International

Environment of
Management

Indian aviation system

Prepared by :
Ajay boricha
Division : A
Roll no. 19004
 Introduction
Indian Aviation Industry is one of the fastest growing airline industries in the world. The
history of Indian Aviation Industry started in December 1912 with its first domestic air
route between Karachi and Delhi. It was opened by the Indian Air Services in collaboration
with the UK based Imperial Airways as an extension of London-Karachi flight of the
Imperial Airways. Tata Sons Ltd., the first Indian airline, started a regular airmail service
between Karachi and Madras three years later without any backing from the Indian
government.

During the period of independence, 9 air transport companies were carrying both air cargo
and passengers in the Indian Territory. In 1948, the Indian Government and Air India set
up a joint sector company, Air India International to further strengthen the Aviation
Industry of India. As part of nationalization in 1953 of Indian Airlines (IA) brought the
domestic civil aviation sector under the purview of Indian Government. Later till the mid
1990’s government-owned airlines dominated Indian aviation industry. When the
government adopted the Open-sky policy in 1990 and other liberalization policies the
Indian Aviation Indian made underwent a rapid and dramatic transformation.

By the year 2000 several private airlines have entered into the aviation business in
succession and many more were about to enter into the arena. Indian aviation industry
today is dominated by private airlines and low-cost carriers like Deccan Airlines, Go Air,
and SpiceJet, etc. And Indian Airlines, the giant of Indian air travel industry, gradually lost
its market share to these private airlines. According to the report of CAPA, these budget
carriers are likely to double their market share by 2010 — one of the highest in the world.
Indian Aviation Industry has been one of the fastest-growing aviation industries in the
world with private airlines accounting for more than 75 % of the sector of the domestic
aviation market. With a compound annual growth rate (CAGR) of 18 % and 454 airports
and airstrips in place in the country, of which 16 are designated as international airports, it
has been stated that the aviation sector will witness revival by 2011.

In 2009 with increase in traffic movement and increase in revenues by almost US$ 21.4
million, the Airports Authority of India seems set to accrue better margins in 2009-10, as
per the latest estimates released by the Ministry of Civil Aviation.

This is being primarily attributed because of the increase in the share of revenue from
Delhi International Airport Limited (DIAL) and Mumbai International Airport Limited
(MIAL). Passengers carried by Indian domestic airlines from January-February 2010 stood
at 8,056,000 as against 6,761,000 in the corresponding period of 2009-a growth of 19.2 %,
according to a report released by the Ministry of Civil Aviation.

Today Hyderabad International Airport has been ranked amongst the world’s top five in
the annual Airport Service Quality (ASQ) passenger survey along with airports at Seoul,
Singapore, Hong Kong and Beijing. This airport in Hyderabad is managed by a public-
private joint venture consisting of the GMR Group, Malaysia Airports Holdings Berhad and
both the State Government of Andhra Pradesh and the Airports Authority of India (AAI).

The Indian aviation sector can be broadly divided into the following main categories:

Scheduled air transport service includes domestic and international airlines.

Non-scheduled air transport service consists of charter operators and air taxi operators.

Air cargo service, which includes air transportation of cargo and mail.

Scheduled air transport service: It is an air transport service undertaken between two or
more places and operated according to a published timetable. It includes:

Domestic airlines, which provide scheduled flights within India and to select international
destinations. Air Deccan, Spice Jet, Kingfisher Airline and IndiGo are some of the domestic
players in the industry.

International airlines operate from scheduled international air services to and from India.

Non-scheduled air transport service: It is an air transport service other than the scheduled
one and may be on charter basis and/or non-scheduled basis. The operator is not
permitted to publish time schedule and issue tickets to passengers.

Air cargo services: It is an air transportation of cargo and mail. It may be on scheduled or
non-scheduled basis. These operations are to destinations within India. For operation
outside India, the operator has to take specific permission of Directorate General of Civil
Aviation demonstrating his capacity for conducting such an operation.

PRODUCT PROFILE
The objective of the aviation industry is to provide better service to their customers. So
service is the primary product of the industry.

This project will accomplish to provide better the service quality to the passengers. These
Flying services of the Indian airlines are divided into three stages-(pre-fight, in-fight, Post-
fight services) and I found that the passengers of the Indian airlines has satisfied with
service quality of Indian airlines. The aim of the company to provide the better services
quality to passengers and the management in particular is very much responsible for this.
Through passengers of the airlines the management is getting proper information about
the services which are providing at pre-fight, in-fight, post-fight. And to find out the areas
where the company needs to improve to service quality of the airlines.

From this study, Indian airlines have come to know about the passengers has satisfied with
services.
From this study the passenger perceptions of service quality of airlines.To assess the level
of satisfaction of passengers on exiting passengers facilities provided by airlines.To provide
an effective marketing scheme to passengers.

