2020, aviation, and a bleak future ahead

From Boeing to bailouts, the aviation industry had one of its worst years in 2020, a radical comedown after a run of profits right up to coronavirus lockdowns.

Undeniably, the aviation industry has been hit hard by the Covid pandemic. To date, it is crippling from severe financial losses and painfully diminished market values to shrunken networks and mounting debt piles,

Airline borrowings have climbed to record levels as carriers struggle to keep their heads above water. State aid to the sector has reached a gargantuan $220 billion, according to IATA. Credit ratings company Moody’s Investors Service forecasts a further $22 billion of liabilities will be added in 2021.

Companies will also need to refinance some of the emergency debt accumulated, while those now saddled with government shareholders must examine whether they can repay borrowings and become masters of their own destinies again.

The fate of global aviation

Carriers will hemorrhage more than $118 billion this year and almost $39 billion in 2021, according to IATA. That’s way beyond the trade group’s predictions in June, when carriers retained hopes for a late summer surge in traffic, only to see them dashed by new waves of the virus.

The estimated losses represent the worst two years for the industry and dwarf those racked up during the last major aviation slump in 2008. They also mark an abrupt end to a decade-long run of positive earnings, highlighting the lingering vulnerability of carriers even after years of consolidation and investment in more efficient aircraft.

Meanwhile, the number of scheduled flights worldwide has remained stubbornly low since a May trough, leading traveler numbers to drop to levels last seen 17 years ago. Airlines have blamed the extended slump on government curbs such as quarantines for arriving passengers, as well as a failure to embrace airport testing, arguing that pent up demand for travel is being strangled. That theory will be put to the test as a rollout of vaccines, combined with an acceptance of testing and so-called Covid passports, may begin to open up national borders.

Any real relief could be some way off, though. While European leisure airlines were earlier reporting signs of revived demand around Easter, a new strain of the virus that’s emerged in the U.K. has caused chaos ahead of the Christmas holiday, with parts of the continent and places from Canada to India and Hong Kong abruptly suspending travel links.

Though the first coronavirus cases were in Asia, its impact on flights there has been neither as severe nor as protracted as in the west. The net effect has been to overturn established hierarchies and accelerate a shift toward eastern dominance of global travel. Europe, heavily exposed to international travel, has been hit especially hard, with the U.K. displaced as the third-largest market and Germany and France dropping out of the top 10.

Chinese domestic traffic has proved especially resilient, rebounding to a level comparable with last year, and in turn propelling the country above the U.S. as the world’s top passenger market for the first time since the dawn of powered flight more than a century ago. John Grant, chief analyst at flight-bookings specialist OAG, predicts an American recovery next year, albeit a brief one.

Asia-Pacific carriers have likewise climbed the airline rankings, though U.S. operators still occupy the three top spots, sustained by internal flights that have continued largely unabated even as the pandemic continues to rage.

Western nations have also suffered a disproportionate amount of the airline sector’s 425,000 job losses. Of the 42 carriers that have failed or filed for creditor protection, 25 have been in Europe and North America.

How COVID affected the Indian Aviation

 The COVID-19 pandemic had a massive impact on the Indian aviation sector in 2020 and major airlines facing losses and challenging times laid off employees, sent them on leave without pay, or cut their salaries. When the pandemic started spreading across the country, all scheduled international flights and domestic passenger flights were suspended from March 23 and March 25, respectively. Scheduled domestic flights were restarted in a limited manner from May 25.

The effect of this disruption can be gauged by the loss figures of India's two largest airlines. IndiGo incurred net losses of ?2,884 crore and ?1,194 crore in Q1 and Q2 of this fiscal respectively. SpiceJet posted net losses of ?600 crore and ?112 crore in Q1 and Q2, respectively.

The government, meanwhile, permitted special international passenger flights under Vande Bharat Mission since May and air bubble arrangements were formed with around 24 countries since July. However, scheduled international flights remain suspended in India.

"The revival of overseas travel is expected to be slower and more challenging than domestic. This will hurt Air India in particular as around 60 percent of its revenue was earlier generated from international operations," said aviation consultancy firm CAPA in October. It also estimated that just 50-60 million passengers -- 40-50 million domestic and less than 10 million international -- would travel in 2020-21.

In 2019-20, approximately 205 million air passengers, 140 million domestic and 65 million international travelled in India. CAPA India projected in October that the Indian aviation industry will lose a combined USD 6-6.5 billion in FY21, of which airlines will account for USD 4-4.5 billion. As a result, the government's plan to sell Air India has been hit.

After its unsuccessful attempt to sell the national carrier in 2018, the government in January restarted the divestment process but the pandemic forced it to extend the date for submission of expression of interest (EOI) five times. The last date of EOI submission was December 14. The government has received multiple EOIs and it will announce the name of qualified bidders by January 5.

