Recently, Warren Buffett (Oracle of Omaha) admitted that he made an understandable mistake when valuing the airline stocks as a near-global halt in travel due to the corona-virus sent their prices sharply lower. He mentioned that he has dumped its entire interests in airlines business i.e. four largest US airlines, collectively has 80% of the revenue passenger miles in US (American airlines, Delta airlines, Southwest Airlines and United Continental).
It is clearly visible that the airline industries are really hurt by a forced shutdown by events. Some of the carriers have already collapsed world over because of the pandemic and huge demand destruction that we have witnessed. It will be very difficult to say how many will survive.
In its latest report, CAPA India said that Indian carriers except IndiGo (India’s largest domestic player) need to raise capital infusion in billions for them to survive and to meet their cost (Major cost such as Lease expense and Staff cost). As of now, the Indigo is well-placed in terms of cash reserves compared with other Indian carriers. However, it too is not immune to risks in the event of a prolonged crisis.
They said that even as airlines in India prepare to resume operations post the lock-down, the next big test for them lies in the possible Supreme Court ruling on passenger refunds. The background is that after domestic and international air services in India were grounded from 25-Mar-2020, Indian carriers informed passengers that payment received for travel on flights that had been cancelled as a result of the lock-down, would be held in credit for a period of 12 months rather than being refunded. If the Apex Court does rule against them, airlines may need to shell out $500 million in refunds; $300 million for domestic tickets, and the rest for international.
They added that social distancing and inspection protocols issued by the Bureau of Civil Aviation Security (BCAS) will seriously impact the ability of airlines to even recover their variable costs. Some carriers may lose less money by remaining grounded.
In order to maintain social distancing on board aircraft, the Bureau of Civil Aviation Security has proposed below:
- They must not sell the middle seat
- Last three rows should be kept vacant in the event that a passenger needs to be quarantined mid-flight
The implication of this is that on a 180-seat narrow body aircraft, an airline can sell at maximum 108 seats, representing a 60% load factor. Even if social distancing is not in place, demand conditions are expected to be so weak that passenger loads are in any case unlikely to be any higher than that. This will naturally increase the average break-even fare.
Also in the coming days, it seems that air travel will fall in the future because in this testing period , the experience of work from home and video conferencing has been successfully tested and once the lock-down is uplifted, there will be a natural propensity on the part of corporate to do away with the air travel to the extent it is possible, for reasons like cash saving and most important , not trying to risk senior management personnel to any risk.
CAPA India has revised its traffic projections downwards for FY2021:
- Domestic traffic:
Declined from 80-90 million, to 55-70 million
- International traffic:
Down from 35-40 million, to 20-27 million
Around the world, 40% of passengers are planning to wait at least six months or more for air travel due to the global coronavirus (COVID-19) pandemic, according to a survey conducted by the International Air Transport Association (IATA).
Meanwhile, 60% anticipate that they could return to airline travel after one to two months of containment of the COVID-19 pandemic, the IATA said in a statement.
It will be interesting to watch that how airlines will come forward with innovations and take care of the security aspect and health for the staff as well as passenger. Even if the suspension is lifted, the fear of travel will still be there due to this deadly disease. Airlines are facing their darkest hour and the government support is very much needed now to ensure that they will have a viable airline industry to lead the economic recovery. Recovery requires strategic decisions to be taken by the industry and government.
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