This information is a good guide to management as it brings out the strengths of the
company and the areas where the company needs to improve the service quality.

SERVICE QUALITY
The concept of services quality its importance has grown in recent years for years for two
main reasons. Firstly, we are starting to understand the total concept of service more and
are now better able to define what is meant by quality of service. Secondly, researchers are
determining ways that service quality can actually be quantified or measured.
Measuring service quality gives marketers a tangible tool to use when developing
strategies for marketing services.

The concept of Quality is very important to marketers because quality drives the
development of all marketing strategies. This means that quality must also be a major focus
of all marketing strategies for service.

The service quality can be measured on the following five dimensions:

Reliability: The ability to perform the promised service dependably and accurately.

Tangibles: The appearance of physical facilities, equipment, personnel and

communication materials.

Responsive- : The willingness to help passengers and provide promptness service.

Assurance: The knowledge and courtesy of employees and their ability to convey trust and
confidence.

Empathy : The caring, individualized attention provided to the passenger.

PLAYERS IN THE INDUSTRY

At present, there is decent number of players compared to the one man army scenario
prior to 1990’s. They are as follows:

I. Air India
The history of Air India is the History of Indian Aviation. It is one of the oldest and the
largest airline of India. Air-India was founded by J.R.D. Tata in July 1912 as Tata Airlines.
Founded as a small, private, domestic carrier in 1932, Air-India is now owned by
government. It operates only on International routes and has negligible presence in the
domestic traffic.
II. Indian Airlines
Indian and Air India were born with nationalization of Air Transport in 1953 by way of Air
Corporation Act, 1953. Indian Airlines emerged as a merger of 8 domestic carriers. It caters
mainly to domestic routes and in some nearest nations.

The two national carriers have enjoyed sole monopoly in the air transport segment over a
long period of time as private carriers were debarred from entering the segment under the
Air Corporation Act, 1953. The private players like Jet, Sahara and others were made to
enter the segment only after the New Economic Policy, 1991 came into existence. Another
major turning point has come in the history of the Air Industry when Air India was granted
permission from the GOI (Government of India) to merge with Indian Airlines, the two
national carriers of India. This Mega Merger marked the first marriage in the Indian skies
which was followed by other mergers. The name of the new airline remained Air India,
since it is known worldwide.

III. Jet Airways

In May 1974 Jet air (Private) Limited was founded. In 1991, as part of the ongoing
diversification programme of his business activities, Naresh Goyal (founder of Jet Airways)
took advantage of the opening of the Indian economy and the enunciation of the Open Skies
Policy by the GOI, to set up the company for the operation of scheduled air services on
domestic sectors in India. It started its International Operations in the year 2004 and
carries more than 7 million passengers per annum. In May 2007, Jet Airways took 100%
stake in Air Sahara.

IV. Air Sahara

Like Jet, Sahara also began its operations in the year 1993 after the domestic Air Market
was opened by the GOI in 1990’s. It is owned by the diversified Sahara India Parivar group.
Now Air Sahara is being taken over by Jet Airways and it is being renamed as “Jet Lite”. Jet
has intensions of converting Air Sahara in sync with LCC model to reach every segment of
air travelers.

V. Air Deccan
India’s first budget carrier arrived in the Air Industry in the year 2003. It is headed by
Captain Gopinath, Air Deccan redefined the accessibility to the Indian Skies with new
model and concept in the aviation sector. It injected competitive spirits into the system and
gave common man wings by reducing airfares which matched the first Class Railway Fares.
The third wedding in skies was marked when Vijay Mallya of Kingfisher Airlines picked up
26 % stake in Air Deccan.
Air Deccan is the Nano of the Airline sector; what Tata – Nano plans to do to the automobile
industry (converting two wheelers into four wheelers) Air Deccan has done to Aviation
industry (shifting people from rail travel to travel by air). Presently, there is a new segment
of travelers; the leisure customers. Yet another segment is introduced and that is the first
time travelers.

Air Deccan introduced the concept of dynamic pricing which means selling at a higher price
during high season (tourist season) and selling cheap during the off-seasons. Therefore,
everyday the price would change depending upon the kind of competition and also the load
factor. Also it introduced various schemes and programmers.

VI. Kingfisher
The King Fisher initiated its operations in May, 2005. It is a major Indian luxury airline
operating an extensive network to 34 destinations, with plans for regional and long-haul
international services. Kingfisher Airlines, through one of its holding company UB holdings
Ltd has acquired 26% stake in the budget airline Air Deccan.

VII. Go Air
Go Air is an Indian low-cost airline based in Mumbai. It was established in June 2004, the
airline started its operations in October 2005 with a fleet of 20 leased Airbus A320 aircraft.