In order to make debt-laden Air India more attractive, the government changed the bidding parameter in October - bidders will now quote enterprise value instead of equity value. This means that the bidder will be able to quote how much cash it would give and how much debt of the airline it would be able to carry. However, the government made it clear that minimum 15% of the bid amount has to be in cash while the remaining would be the debt component. Air India's debt was ?58,255 crore as on March 31, 2019. Later in 2019, ?29,464 crore of this debt was transferred from Air India to a government-owned special purpose vehicle called Air India Assets Holding Company Limited (AIAHL).

While Air India was unable to get a private owner in 2020, bankrupt airline Jet Airways was able to find one. A consortium of UAE-based businessman Murari Lal Jalan and London's Kalrock Capital won the bid on October 17 to revive Jet Airways. It expects to start operating the airline by the summer of 2021. The consortium said it is awaiting the NCLT and other regulatory approvals, including reinstatement of slots and bilateral traffic rights by the civil aviation ministry and Directorate General of Civil Aviation (DGCA).

Slots -- which is the time zone at which a flight can land at the airport -- as well as bilateral traffic rights -- the number of flights an airline can fly to another country's city -- are precious commodities in the aviation sector. When Jet Airways went bankrupt in April 2019, its slots and rights were temporarily given to other Indian carriers by the government so that they can start new flights and fill the supply gap. Now, as other airlines have added planes and started flights considering these slots and rights will remain with them, it is not clear what decision the government will take on this matter in 2021.

Meanwhile, the process to build the second international airport in Delhi moved ahead in 2020.

Ten months after winning the bid for Greenfield international airport in Jewar, Zurich Airport International signed a concession agreement with the Uttar Pradesh government on October 7, 2020, to begin its construction. The Swiss developer has selected a four-company consortium to design its passenger terminal. The first phase of construction of the airport is likely to be completed by 2024. Air cargo traffic in India has been showing faster recovery in 2020 as compared to passenger traffic. This has given some respite to the aviation sector.

However, Anupama Arora, Vice President and Sector Head, ICRA Ratings, said, "In FY2021, total cargo volumes are expected to decline by 17-20% in FY2021 with meaningful recovery in cargo volumes expected only in FY2022."

To survive the pandemic-induced crisis, all airlines took cost cutting measures like firings or pay cuts in 2020. In April, GoAir sent the majority of its employees on leave without pay. Air India had in April cut the salaries of its employees by 10 per cent. At the same time, SpiceJet and IndiGo cut the salaries of all employees by 10-30 per cent and 5-25 per cent, respectively. In July, IndiGo also laid off 10 percent of its workforce. AirAsia India in April has cut the salaries of its senior employees by up to 20 per cent. Starting April, Vistara implemented a leave without pay program for its employees based on seniority.

Currently, the Indian airlines are operating domestic flights at around 80 per cent of their pre-COVID levels. The domestic services are expected to reach their pre-COVID levels by March 2021.

With the anti-coronavirus vaccination likely to begin from 2021, the Indian aviation sector is hoping for a much better year as compared to 2020. However, after a new and more infectious coronavirus strain emerged in the UK recently, India announced on December 21 that all passenger flights connecting that country will be suspended from December 23 to December 31.

A cue for the future

During FY2020, Indian airlines had reported net losses of Rs 12,700 crore.

The overall airline industry debt is expected to increase to about Rs 50,000 crore, excluding lease liabilities by FY 2022, Icra said in its report.

"The two listed airlines [indigo and SpiceJet Limited] have together lost about Rs 31 crore per day during H1 FY2021 [April-September 2020]," the report further read, adding that daily loss for airlines has been reduced to Rs 26 crore during the September quarter due to improvement in domestic passenger traffic, and cost rationalisation initiatives by the airlines.

The report added that the recovery of domestic passenger traffic is however dependent on several factors, which include containing the spread of covid-19 infections, development and availability of vaccines, willingness to undertake leisure travel, and recovery in macroeconomic growth, among others.

Increase in the number of infections, and expectations of non-availability of a vaccine on a wide scale until the second half of calendar year 2021 are expected to impact air travel, it added.

"ICRA thus expects FY2021 to witness a higher decline of 62-64% in domestic passenger traffic, than its earlier estimates of 41-46% decline. With this, the domestic passenger traffic will reach much lower than the FY2011 levels," it said. The report added that a recovery in air travel is expected to be gradual once the Covid-19 threat diminishes.

However, with international air travel heavily dependent on opening up of scheduled international operations by the government of India as well as easing of quarantine norms and restrictions initiated by various countries, the impact of the coronavirus pandemic on international air travel is expected to linger on longer as compared to domestic flights.

"Thus, Icra expects the FY2021 international passenger traffic for Indian carriers to witness a significant YoY [year-on-year] decline of about 88-89%, higher than its earlier estimates of about 67-72% decline," the report added.

"In the near term, the balance sheets of Indian carriers will remain stressed until the carriers are able to reduce their debt burden through a combination of improvement in operating performance and/or by way of equity infusion," the report read.

Do you think the Indian, as well as the global aviation will bounce back like before in 2021? Write your thoughts and opinions.