go Airlines India. That puts them on track to follow the likes of Flybe Group in the UK, Virgin Australia Holdings and Latam Airlines Group in Chile into administration or collapse.

India’s airlines could go the way of Virgin Australia, which went into administration in April amid the pandemic. Photo: New Zealand Herald

“Airlines with weak balance sheets and inadequate collateral have survived by withholding payments to suppliers for two months and counting,” Pandey said.

The Indian aviation market was challenging enough before the pandemic as crushing fare wars and high costs took their toll. There were two major collapses in the last decade: Jet Airways India, the country’s oldest private-sector carrier, and Kingfisher Airlines, which was owned by Vijay Mallya. Air India has been limping along under a mountain of debt for years searching for a buyer.

Coronavirus could hand Singapore Airlines a bigger share of India’s aviation market

In addition to Indian states imposing levies of as much as 30 per cent on jet fuel, a weakening rupee adds to the pain. The currency has fallen nearly 10 per cent against the dollar over the past year, the weakest in Asia, which hurts Indian airlines as their costs are mostly dollar-denominated.

“We haven’t given a financial bailout package, but that doesn’t mean the government has not been helping the aviation sector,” said Pradeep Singh Kharola, the top bureaucrat in India’s aviation ministry. “The help can be in various ways.”

India’s Prime Minister Narendra Modi is seen as reluctant to bail out businesses owned by billionaires. Photo: AP

Kharola cited an announcement to open up the nation’s airspace – part of a US$277 billion government stimulus package for the economy first proposed in 2013. Another decision to reform plane-repair facilities was announced in 2016, and a plan is in the works to privatise more airports.

Without immediate government support, any cash infusion would need to come from tycoon owners, CAPA’s South Asia CEO Kapil Kaul said on Bloomberg Television. Tata Group, India’s biggest conglomerate, owns majority stakes in Vistara and AirAsia India, while Wadia Group – a family business empire – owns GoAir. Billionaires Rahul Bhatia and Rakesh Gangwal own IndiGo.

But wealthy backers do not guarantee salvation, as Jet and Kingfisher show.

Two senior bankers who approve loans to large companies, including airlines, said there’s little desire to lend to them without a government backstop, adding that there is now a big gap between carriers’ revenues and expenses. Cash flows have almost dried up, but the airlines still need to pay salaries, maintain airlines and cover outgoings, the bankers said, asking not to be identified as they were not authorised to speak publicly on the matter.

IndiGo, a unit of InterGlobe Aviation, is owned by Indian billionaires Rahul Bhatia and Rakesh Gangwal. Photo: Bloomberg

SpiceJet, Air India and Vistara had cash ratios of less than 1, the latest annual figures show, indicating there is a risk of not fulfilling current liabilities with cash and cash equivalents, according to data compiled by Bloomberg.

Close to 3 million jobs in aviation and related industries could be lost in India this year because of the pandemic, as well as more than US$11 billion in revenue, according to the International Air Transport Association. India is one of the worst-affected countries, with more than half a million confirmed virus cases and 16,475 deaths.

Even after some domestic routes reopened in late May, planes were flying only about half full in the first week back, according to data shared by the country’s aviation regulator. The fixed costs of maintaining grounded planes and meeting financial obligations to banks, oil companies, lessors and staff make it even harder for weaker carriers to stay afloat.

There is an added legal risk, too, that could run the airlines dry, with India’s top court hearing a plea to mandate carriers refund passengers whose flights were cancelled because of the lockdown. That figure that could top US$500 million, according to CAPA.

Covid will accelerate the reduction of capacity, in a number of cases by extinguishing airlines

Robert Mann, aviation consultant

Vistara, a joint venture between Tata Group and Singapore Airlines, said it is working to lower or defer operating expenditure and avoiding discretionary expenses. It also reduced staff costs to save jobs. SpiceJet said it is confident of emerging stronger after the crisis and has adequate cash flow. The listed carrier, whose market value has more than halved this year, has not cut jobs.

Representatives at IndiGo, GoAir and AirAsia India did not respond to requests for comment.

Also at stake are orders with Boeing and Airbus. IndiGo, operated by InterGlobe Aviation, is the world’s biggest customer for Airbus’s bestselling A320neo-family of jets, while GoAir also has ordered 144 of them. SpiceJet is one of the biggest buyers of Boeing’s now-grounded 737 MAX jets, with as many as 205 on order.

“The growth of airline capacity in India far outstripped demand at economic prices, placing the viability of fleet plans and entire carriers in doubt,” said Robert Mann, New York-based head of aviation consultancy R.W. Mann & Co. “Covid will accelerate the reduction of capacity, in a number of cases by extinguishing airlines.”

This article appeared in the South China Morning Post print edition as: Airlines risk ruin in perfect storm without bailouts

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