VIII. Indigo
IndiGo Airlines commenced its operations in 2006 and went on to swiftly establish itself as
one of the premier budget airlines in the country. IndiGo Airways soon added IndiGo flights
and destinations to its network. The unimpeachable services and timely performances of
IndiGo flights added to the popularity of the airline.

IX. SpiceJet
SpiceJet, a rebirth of ModiLuft marked its entry in service by offering fares priced at Rs.99
for the first 99 days since its inception in 2005. The carrier is giving tough competition to
Railways.

Market overview :

EVOLUTION OF THE INDIAN AVIATION SECTOR :

India is the 7th largest civil aviation market in the world and is set to become the world’s
3rd* largest by 2024
In FY19, airports in India witnessed domestic passenger traffic of about 275.21 million
people. During FY20 (April-December 19), air passenger
traffic stood at 262.67 million.

India plans to open 100 additional airports by 2024.

Investments worth US$ 6 billion are expected in the country's airport sector in 5 years

In-service fleet size scheduled Indian operators stood at 643 airplanes, as of July 2019.
The number of airplanes is expected to grow to 1,100
AIRPORTS AND AIRSTRIPS
MAJOR AIRLINES OPERATING IN INDIA
MAJOR AIRPORTS IN INDIA
AIRLINES DEMAND, CAPACITY AND UTILISATION
COVID-19 is having an unprecedented impact on
global aviation, including in India
The current financial year started with the closure of Jet Airways, India’s largest
international and second-largest domestic carrier. This, combined with the subdued
demand due to the slowdown in the Indian economy, means that there has been virtually
no growth in traffic over the last 12 months.
Furthermore, the sector has experienced several operational challenges during the year,
including the temporary closure of Pakistani airspace which impacted westbound
international operations; the grounding and suspension of deliveries of MAX aircraft; and
continuing issues with Pratt & Whitney engines on NEO aircraft.
The challenges in FY2020 compounded the underlying weakness of Indian carriers
resulting from historic issues that Indian airlines have had to grapple with for many years.
These include a negative fiscal regime with particularly punitive levels of taxation on
Aviation Turbine Fuel; a restrictive regulatory framework; a shortage of skills; and limited
access to capital.
As a result, even before COVID-19 appeared on the scene, most Indian carriers already had
very strained balance sheets and almost no liquidity. This latest shock will once again
expose the vulnerability of India’s aviation system as happened during the fuel price spike
in 2008. But on that occasion, the shock was short-lived, even if its impact reverberated for
several years. This time, the shock itself will be far deeper and much longer.
CAPA India’s preliminary estimates for the near-term impact on the Indian industry are
presented below. However, it should be noted that the situation could deteriorate quickly
and significant downward revisions to these estimates are possible.
Article I. Initial weakness in the domestic market emerged in February, with some
carriers experiencing a 5-10% year-on-year decline in yields, although others were able to
maintain similar levels to last year. But during 1-15 March the yield decline has accelerated
across the board to around 12-15%, and as per CAPA estimates forward bookings are down
30%+ relative to last year.
Article II. With new advisories and restrictions being announced every day, and with
the Indian government urging people to avoid all non-essential travel, demand is expected
to weaken substantially, with a drop of 40-50% or quite possibly even higher being
possible in the near-term, as is being seen in other markets. Yields may also come under
further pressure and could deteriorate by 25% or more. However, given the structural
reason for the decline in demand, reducing fares will not stimulate traffic, but will simply
dilute yield on those passengers that clearly have an urgent need to travel regardless.
Article III. Based on the latest cancellations, international capacity is currently
estimated to be down by 60-70% year-on-year, although the situation is evolving on a daily
basis. India has banned entry by all foreign nationals (with some very limited exceptions)
until at least 15-Apr-2020. Foreigners account for around 25% of international air
travellers to/from India. However, India has also blocked the entry of its own nationals
from the European Union and several other countries and has advised its citizens not to
travel overseas. International traffic could therefore soon approach a state of suspense.
Article IV. As a result of the significant reduction in flying, Indian carriers may initially
ground around 150 aircraft (including almost all of the international fleet), with this
number expected to increase as more domestic operations are curtailed over the coming
weeks. If the decline in traffic continues to be severe, the majority of the fleet could be
grounded by April.
Article V. By extension, the reduced scale of operations could impact the requirement
for around 30% of airline staff and up to 50% of ground handling staff. For the first couple
of months, this could potentially be handled through mandatory leave and leave-without-
pay initiatives for 1-2 months. But should the situation continue beyond a few weeks, it will
quickly result in short-term retrenchment – with the prospect of re-employment once the
situation improves. And an extended downturn will inevitably lead to significant
redundancies.
Article VI. Any shrinking of the airline industry will have a cascading impact across the
aviation value chain, particularly on 3rd party MROs, ground handling companies and
private airport operators.
Article VII. These extraordinary conditions are expected to impact all of 1QFY2021, with
the strong possibility of extending into 2QFY2021. The political consensus increasingly
suggests that the impact of COVID-19 will not simply be a short-lived disruption but could
extend for up to six months or more.
Article VIII. In light of these circumstances, all Indian airlines will report significant
losses in 1QFY2021, even with oil prices at around USD30/barrel. If operations have
virtually ground to a halt, low fuel prices will provide no benefit. At an industry level,
consolidated losses are estimated to be in the range of USD500-600mn for the quarter
(excluding Air India). However, these are very preliminary estimates and are subject to
further downward revision. In the absence of serious and meaningful government
intervention, such an outcome could lead to several Indian airlines shutting down
operations by May or June due to a lack of cash.

