Global aviation is shutting down because of the Coronavirus outbreak and travel restrictions designed to contain it. According to CAPA Centre for Aviation, a consultancy, most airlines in the world will be bankrupt by the end of May unless governments intervene. “Demand is drying up in ways that are completely unprecedented,” the report added.
This isn’t the first time global aviation has hit a crisis. In this century, aviation was severely affected due to the 9/11 attack, SARS outbreak, as well as the Swine flu epidemic. However, the Corona pandemic has wreaked havoc at an unprecedented scale.
The virus can be easily spread due to just one infected victim. Further, it can take up to 14 days for it to start showing symptoms. Hence, even an infected person won’t have any clue and could actively transfer the virus to many others around them. Due to the inherent nature of the virus, countries are actively taking quarantine measures and sealing of their borders.
The virus that originated in Wuhan, China, has now spread to every corner of the world. At the time of posting, Italy is the new epicentre with rapidly rising cases. While corporates are shifting their workforce to a “work from home” model, the aviation industry is the most hit. With borders blocked off and the rising fear of the spread, people are avoiding air travel.
Why are airlines expected to go bankrupt within a short period?
- Firstly, there’s no passenger demand. This is a basic requirement of any mode of transportation. India has completely blocked access for foreign nationals. For domestic travel, people are completely avoiding trips. Even companies have drastically cut corporate travel and all meetings are being held online. Unless very necessary, nobody wants to fly. Numerous flights have been completely quarantined because an affected victim was onboard. When there’s no demand to fly, who will the airlines fly?
- Low passenger demand means airlines are forced to cancel their scheduled flights. With lower demand, they can only operate a few flights, meaning efficiency comes down. Take IndiGo’s example. It has more than 250 aircraft in service and flies to more than 60 destinations in India. Instead of operating x number of flights from a destination, it now operates y. But, the staff required is the same. Ultimately providing lower efficiency and higher operational cost per flight.
- Obviously, the two factors above translate to lower revenues. Passengers who had booked flights in this period have either cancelled their plan or had it rescheduled to a further date, hoping the pandemic will end in the coming months. Adding to this, the airlines are barely getting new bookings. Keep in mind, rescheduling is also a loss-making option because the originally booked seat flies empty while also occupying space for another seat in the future. IATA, a global airline association, estimated a revenue loss of US$ 113 billion based on the current trajectory of the virus spread.
- The airlines are still officially in business and have thousands of employees ranging from pilots to ground handlers. They are available for duty, but there’s no work to complete. Aviation professionals are niche and have been trained for years to do their job perfectly. They can’t just shift out in the interim period and work other jobs. How will the airline look after their staff when cash flow is diminishing quickly? Behemoth airlines like Delta, American, and Virgin have asked their staff to take short-term unpaid leaves. Companies don’t have any other option.
- This is the most important point: assets are becoming a liability. Aircraft is an asset only when it flies. The moment it’s parked, it becomes a liability. A parked plane incurs maintenance cost, parking charges, and lease rental. The maintenance includes preparing the aircraft for storage and ensuring it doesn’t accumulate too much dust (looking after crucial equipment). Every airport levies parking charges and they’re exponentially higher at airports like Mumbai and Delhi.
- Leased aircraft are the biggest concern. Whether the aircraft flies or not, the airline has to pay the rental fee. For a Boeing 737 or Airbus A320, it can range anywhere from US$ 200K – 300K (INR 1.5 – 2.2 crore) each month. These figures can vary based on aircraft age, negotiations, and multiple other factors. But the point is, each aircraft is incurring a huge bill and generating zero revenue in return. A majority of planes in India are leased (wet or dry) from capital companies like GECAS, Avolon, AerCap, and more.
- With every passing day, these aircraft are also ageing. Modern airlines are very particular about inducting younger planes because they need less maintenance and offer higher efficiency. Even though the fuselage isn’t undergoing stress, the plane is adding age on-paper. If an airline owns a piece of equipment, its resale value is consistently dropping. It’s like the industry has been suddenly paused and kept on short-term hold.
- It’s not just the airlines who are suffering. Airports are also in deep trouble because they make money by operating maximum flights. If the airlines don’t fly, how will passengers use the airport’s facilities? Recently, Indian airport operators suggested levying a “Corona Recovery Fee” to cover up the cost of screening, hand sanitisers, and masks. Additionally, airport retailers and duty-free shopping are critical for an airport’s revenue.
These are just some general pointers that apply to every airline worldwide. This includes a super-carrier like Emirates, a full-service carrier like Vistara, a low-cost carrier like IndiGo, and a regional carrier like Star Air. However, a few airlines are more vulnerable than the rest.
