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Pressure on cash flow: Airlines move to reduce costs; IndiGo announces pay cuts

IndiGo, which is India’s only cash-positive airline, reported total cash of Rs 20,068.70 crore on its books as of December 2019. The situation for other airlines is even more precarious.

Written by Pranav Mukul | New Delhi | Published: March 20, 2020 4:59:12 am
coronavirus latest update, coronavirus, indigo, coronavirus aviation sector, indigo news, indigo cancellation, indian express At an industry level, consultancy firm CAPA expects consolidated losses to be in the range of 0-600 million for the ongoing quarter, excluding Air India. (File Photo)

Given that airlines significantly depend on a continuous flow of cash to remain afloat, Indian carriers are resorting to a combination of strategies including salary cuts, temporary reduction of staff, delaying aircraft deliveries and promotional fare offers to ensure survival. This comes at a time when the aviation industry is undergoing one clampdown after another in the government’s efforts to contain the Covid-19 outbreak. However, the financial situation for airlines is only worsening with each passing day. At an industry level, consultancy firm CAPA expects consolidated losses to be in the range of $500-600 million for the ongoing quarter, excluding Air India.

India’s largest airline IndiGo on Thursday decided to cut the salaries in the range of 5 per cent to 25 per cent for its employees across all bands. In an e-mail to the airline’s staff, IndiGo’s CEO Ronojoy Dutta noted: “With the precipitous drop in revenues, the very survival of the airline industry is now at stake. We have to pay careful attention to our cash flow so that we do not run out of cash. Unfortunately, this means that we have to reduce our costs in line with the drop in revenues”.

IndiGo, which is India’s only cash-positive airline, reported total cash of Rs 20,068.70 crore on its books as of December 2019. The situation for other airlines is even more precarious.

The International Air Transport Association (IATA), in a study of airlines across the world, said that the cash position of most carriers covered less than three months of expenses. Further, even as a typical airline started 2020 with cash to cover two months of expenses, almost 80 per cent of the airlines had less than 1.5 months of cash.

“Airlines are a high fixed-cost industry that depend significantly on cash-flow, it is their life-blood. Unlike manufacturing industries, airlines can’t put their product (seats) into storage like a bar of soap and sell them later — each seat revenue lost is lost forever. Therefore anything that curtails their revenues and cash flow harms them disproportionately,” said Sanjiv Kapoor, former chief strategy and commercial officer at Vistara.

“Once things normalise, passengers should return quickly. The question is can airlines survive until then? Even if they do survive, how damaged will they be by the time normalcy returns? If they are expected to pay for their arrears and fixed costs for the period their operations were severely curtailed or grounded, they may never recover. This is why governments worldwide are prioritising airline relief funding,” Kapoor added.

Concurring with Kapoor’s views, CAPA in its research note pointed out that in the absence of serious and meaningful government intervention, such an outcome could lead to several Indian airlines shutting down operations by May or June due to a lack of cash.

The latest move by the government to restrict all international flights from landing in India Sunday onwards would translate into loss of a chunk of revenues for the airlines. According to industry sources, nearly 60-70 per cent of Air India’s revenues are from its international operations, while for private carriers it comprises less than 25 per cent of their revenues. For Air India, the move means a large inventory of wide-bodied aircraft with nowhere to fly, and raises a question of whether the airline should fly these aircraft on domestic routes at a time of weak demand, or should it bear the costs of grounding them. “If they can cover variable costs and the apportioned per-cycle maintenance costs, they should fly it. If not, ground it,” an industry official said.

CAPA pointed out that a number of further steps are imperative from the industry to tackle the situation. It said that on lines of what some European carriers have done, some Indian airlines may choose to temporarily shut operations by design on the basis of demand.

“Regardless of any fiscal concessions and support that the government may offer, most airlines will have to shrink their operations, and the more vulnerable carriers may shutdown. This will in turn impact the entire aviation value chain, resulting in rationalisation and job losses across airports, ground handling companies, MROs, travel companies, as well as hotels and tourism operators. The prospect of defaults on aircraft lease payments is also likely,” CAPA said.

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