A number of government and industry responses are possible in the

short-term
1) Some airlines may choose to temporarily shut down their operations by design – as is
currently the case with several European carriers – on the basis that demand is so low
that such action will result in reduced losses than if they continue to operate.
2) Airlines will seek to adjust aircraft deliveries scheduled for 1QFY2021 and may cancel
some orders. Indian carriers have 50 aircraft due for induction between now and 30-
Jun-2020. But delaying deliveries may impact the liquidity of some carriers that are
reliant on sale-and-leaseback margins on aircraft inductions to generate cash. And the
availability of financing for deliveries may also be compromised if some lessors come
under financial pressure themselves.
3) To mitigate the severe financial crunch that airlines will experience, the Ministry of Civil
Aviation is likely to recommend that short-term financial assistance be extended to the
sector.

4) The privatisation process for Air India will be further delayed. The submission date for
Expressions of Interest has already been pushed back by six weeks. As a result, the
government will need to commit significant and immediate interim funding of USD300-
 400 million for the national carrier, to ensure that it is able to operate at least in its
current condition until such time as the sale transaction is concluded. The government
must also have a fall-back plan to regroup and continue to operate the airline for the
medium-term if the privatisation process is unable to proceed.

Likely outcomes if the severity of the impact increases and extends beyond a couple
of months
1. Regardless of any fiscal concessions and support that the government may offer, most
airlines will have to shrink their operations, and the more vulnerable carriers may
shutdown. This will, in turn, impact the entire aviation value chain, resulting in
rationalisation and job losses across airports, ground handling companies, MROs, travel
companies, as well as hotels and tourism operators. The prospect of defaults on aircraft
lease payments is also likely.
2. If there is a virtual cessation of air travel, then whatever support the government offers,
there is little that can be done to sustain operations.

CAPA India recommends that the government implement the following measures as
soon as possible to mitigate the short-term impact of COVID-19
1. Include Aviation Turbine Fuel under the GST framework so that airlines can benefit
from tax credit on their largest input cost item.
2. Revise Aviation Turbine Fuel prices on a weekly basis so that airlines can take
advantage of lower rates as soon as they become available.
That said, whilst both of the above-mentioned fuel-related benefits will be critical for
recovery, they will make less of a contribution towards survival in the short-term since
airlines will have limited expenditure on fuel due to curtailed operations.

1) Implement a short-term moratorium or extended credit terms for payments due to fuel
companies and the Airports Authority of India; and similarly for interest and principal
payments to banks on working capital loans.

Within the private sector, PPP airport operators will need to consider a temporary
revision to the terms of concession agreements for duty-free, retail and food &
beverage operators. In several cases, concessionaires are currently required to pay a
fee, in advance, based on the revenue projected in the business plan. With
international operations practically coming to a halt, such operators will face a
severe cashflow constraint. Airport operators will either need to extend a
moratorium on payments or revise the calculation of the fee to be based on actual
revenue rather than planned revenue.

Article I. All of the above may still not be enough, and there could be a requirement for
banks to extend working capital loans, secured against future sales or sale-and-leaseback
incentives.

Longer-term, the airline system will require a re-set

Article I. Following the first wave of airline deregulation in the 1990s, there were
multiple airline failures but given the nascent status of the market at that time they were
relatively small. However, since 2012 we have seen two major airline closures since
(Kingfisher and Jet Airways) which left a residual impact of USD5-6 billion on the aviation
system, with a third exit only averted at the last minute when SpiceJet was rescued by Ajay
Singh.
Article II. Airlines continue to remain vulnerable but are now of a scale where a
repetition of such failures has a very damaging impact not only on all aviation stakeholders
but also on the national economy. We can no longer celebrate profitless growth. There is a
need to relook at the entire system in terms of the policy, regulatory and fiscal frameworks
in which aviation operates. This must address the entire industry and not just airlines and
airports.
Article III. One of the recommendations that CAPA India has regularly proposed is the
introduction of a regulatory requirement for airlines to hold cash balances that can support
six months of operations in the absence of revenue, in order to be able to both obtain and
to renew an AOP. When airlines expand without the balance sheet strength to support their
growth, this results in excess capacity and loss-leader pricing which destabilises the entire
industry.  Incumbent airlines will of course need to be given adequate time to comply with
this requirement, but this will be an important step in ensuring that they are better placed
to withstand the shocks that regularly visit the industry.