These airlines include those who’ve amassed massive loans for operating with a long-term perspective. Last year, Jet Airways shut down because it was consistently loss-making and ran out of money that was lent to it long back. In today’s scenario, airlines will burn through their loans and default on payments.
Indian airline Spicejet has just INR 93 crore in cash (based on their latest stock exchange filing). Further, its negative net worth is INR 850 crore. On a normal day, the airline had load factors of more than 90% and yet couldn’t earn a penny. IndiGo confirmed its load has dropped by 15% due to the crisis but that figure is far from reality. Based on my practical experience, the figure is at least triple that. How will an endangered airline like Spicejet make it past the crisis? Norwegian Airlines is another example that could crash land at any moment.
IndiGo has more than INR 18,000 crore in cash. It’s quite healthy to get past the crisis, but it could massively hurt their future ambitions of expanding international and asserting supremacy in the market. GoAir is a private company and often considered an underdog of the market who takes everything slowly and isn’t as aggressive as the others. Vistara and AirAsia have healthy backing from parents like the Tata Group, AirAsia Bhd, and SIA. Lastly, Air India has Indian taxpayers.
How can we prevent the worst from happening?
- Every airline today is looking up to its respective government for relief. American airlines are seeking government assistance of more than US$ 50 billion, including a mix of direct aid and loan guarantees. While airlines in India haven’t asked for direct monetary help, they’ve urged MoCA (Ministry of Civil Aviation) to relax taxation of fuel and other miscellaneous charges.
- In response, MoCA has included aviation fuel in the GST (Goods and Service Tax) regime. Individual states also levy a further charge which has asked to be removed. Instead of revising fuel prices every month, they’ll now be done every 15 weeks.
- However, these measures are just the tip of the iceberg. In the coming days, the government will have to provide a line-of-credit via state-run organisations like Indian Oil, Hindustan Petroleum, Bharat Petroleum, Airport Authorities of India, and more.
- Standard aviation rules will have to be relaxed because the world is operating in unchartered waters. The infamous “use it or lose it” policy needs to go. It mandates an airline to operate flights irrespective of load on a route to keep it. If the airline temporarily stops operating active flights, it’ll lose the slot. Airlines around the world are operating “ghost” flights or empty planes to maintain their ownership over the sector.
- Another policy is the “Route Dispersal Guideline” that mentions a few regions of India like North East, Jammu & Kashmir, Leh, Uttarakhand or Himachal Pradesh. An airline has to operate a particular number of flights based on its equipment strength. With reducing loads, these tier 2 and tier 3 airports barely have any demand left and are forcing airlines to fly near-empty planes.
- Why should governments take all the brunt? During a humanitarian crisis like this, aircraft lessors too can lend a hand. If we’re expecting public organisations to extend a line-of-credit, the same can be done by the lessors. Or, waive-off rental for unflown aircraft. The industry needs to stick together and work around a solution. Today if the lessors don’t extend a helping hand, they may lose a long-term customer over nothing. Do you prefer a few months of instalments or years?
- Airlines are already recognising that operating flights, as usual, is of no use and have announced cut-backs accordingly. European budget carrier Ryanair said it expects to reduce its seat capacity by up to 80% for April and May. British Airways has announced a capacity cut of 75%. United says it will cut 50% of supply and American carriers are also preparing for a complete grounding if the situation deteriorates. Even a supercarrier like Emirates and has grounded more than 20 of its A380 Superjumbo jets.
- Hundreds if not thousands of planes are now grounded worldwide. These planes could be used for transporting medical equipment, basic necessities, and relief material from one city to the other. It’s time for the world to come together and help in as many ways as possible. There are multiple reports of goods shortage in Italy. On the other side of the world, China is constantly churning out new products that help save a life.
- Corporates splurge billions on advertising via cricket matches, concerts, shows, and championships. None of these events will be materializing for months to come. Even if a small part of their marketing budget is shifted to fight Coronavirus, humanity will come a long way forward. If you want, stick your logo all over the aircraft. I’m sure a life matters more than an aluminium tube with wings.
Millions of jobs are at stake. Rather than trying to mint a few bucks right now, it’s time for the world to put a full stop on ease of flying. One month of lost revenue is still better than no future. These are testing times for the aviation industry. The industry has survived two world wars, multiple epidemics, a series of terrorist attacks, and much more. But nothing could deter it. Coronavirus is another challenge that the industry will conquer. Albeit, with some casualties.