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Wednesday, June 29, 2022

Global aviation sector expected to achieve 100% efficiency only by 2023: Expert

While the airline industry is going through a rough patch during lockdown, Mathews says the industry has to "try to reduce spending as much as possible so that you don't run out of cash".

Written by Vishnu Varma | Kochi |
Updated: May 21, 2020 1:10:38 pm
VK Mathews, a renowned expert in the civil aviation sector, said there are so many innovations that will be facilitated by technology which again is vital for the airlines to operate and survive in this environment.

For the last five months, the highly-infectious Sars-Cov-2 virus has spread it’s tentacles across the world, killing hundreds of thousands and putting global health care systems under severe strain. Billions of people are under lockdown. Naturally, with all travel plans kept in abeyance, the airline and logistics industry has been one of the prime affected sectors with airlines bleeding with each passing day and a few like Virgin Australia even declaring bankruptcy.

To make sense of the sector’s mounting losses, spoke to VK Mathews, a renowned expert in the civil aviation sector, who headed the IT division at Dubai-based Emirates for over a decade-and-a-half. He is the founder-executive chairman of IBS Software, an IT solutions company for the air transportation industry.

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Q. We are facing an extraordinary situation today. This is the first time in perhaps 50 years that the global aviation industry has come to a complete standstill. What’s your sense of the damage to the airline industry?

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A: Travel, which encompasses aviation, hospitality, tour and cruise operations, has been the hardest-hit during this crisis. Other sectors are also affected, but travel is at the forefront. Both the World Travel and Tourism Council (WTTC) and IATA normally do scenario-planning. The WTTC assumption is that travel GDP will come down by 25 per cent this year. Travel constitutes 10 per cent of the global GDP which means $1 out of every $10 is spent on travel. It’s a huge drop for the global GDP. IATA forecast is that there will be a 55 per cent drop in revenues and about 50 per cent in journeys. One view is that we will be about 25 per cent of the capacity utilisation by August and we will leave 2020 by 60 per cent of the utilisation. By the summer of 2021, we should reach 80 per cent of the utilisation. We are assuming that by next year we will have a vaccine or prevention ready. That’s the forecast for the industry.

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Q. For nearly two months in India, all major airlines have been grounded. How exactly does an airline bleed when it is grounded for such a long time? How can it hope to recover its losses?

A: Even though such crises have taken place in the past, they were not at a scale that’s globally applicable now. During SARS, we had Cathay-Pacific shutting down their operations. But nothing happened in Europe or the Americas. Typically, during a crisis like this, an airline is sitting on a huge, expensive asset pile and mostly they are either acquired by financing or they are leased. Typically, the CEOs will tell their lessers that they are not going to pay the lease amounts. So the lessers will have to negotiate with the banks for a debt moratorium. Our estimate is that in this present quarter of the financial year, the airlines would have burnt a cash reserve of $60 billion. Most airlines have a maximum of two or three months’ cash. Naturally, they will attempt to defer the cost of the aircraft. Secondly, the employee costs – quite a few airlines have furloughed them. Wherever there is employment subsidy available, they have been able to do that. Most airlines will ask for waivers, discounts and deferrals from their suppliers. They will request the banks to give them a period of moratorium. Sometimes, employees are laid off or sent on leave without pay. Sometimes, depending on which country they are operating, they will be on payroll subsidy by the government. But the most important job for them is secure funding through banks. In many countries, the banks will be given guarantees by the state. In these countries, they cannot pay money to an airline because it is a private enterprise. Sometimes, they give money by taking a stake in the airline and which most of the leading, progressive airlines would never want to have. They will declare bankruptcy but they wouldn’t want the government to sit in their boat. The number one priority for management teams is to secure the funds so that they can tide over the crisis. Of course, they will push the entire ecosystem. Wherever they have options, they are going to push back the OEMs such as Boeing and Airbus etc. They know that the airlines are in trouble. They will have to find funding from somewhere. This is a cascading problem for everybody who’s in the industry. For example, in the hotel industry, in less than 8 weeks, 83% of all world travel destinations have implemented restrictions.


Q. In a highly competitive market like the Indian airline industry where so many airlines have been struggling financially already, how do you assess the impact of the lockdown?