23 March 2020

Shutdown of scheduled domestic airline

operations in India
The Government of India’s decision to suspend all scheduled domestic airline
operations with effect from midnight on Tuesday 24 March 2020, is consistent with
expectations outlined in CAPA India’s report of 20 March.
In light of concerns about the accelerating number of COVID-19 cases in India,
central, state and local governments have been imposing progressively stringent
restrictions on the movement of people. Yesterday, India observed a nationwide
14-hour curfew. On the same day, all scheduled international services to/from India
came to a halt, as did the Indian Railways.

The government clearly sees heightened risks related to the COVID-19 virus and is
determined to take unprecedented action to slow its transmission. This is the right
decision in the prevailing circumstances. For airlines, this suspension coincides with
what can only be described as a destruction of demand in the last few days.

The timing of the resumption of services is entirely in the control of the

government, but it will most likely be beyond 31 March. As a result, the entire
Indian commercial fleet of around 650 aircraft lies grounded. In fact, not a single
scheduled aircraft movement will take place at Indian airports over the coming
days, either by an Indian or a foreign airline.

The severity of disruption which the Indian aviation industry is experiencing will
have an impact that is felt well beyond FY2021, unless the government is able to
provide quick and meaningful support. Industry stability in the post-COVID period
will also depend upon promoters of distressed airlines themselves bringing in
significant funds.

Projecting the potential financial impact of COVID-19 on Indian

Aviation
The shutdown of aviation until at least 15-Apr means that 1QFY2021 is looking
increasingly like a washout
The extension of the domestic lockdown until at least 15-Apr-2020 is the right decision by
the Government of India. However, it has ensured that aviation will be seriously impacted
by COVID-19. The April-June quarter, traditionally one of the stronger quarters of the year
for Indian airlines, is increasingly looking like it will be a washout.
This will have consequent implications for Q2 (usually the weakest quarter) and for the
rest of FY2021. The severity of the impact could possibly lead to a structural reset of the
airline sector in India, with a strategic shift in terms of traffic growth, fleet expansion,
pricing, costs and business models. Although it is too early to come to a firm conclusion,
what emerges on the other side may be a smaller, consolidated industry.
The already-weak Indian airline sector is not equipped to deal with a shock of the
magnitude of COVID-19
As stated in our earlier update dated 18-Mar, India’s airline sector was already vulnerable
even prior to the advent of COVID-19. This was despite the fact that the suspension of
operations by Jet Airways in Apr-2019 (which was one of India’s largest airlines),
combined with moderate oil prices should have created a more favourable competitive
environment over the last year.
Most Indian airlines have not structured their business models to be able to withstand even
regular shocks, such as elevated fuel prices or economic downturns, let alone once-in-a-
century events.
With few exceptions, Indian carriers have weak balance sheets and precarious levels of
liquidity. Airlines have generated cash to stay afloat through advance sales or sale-and-
leaseback margins (and government infusion in the case of Air India), but with no cushion
to be able to withstand downward cycles.
Although it has become trite in recent days to use the term “unprecedented” in relation to
COVID-19, this is undoubtedly accurate. With global aviation almost grinding to a halt – and
for what could be an extended period – this is a state of affairs that will heighten risks for
even the strongest carriers in the world. Meanwhile, several weaker airlines are likely to
exit.
India’s airline system is certainly not prepared for such a severe systemic shock, and this
will have an impact on the entire aviation value chain, including:

 airport operators;
 duty free, retail, food & beverage, and other airport concessionaires;
 ground handlers;
 MROs;
 inflight catering companies;
 not to mention travel distribution, which will be devastated.
The entire sector is now in a state of crisis which will certainly impact FY2021 and quite
possibly well beyond
India’s aviation sector could incur losses of USD3.3-3.6 billion in 1QFY2021
CAPA India has developed preliminary estimates for the potential sectoral losses in
1QFY2021 as below, assuming that all domestic and international operations remain
grounded until 30-Jun-2020. Even with some partial resumption of services in May and
June, the financial outcomes may not change significantly.

