Just after the COVID-19 breakout, international flights had been suspended and after a nationwide lockdown, all domestic flights have also been cancelled till 3rd May, 2020. This will lead to significant lower capacity utilization and load factors that would have a significant impact on the financials of airlines. Barring fuel costs, all other costs are fixed in nature and in fact, keeping aircraft in the parking area would lead to further addition to costs.
Airline companies are expected to report significant losses in Q4 FY20 and Q1 FY21. This is despite a reduction in employee costs after layoffs and pay cuts. Crude oil, a major cost component, is the only respite for the airlines as crude oil prices have declined significantly over past month.
Which airlines can survive in the long run, in a worst case scenario?
Cash position of companies is expected to be stretched, as upfront revenue is drying up which used to help them manage cash flows.
Airline companies were banking on cash that they generated through bookings made during lockdown but now the DGCA (Directorate General of Civil Aviation) has asked airlines to stop taking fresh bookings. To make matters worse, the DGCA has also asked airlines to refund the ticket amount for tickets booked during the lockdown period within 3 weeks from the date of request for cancellation by airlines without levying cancellation charges. Earlier, companies were keeping the money and were giving various options to flyers such an option to use that amount for their travels anytime within a year and so on.
Assuming that there will be no revenue as also nil fuel costs for the first quarter of FY21, and also assuming a 20 percent reduction in employee costs due to furloughs and layoffs, while keeping other costs more or less constant, IndiGo seems to be surviving for atleast four quarters as it has more than Rs20,000 crore in cash. On the other hand, SpiceJet would need a bailout within a month’s time.
Airlines may have to knock on the doors of the government for emergency credit facilities and deferment in taxes or waive off airport fees to ensure that these companies stay afloat. In fact, global airlines are also seeking help from their governments. The US granted $58 billion to help the industry come out of this challenging period in one piece.