A: The Indian aviation market has huge potential because it is a growing market. We had double-digit growth for about 55 consecutive months. At the same time, it’s an extremely cost-sensitive market. The total collective profit of Indian civil aviation is a big zero or in the negative. If you add the profits and losses of all airlines, Indian civil aviation has never made money. That’s because it’s a price-stimulated market. They are not sitting with a load of cash. So the two months of lockdown will be very difficult for the industry. I think some of the airlines have either laid off people or sent them on leave without pay. The priorities remain the same: shore up the funding required to tide over the crisis. Try to reduce spending as much as possible so that you don’t run out of cash. This is what they have to do. Even if the flights restart, many of them will struggle to meet both ends. They would still require a huge working capital to continue to keep flying. The flights will become expensive if they have to follow Covid-19 safety mandates. What the Air India Express has done with the evacuation is absolute madness. There’s social distancing and testing happening on both sides, but inside you are sitting two inches from each other in a close, packed aircraft. They could have asked professional airlines to do the job with special instructions to carry Indian citizens on priority. All of this could have been done through other professional airlines too like Emirates, Etihad, Indigo, Go Air etc and booking could have been done through normal channels too.

Q. What does the government need to do to help the sector? Does a bailout package for struggling airlines work?

A: In my view, the government cannot do a lot. But what it can do is waive, wherever possible, the airport landing fees, flying charges and taxes on aviation turbine fuel. These measures can support the sector. The airport fees in India is one of the highest in the world. At Delhi airport, 46 per cent of all the revenue goes to the government. The most important thing is if they can allow airlines to take soft loans on good payment terms guaranteed by the government. The airlines will have cash available to help them tide over the crisis. Instead of giving free money, the airlines will have the responsibility to pay back.

Q. What sort of lessons are to be learnt from this crisis so that they are not repeated in the future?

A: It is extremely important for asset intensive enterprises to variabilise their costs. That means when the revenues are depressed, they should be able to throttle down their costs. For the airline, the problem is that they have a lot of fixed costs. If they are not flying, they are not taking the fuel or pay for the aircraft. If they are not flying, then employees will go on their minimums so that there’s no variable pay. If they really want to variabilise, they need to have a lot of technology. Another important thing is the airlines need to truly internationalise their costs. I’m operating in a high-cost area but my revenue is also coming from a low-cost area, I should keep my costs not just in Germany but elsewhere also. That’s possible now thanks to technology. They have learnt that they have very high costs. How do you variabilise and internationalise the costs? How do you quickly respond to market conditions on which you have no control? For example, when we restart, there will be a lot of jurisdictional safety mandates in cross-border travel. The receiving country may stipulate on temperature checks on all passengers, seating norms, wearing masks and all the details of passengers including where they are staying so that it becomes easier for contact-tracing and isolation. That may be the requirement for the next one year. Airlines in India will not have that capability because they don’t have good IT systems. All of these changes can be brought about only if they have good IT systems to support them.

Q. So that’s where technology can come in…

A: Absolutely. The airline business is going to become a technology business. Maybe the airline has to think themselves as a digital airline. They should be able to digitally connect, engage and serve the customers. They have to source their products and services digitally. That’s another concept of variabilising of costs. Technology will play a massive role. A company operating 10 or 30 aircraft like GoAir has no economies of scale compared to American Airlines which has 1,600 aircraft. I will need less number of spares, overhead of spares, overhead of maintenance and crew management. If there is a smaller crew, they cannot optimise. If I have a larger crew, I can optimise and gain a higher productivity level from them. If you have the right technology, you will be able to optimise it across airlines. There are so many innovations that will be facilitated by technology which again is vital for the airlines to operate and survive in this environment.

Q. Finally, how much time will the sector need to go back to 100% of its efficiency and operations?

A: The world will get to 80 per cent of its normal travel schedules by the second half of next year. People will want to travel on leisure and you will be surprised to know that cruise operators booking for the summer of 2021 is 40 per cent higher than the 2020 bookings. The bookings were made in 2019. People are desperate to get out of the lockdown and travel. Initially, in the first 18 years of this century, our calculation was that the recovery in the travel industry is going to be on an average 19.5 months. Now, we realise that the industry is so resilient that it can even recover in 10 months. That’s good news. But my realistic forecast is that we will get to 80 per cent efficiency by the close of 2021. That’s bad because there will be a 20 per cent depression in travel GDP. Even in the best of times, the world has not grown as a whole more than 5 per cent. So from 80 per cent to get to 100 per cent, we are talking about 2023 at least. That’s the time-frame we are getting to hear.

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