Lethargic liquidity and unrelenting losses: India’s airlines and the continued challenges

With the vaccination drive on full-throttle, aviation stakeholders are looking ahead with some varying degrees of optimism. Slowly but surely more folks are taking to the skies and airlines are increasing flights. However, the fundamentals continue to be fragile and require fixes. Failing that any recovery will be short-lived at best. The key to the recovery is the restoration of liquidity. On that front, airlines are adopting very different strategies. The proof of success remains to be seen.

For India’s airlines, operating margins have always been fairly thin. This was expertly supplemented with new non-operational income streams which helped immensely. Yet, the pandemic has impacted most of the non-operational streams. At the same time, fuel and financing rates are rising and the rupee-dollar spread consistently increasing.

Airports charges are forecast to rise without any respite for consumers given the economic regulatory model where consumers pay for expansion without avenues for input or appeal. And add to it the overall cost of travel including quarantine restrictions, testing procedures and a tendency towards longer trips. Overall, airlines face a situation where costs are rising which equates to higher outflows. At the same time, cash-inflows are limited. This in any scenario is unsustainable.

Mitigation of input costs requires measures that are few and far between. Hedging, volume discounts, amortisation, non-cash measures and structured solutions cannot be implemented due to a variety of challenges and this is leading to a linear cost structure. And to a point where earnings are not able to cover the cost of capital.

Arguably, the pandemic is a once-in-a-lifetime event and caught several airlines by surprise. But even prior, India’s airlines were struggling on an adequate return on capital. The path to profitability for airlines remains foggy and at some point, the lethargic liquidity may push some airlines over the edge.

Several airlines in India went ahead with voluminous aircraft orders financed via the sale-and-leaseback mechanism. This imitating the success Indigo had with a similar strategy. Yet the very same strategy now has come back to bite as the market is demanding liquidity and balance sheet strength. And with the exception of one airline, others don’t have much to show for it.

A sale-and-leaseback stream is also a double-edged sword in that it adds to capacity. The capacity then has to be deployed. And in the current market, supply outstrips demand — and is only being restrained via government-mandated capacity restrictions. As these are lifted, weaker airlines will feel the brunt.

And while the market has indeed picked up — it is from a lower base. Considering where traffic levels were pre-pandemic, there is a long flightpath ahead. And no matter how one slices and dices the data, the levels of growth seen previously remain to be seen. This not only because of muted consumer sentiment but also driven by job losses, macro-economic woes and technology transitions.

Thus airlines are faced with a double-edged sword of whether to induct additional aircraft or not. And the financing in most cases is no longer cash-accretive.

Airlines for the most part are cognizant of this situation. All airlines in some manner or form have rushed to raise capital. The forms are varied including via capital markets or accessing additional credit (two airlines have got funds via the government emergency credit guarantee scheme) or even straight equity infusions. Yet it is also a fact that the response to these efforts in raising funds has been muted.

Talks of Qualified Institutional Placements (QIPs) have remained just that; additional credit lines don’t even cover a fraction of the liquidity required; and equity infusions for airlines that require them the most have been found wanting. India’s airlines are heading towards a reality where all airlines will have a negative net worth.

The rush to raise capital is leaning towards equity-based solutions as bankers continue to be wary of aviation as a whole. Stand-alone credit risk assessments fail to throw up numbers that provide any semblance of comfort — because the cash flows are tepid and unstable at best. And it doesn’t help that in the background there is the Jet Airways fiasco where lenders have taken steep haircuts and there is speculation of possibly two other debt restructurings or at even NCLT filings.

This leaves airlines in a precarious position. When it comes to liquidity and any and all options are on the table including renegotiation and even additional orders for aircraft and engines. Options that may help unlock liquidity but are short-term in nature. Structuring and restructuring solutions are also being widely discussed.

In the long-term, the market should witness some degree of stability but the near and mid-term are not without challenges. India’s airlines continue to cruise towards losses that will be in excess of around $4.3 billion for 2021 alone. This is in spite of government-mandated price floors which have helped and are helping with yield levels. But along with yields the volumes also have to rise and costs have to be constrained. This concurrence is a while away.

For airlines, the world over success is evidenced with margins and for India’s airlines, the margins are nowhere near where they need to be. Lethargic liquidity and unrelenting losses continue and sooner or later it will lead to a shakeup of the Indian skies.