India’s Fledgling Aviation Sector Is Bleeding And Could Use Some Help From The Government

India’s largest private sectors airline, Indigo, posted its highest ever quarterly loss of Rs. 3174 crores during the April-June period. Already reeling from losses, the lockdowns during April and May further reduced the number of airline passengers.

Fuel cost, as a percentage of revenue, was at 40 per cent. The number was at 30 per cent in the previous quarter. Debt, which includes lease liabilities on the aircrafts, has grown 35 per cent year-on-year. Further, the company’s net worth has slipped into negative territory for the first time in its history.

These statistics serve as a proxy to gauge the health of the entire aviation sector – every company in the aviation space is reeling from losses.

The capital-intensive nature of the business means that the airlines owe large amounts to lenders and leasing companies. Indian banks are already struggling with debt recoveries from Air India and Jet Airways.

Given these factors, it can be argued that the airline sector in India needs some form of aid from the government.

The USA has introduced wage-assistance programs to help airline pay their employees. The funds were provided in the form of grants or low-interest loans. The payroll support programs (PSPs) come with the condition that the airlines cannot furlough employees or cut pay during the support period.

The aid money helped the airlines tide over employee costs during the lockdown period while lowering furlough numbers.

With higher demand, the US airline companies have managed to return to profitability – Delta Airlines announced that it had returned to profitability in the second quarter of 2021, while other airlines have forecasted profitability from the next quarter. The roll-out of vaccines coincided with the holiday period, resulting in increased demand. While the companies are still far-off from recovering to the pre-Covid levels, they have managed to stabilise their financials for now.

Until March 2021, the US Treasury had disbursed around $35 billion to airlines out of $48 billion that Congress had allocated to the initial program, data from Peter G Peterson Foundation showed. US taxpayers, who have funded the aid, received warrants – the right to buy shares in the airlines in return for the funds.

So far, the initiative seems to have borne fruit - airlines are returning to profitability, several thousand jobs have been saved and taxpayers will receive financial rewards if airlines perform well.

While the Indian government cannot (and should not) dole out free grants to airlines, it certainly can introduce multiple other measures to stabilise the financials.

Here are a few immediate measures that the government can take to aid recovery:

First, lowering Taxes on Aviation Turbine Fuel.

ATF is not included under the Goods and Services Tax (GST) regime, along with several other petroleum products. Therefore both central and state governments can tax ATF. In the past, the difference between ATF rates in India and other countries have been as high as 50 per cent.

Fuel costs for airlines, as a percentage of revenue, are much lower world-over when compared to India. In an industry which operates on wafer thin margins, it is tough for Indian airlines to compete with global competitors on the basis of price due to their bloated cost structures.

Second, the government could consider removing airfare caps.

The Indian government has introduced price caps on the prices of tickets. The upper price limit is to benefit the consumer and the lower price limit is to prevent under-pricing. With the lower limit, the government has passed on the onus of protecting weaker airlines onto the customers. If the government wishes to help airlines, it can do so in a more equitable manner.

Price caps often distort the market and prove to be harmful for the sector.

Every airline has a very different cost structure, therefore the air fares can differ by airline. Some airlines with strong focus on costs can afford to price themselves lower, without undergoing financial stress. On the other hand, higher price caps can stop airline from improving their realisations in case a route has higher demand.

Third, there could be removal of capacity constraints:

The government has capped capacity at 65 per cent, which is an increase from the previous 50 per cent. Willie Walsh, the director of IATA, has said that the demand is in excess of 65 per cent capacity. These capacity constraints only restrain the airline industry from performing better and improving their financial strength.

The airline industry has high fixed costs, giving it operational leverage. However, operational leverage cuts both ways.

Currently, with low capacity utilisations and price caps, airlines are unable to overcome fixed costs and exploit their natural operational leverage. On the other hand, once airlines have a strong capacity utilisation, they can use operational leverage to their advantage.

Fourth, the government could look at some form of financial aid:

In the case of Indian airlines, financial aid can be justified because the situation was not of their own creation, unlike the financial crisis bailouts in the USA. However, financial aid should not come in the form of free grants. The government can extend short-term low-interest loans to players in the space. The use of the loans can be specifically limited to employee expenses or other essential costs.

Or the government can take up minority stakes by infusing funds into the airlines. These stakes can be sold to other investors once the situation improves.

The government need not wait until the situation is beyond repair. We have already seen large hotels and hospitality establishments shut down during the second wave due to lack of funds.

The banking system is still sorting the mess from the previous loan crisis. Another financial meltdown will only add further stress on the already-fragile financial ecosystem.