CAPA India preliminary estimates for industry losses in

1QFY2021
 

Sector of the industry Estimated loss in 1QFY2021

Airlines approx. USD1.75 billion

Airports and concessionaires USD1.50 – 1.75 billion

Ground handlers USD80 – 90 million

TOTAL USD3.3-3.6 billion

Source: CAPA India research and analysis

In order to minimise long-term damage to the aviation sector – which will have
wider implications for the ability of the national economy to repair itself – urgent
government intervention is required.

There is a need for a coordinated national aviation industry response which

addresses the requirements of all elements of the aviation industry and not just
airlines, which tend to have the highest profile.

This should consist of three phases as outlined below.

Indus
try
Suppo Description
rt
Plan

Phase
 Cash infusion to support part-payment of salaries up to a certain grade for 3-6 m
1:
Emerg so that redundancies can be averted, as is currently being discussed with the
ency
government.
relief

 Moratorium on outstanding payments for a period of 3-6 months for:

Phase  Airport charges at all airports;

2:
 Aviation turbine fuel;
Surviv
al  GST and other tax payments.
relief
Rescheduling interest and principal payments on working capital loans for
months
 1. Bring Aviation Turbine Fuel under the GST framework, which will provide for full inp

credit. In the interim, until ATF is brought under GST, sales tax should be reduced to 4%

2. Provide a waiver on airport charges as and when services resume, for a period of 3-
Phase months.
3: Set-
up for 3. Ensure that appropriate credit lines are available from banks on attractive terms to
Recov support
ery
the revival of the sector.

4. Depending upon the severity of the impact, the possibility of a direct cash injection
government in the form of grants. This would be the first such instance of public fun
being infused into private Indian carriers, but may be required in the event of an
extended shutdowns
CAPA India recommendations for 3 Phases of support for airlines

CAPA India recommendations for sectoral support

Industry
Support Description
Plan

1. The revenue share payable to the Airports Authority of India should be deferred for 3-6 months.
2. In the event of a very severe impact (and in order to enable airport operators to be able to bear
concessions on aeronautical charges offered to airlines), part of the revenue share may in fact need to
PPP
be waived. Alternatively,
Airports
direct cash assistance could be offered.
3. Moratorium on interest and principal payments for 3-6 months.
4. Moratorium on GST and other tax payments for 3-6 months.
 1. In light of the support measures outlined in this document, the Airports Authority of India
Airports may experience a very serious impact with both aeronautical dues and revenue share payments being
Authorit deferred or waived.
y of India However, the AAI should not be penalised as a result of its status as a government entity and should
, therefore, receive cash assistance as appropriate to absorb the proposed initiatives.

1. Revenue share/royalty payments due to airport operators should be deferred,

temporarily reduced or even waived.
Ground 2. Ground handlers employ a very large workforce. Cash injections may be required to
Handlers avoid wide-scale redundancies.
3. Moratorium on interest and principal payments for 3-6 months.
4. Moratorium on GST and other tax payments for 3-6 months

MROs 1. This segment will be reviewed in our next update.

Although the initial focus will be on addressing the current emergency and near-
term survival, it is critical that the support package recognises that recovery is
arguably the most important phase. Otherwise, we may simply be deferring a
problem.

In the United States, despite the fact its major airlines have had several consecutive
years of record profits, US carriers are seeking a bailout package of around USD58
billion. In contrast, Indian carriers are facing this situation from a far weaker
position. They will require substantial assistance for revival and to return to some
semblance of normality.

A substantially different aviation sector will emerge

1.The impact of COVID-19 will be so severe that even the stronger carriers may not be
immune. In the event of a 3-month shutdown, the two listed carriers alone –
IndiGo and SpiceJet – could report combined losses of USD1.25-1.50 billion across
4QFY2020 and 1QFY2021. IndiGo’s hitherto enviable free cash reserves may
almost be wiped out by the end of 2QFY2021. Smaller carriers may exit.
2.There is a strong likelihood of aircraft orders being deferred or even cancelled.
Some leased equipment – particularly those aircraft approaching the end of their
lease terms – may be returned early to lessors.
3.Tata Sons may be strategically compelled to operate just one rather than two
airlines (AirAsia India and Vistara). This may be the right time to rationalise its
airline portfolio.
4.Air India’s privatisation is unlikely to proceed in FY2021 and may be postponed
beyond. The government must prepare a back-up plan which will require it to
make a renewed commitment to operating the national carrier, and to brace the
exchequer for long term capital infusions. In the short term alone, Air India could
conservatively require financial assistance of over USD1.5 billion to survive.
5.Although the duration of the lockdown is as yet unknown, if the first quarter is
subject to continued and extensive disruption, with a rolling impact on the
remainder of the year, it is possible that both domestic and international traffic
could decline by 30-50% year-on-year in FY2021. However, we strongly caution
that this is very much an indicative figure only, in what is a highly uncertain and
fast-moving environment and should not be considered a projection.
6.Given the expected decline in traffic, both Delhi and Mumbai airports are expected
to consolidate their operations in a single terminal in the near-term, as and when
service resumes.
The industry needs a strategic response which supports revival
and not simply survival
Post COVID-19, the movement of passengers and cargo by air will be critical for the
economy to repair itself. In recognition of the strategic role that aviation will play in
national recovery it is essential that the government’s response supports the revival
and not simply the survival of aviation. However, if the government is able to
provide swift and meaningful assistance, it will also be incumbent upon the
promoters of private carriers to play their part and collaborate by bringing in
additional funds.

