Aviation sector needs support from government to take off again
The sector, already struggling with wafer-thin margins, currently stands crippled and perhaps would continue to be paralysed as we head deeper into the COVID crisis.
The air transport business along with its supply chain may see a near wipeout of approximately 40 per cent of business volume in the current financial year.
The Centre’s Rs 20 lakh crore economic relief package is very welcome. I hope it has a sector-specific package for the country’s air transport business, which is the worst affected industry in this crisis. The aviation sector contributes significantly to the Indian economy: The air transport industry, including airlines and its supply chain, is estimated to contribute directly or indirectly $72 billion of GDP to India. According to IATA (International Air Transport Association), India was the fastest-growing domestic market in the world for the fourth year in a row at 18.6 per cent per annum, followed by China at 11.6 per cent.
The same IATA report says that in India, 29.32 lakh jobs in the aviation sector are at risk. The data shows that airlines in the Asia Pacific region may see the largest revenue drop and among the Asia Pacific countries, the Indian aviation sector will be the worst hit by the COVID-19 crisis.
The air transport business along with its supply chain may see a near wipeout of approximately 40 per cent of business volume in the current financial year. Revenues have been virtually nil since March 25 and even considering partial relaxation in air travel in May, the aviation sector is staring at an unprecedented crisis.
This sector needs all the support from the government to take off again. Now, in order to ensure that the sector becomes reasonably operational, the primary onus rests with the government.
The sector, already struggling with wafer-thin margins, currently stands crippled and perhaps would continue to be paralysed as we head deeper into the COVID crisis. The two-month long shutdown has eroded the capital of most airlines. The cost of maintaining Aircraft on Ground (AoG) is extremely high, and with nil revenues, this is a sure shot recipe for disaster. We have already read reports of some major global airlines filing for bankruptcy.
The economics of running an airline profitably with a fleet of A-320 Airbus or similar aircraft are fairly simple: You should be flying your entire fleet, with no Aircraft on Ground; every plane must fly for 11 hours a day, which will be possible only if you have a turnaround time of 30-45 minutes and, you have an average Passenger Load Factor (PLF) of around 65 to 67 per cent. Now consider this: Forty per cent of your fleet is grounded; due to social distancing and other hygiene protocols, an aircraft can fly only eight hours because of the elongated turnaround time, plus one-third seats are to be kept vacant; and finally, you are flying with a reduced 50 per cent PLF. The break-even ticket price in such a scenario would be astronomical.
Thus, a partial opening up of the service with stringent measures, would mean, in effect, a business already strained by liquidity flow and a rising debt burden is bound to buckle under pressure. The recessionary impact of job losses, reduced spending, restricted trade flows, disrupted connectivity, marginal tourism and hospitality, reduced catering and other related reduced supply chain services would be socially and economically disastrous. Ensuring stable and safe air connectivity is also critical to the flow of essential goods and medical supplies, more repatriation of Indians stranded in overseas and connecting manufacturing hubs.
Business leaders from all levels of the value chain have reached out to the Centre for help. The Asia Pacific division of the IATA has corresponded with the Indian government, citing the case of some of the other nations which have announced financial relief packages for the sector. As per reports, countries like Australia, New Zealand and Singapore, have announced relief packages to the tune of $460 million, $360 million and $82 million respectively. In the US, the Trump administration has reached an agreement in principle with major airlines for a $25-billion dollar bailout package. FICCI has urged the government to immediately provide direct cash support to Indian carriers whereby the airlines can meet their fixed costs, at least for the period where the loss of revenues and liquidity is directly attributable to the government’s directive to cease operations.
The government is yet to respond. I urge the government to extend the following relief measures:
First, a moratorium for the next 12 months on all interest on the principal amount of loans without limitations of size or turnover through a direction to all financial institutions. Second, VAT on ATF by state governments, which ranges from 0-30 per cent, should be rationalised with immediate effect to a maximum of 4 per cent across all states for the next six months. Third, aviation turbine fuel needs to be brought under the ambit of 12 per cent GST, with full input tax credit on all goods and services.
Fourth, a waiver for private airport operators space rentals and AAI, royalty, landing, parking, route navigation and route terminal changes for the next one year. This should be done not only for the airlines but all aviation-related businesses. Fifth, all airlines and aviation-related business must be treated as priority sector lending. Sixth, no loans to airlines and other aviation-related business should be classified as NPAs and no collateral enforced or enhanced during this moratorium. Finally, support the airlines and other-aviation related companies by paying or taking care of salaries of the employees for a period of six months. This will allow employee retention and is being done in a lot of countries.
We must swing into action swiftly. I am hopeful that India’s air travel will take off once airport protocols are in place. It is imperative that all airlines, if aided by the government, should ensure proper pricing policies so that the common man can still avail of this vital service. Recovery from this crisis is going to be a long and uphill task. It will take effort, planning and, most importantly, coordination between the aviation industry and the government.
The writer, an aviation expert, was on the board of Damania Airways, Kingfisher Airlines, and Air Sahara
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