Revival, not survival

Going ahead, the government's policy actions for the aviation sector needs to be less myopic

As we begin the second week into the lockdown, we are still unable to assess the full impact on the economy and the aviation sector globally or in India. But a few things are already evident. One, the pain from this unexpected tsunami is likely to last longer than the tsunami itself. IATA has estimated a revenue loss of $113 billion for airlines globally. CAPA has estimated that if the cessation of operations stays till June, the combined industry loss in India (airlines, airports and concessionaires and ground handlers) for the first quarter of financial year April 2020-March 2021 is likely to range between $3.3 billion and $3.6 billion. Of this, the loss for the airlines is expected to be $1.75 billion.

While that could be written off as a one-time hit, what is even more alarming is that even if things return to normal, air traffic is likely to be severely affected for the entire year. CAPA estimates that the fall in India’s domestic and international traffic could be as high as 30-35 per cent for the full year vis-a-vis the year gone by. IATA estimates a 9 per cent drop in traffic volumes in the year. Leisure travellers will decline as tourists remain wary and incomes take a hit due to the wider economic churn. Business traffic will be subdued and perhaps permanently altered by the use of technology platforms like ZOOM.

Moreover, depending on how long this plays out, the closure of some of India’s six-odd players cannot be ruled out. The aviation grapevine is convinced that the the Tata group may see this as the perfect opportunity to bail out of a misadventure (Air Asia India). The industry is also unconvinced of the Wadia family’s commitment to run Go Air, especially on account of their consistent failure to retain top managers. Many argue that Jeh is stuck in a predicament similar to that of Rahul Gandhi, with his heart not where he finds himself.

However, eventual closure of any of the airlines is more likely to be based on the head than the heart. Any casualties means job losses and further pain for an industry that has been racked with pain for over a decade now. In India alone, IATA has estimated industry-wide job losses to the tune of 575,000 as a result of Covid-19.

Another fact that is becoming increasingly clear is that the government’s plan to sell Air India has come a cropper. Air India’s sale chances looked grim in a pre-Covid world, but post the virus, I’d say the the probability of a sale no longer exists. The airline is likely to need close to $1.5 billion to survive this.

Faced with all this, there are, in my view, three things I’d like to see the government actively consider. One, it should look at asking private airlines to maintain a healthier balance sheet that allows them to survive small shocks if not a tsunami like the present one. Airlines in India have been pursuing a reckless path of growth at all cost, leaving themselves, their staff and the sector highly vulnerable. Just like the banks are required to maintain a certain cash reserve ratio, it might be worth considering asking the airlines to maintain a certain cushion (linked to fleet size) to withstand at least minor shocks.

Two, while it might be prudent for the government to support the industry’s survival at this point, including through lines of credit, it should look beyond the industry’s revival, which necessitates a sharper look at the airport charges and taxes, including those on turbine fuel, that make India’s cost of operation higher than that of the region. This is necessary in an increasingly shrinking world. To my mind, there is simply no rationale for India not becoming an MRO hub in the region barring myopic government policy and mismanagement. India has over 200 million passengers a year now (domestic and international) and air travel can no longer be defined as a luxury. Taxes should be aligned accordingly.

Last but not least, grab this opportunity to bring the shutters down on Air India in a dignified manner. In the boat that the government finds itself, I don’t see how it can justify spending over a billion dollars to keep an airline running when the same amount can be used to feed hungry mouths. Sell Air India’s assets piecemeal and put an end to this sorry saga. You may have meant well by undertaking to sell the carrier, but circumstances are at times beyond even Superman’s control. And this appears to be one of those moments -- even the Modi-Shah combine might not be enough to take this boat through choppy waters to the safety of new shores.