COVID-19 & the State of the Indian Aviation

Industry
Global aviation is in the midst of a crisis for which the industry is fast running
out of adjectives

Based on the number of daily flights tracked by Flightradar24, global aviation

activity has declined by 66.8% over the last month. In India the decline in aircraft
movements has been even more dramatic, with the government having suspended
all scheduled domestic and international flights until 15-Apr-2020, a date which may
 be further extended. With the exception of a handful of cargo and repatriation
charter flights, India’s skies are largely empty.

What happens once these restrictions are lifted is as yet difficult to assess. The
trajectory of the resumption of operations will be driven by the demand for travel,
which will have clearly been damaged by the severe human and economic costs
that COVID-19 is inflicting. Given the tremendous uncertainty around the duration
of restrictions, projecting how long it will take the economy to normalise is fraught
with risks.

However, based on our understanding of the aviation system in India, and our
assessment of the situation as of today, we currently expect the following outlook.

The Indian aviation sector is likely to shrink significantly, even if

some of the vulnerable airlines manage to survive. CAPA India
estimates that there could be 200-250 surplus aircraft for the
next 6-12 months.
1)From a point of complete suspension of travel, recovery is likely to be slow.
Demand will be suppressed due to economic dislocation; slow or even negative
GDP growth; broken supply chains; low consumer confidence; and concerns about
lingering outbreaks of COVID-19, especially if travel insurance companies refuse to
provide cover for associated medical expenses or travel disruption costs.

2)For India to return to a pre-COVID operational fleet of 650 aircraft is likely to take
up to 12 months from the time that restrictions are lifted, and this may be
conservative. It assumes that 1QFY2021 will be almost written-off, with traffic
limping back during the weak second quarter, followed by a gradual trajectory
towards normality during the second half of the financial year.
3)Projections are further complicated by the fact that restrictions are unlikely to be
lifted in totality overnight. Instead, this process is expected to occur in a staggered
manner and may not follow a straight line, particularly when it comes to
international travel. For example, China, Hong Kong and Singapore have all re-
imposed certain travel restrictions after an initial relaxation resulted in an
acceleration of new cases, mostly imported by overseas arrivals.
4)For industry operators, the suspension of services, although dramatic, was in some
senses relatively simple. It was possible to bring activity to a halt overnight. In
contrast, the resumption of operations is far more complex, given that the
 industry will likely have to re-start in an environment in which there will be limited
visibility on the outlook for demand.
5)This is especially true in a market such as India which has a very late booking
profile. On top of which, forward bookings for domestic travel in May, June and
July are currently down 80% year-on-year, and will remain significantly constrained
for at least the next 4-6 weeks. This will further impact the more vulnerable
carriers that are dependent upon cash generated from advance sales.
6)When services resume, airlines will have to publish a schedule, which will require
decisions to be made with respect to which routes to launch first and with what
level of capacity, without knowing until much closer to the date of departure
whether demand actually exists. Some carriers may decide to operate very much
a skeleton network only, on the basis that it may be better to keep aircraft
grounded to conserve cash, until there is greater clarity on how the demand for
travel is recovering.
7)In addition, it is as yet unknown whether there will be additional operational
considerations to be taken into account when services resume e.g. passenger
concerns or even regulatory provisions related to social distancing at the airport
and onboard; increased turnaround times to enable thorough cabin cleansing
after each flight; limitations on inflight service; airport health checks as well as
changes to security screening and immigration procedures, which may lengthen
processing time. Aside from increasing costs, the impact on the passenger
experience may deter some travellers.
8)International travel will be even more complex because it is highly unlikely that
there will be a coordinated lifting of restrictions. Instead, passengers are likely to
be faced with continually changing regulations on entry and transit conditions for
passengers depending upon their nationality and recent travel history, often
introduced with no advance notice in response to new local outbreaks of COVID-
19. The implementation of travel bans in recent weeks are decisions that that
most governments would have deliberated on, given the unprecedented nature of
such actions. But now that travel bans have become globally accepted as a
legitimate response to a health pandemic, they would likely be re-introduced
without hesitation should they be required in future.
9)The combination of COVID-related travel restrictions and an economic downturn is
likely to result in 1QFY2021 being a virtual washout for the Indian industry. The
second quarter is historically the weakest period for demand and hence airlines
are only likely to limp back into recovery. As a result, the majority of the fleet is
likely to be surplus to requirement during the first half of the financial year.
10)A gradual path towards normality could be expected during Q3 and Q4. CAPA
India estimates that Indian carriers will require a domestic fleet of around 300-325
 aircraft from Oct-2020 onwards, and an international fleet of 100-125 aircraft. The
total fleet size of 400-450 aircraft would still mean that the current fleet of 650
represents a surplus of 200-250 aircraft for a period of 6-12 months. This may
even be optimistic. All of the projections in this report assume that travel
restrictions are mostly lifted by the end of the first quarter. If lockdown conditions
are extended, then these estimates would be subject to revision.
11)Virtually all market segments are likely to see a very slow recovery. VFR traffic
would normally be the first to pick-up as friends and families seek to re-unite after
months of separation. However, health concerns associated with travel may limit
this segment, especially senior citizens. Discretionary international leisure travel
may take even longer as this will be impacted by the weak economy. Small and
medium businesses will be particularly badly affected by the COVID-19 restrictions
and many will close. And larger companies may take time to assess the impact on
their operations which could see revisions to their near-term business plans.
Furthermore, with companies becoming more comfortable using technology to
communicate during lockdown, this may in the future lead to the need for some
travel being re-assessed. Even labour traffic, mostly to the Gulf, may see
downward pressure.
12)Domestic traffic is expected to decline from an estimated 140 million in FY2020 to
around 80-90 million in FY2021. International traffic is expected to fall from
approximately 70 million in FY2020 to 35-40 million in FY2021, and possibly less.
These are CAPA India’s initial estimates and will be continually revised.
13)To reflect the new demand environment, airlines will need to develop an interim
business plan for the next 12-18 months to stabilise their operations and ride
through the recovery period, until some semblance of pre-COVID normality
returns.
14)Starting from the end of Apr-2020, Indian carriers are initially expected to seek to
return up to 100 aircraft to lessors, especially older equipment and those that may
be closer to the expiry of their terms. The number of returned aircraft will
continue to increase significantly up until Sep-2020, possibly reaching 200-250, or
even higher. Since aircraft lessors will have limited customers to whom they can
remarket returned aircraft, they may be willing to negotiate temporary rental
holidays. Although, this may not be applicable for carriers with a high credit risk
rating with the prospect for further deterioration. Likewise, airlines that are
offered concessions by lessors will need to take a strategic call on whether they
require all of their aircraft. The holding costs of maintaining a larger fleet may
outweigh the concession available.
15)More than 200 aircraft that are scheduled for delivery over the next couple of
years (including 56 MAX aircraft) are likely to be deferred by 1-2 years.
16)Several foreign carriers have loaded flights for sale after the current lockdown
ends, with services scheduled for resumption over a period of several weeks from
16-Apr-2020 onwards. However, it is as yet uncertain whether these flights will
operate as planned, either because of a government extension of the lockdown;
insufficient demand materialising; or strategic network and schedule decisions
taken by individual carriers based on their financial position. Despite the
published schedules, at this stage most European and North American carriers are
expected to operate very limited services in 1QFY2021, with a gradual increase
from the second quarter. Gulf airlines are also expected to pursue a calibrated
return to the Indian market. With Europe and the US having become the
epicentres of COVID-19, all carriers serving westbound routes will be particularly
impacted, especially as European and Gulf carriers rely significantly on US traffic
to/from India.
Planned date of resumption of India services by selected
foreign carriers

Planned date of resumption    

Airline
(based on departure ex India)

British Airways 16-Apr-2020

Qatar Airways 16-Apr-2020

Virgin Atlantic 28-Apr-2020

Emirates 01-May-2020

Singapore Airlines 01-May-2020

United Airlines 04-May-2020

Lufthansa 05-May-2020

Air France 05-May-2020

Governments around the world have announced economic

stimulus packages – and in some cases measures aimed
specifically at the aviation sector – but approaches vary.
Article I. The world’s largest aviation market, the United States, has also
unveiled the most significant recovery package, valued at USD71 billion for the
 aviation industry alone. This consists of a combination of grants (to protect
employee wages), loans and loan guarantees.
Article II. But other Western economies, such as the UK and Canada, have to
date not released an aviation-specific package and have instead mainly focused
on job protection and wage subsidies across the entire economy. Australia
similarly offers a wage subsidy programme, as well as waivers on various aviation
taxes and charges. In Europe, governments have instead focused on providing
loan guarantees for specific carriers.
Article III. Australia and the UK have adopted differing approaches with respect
to providing targeted support to specific companies. Australia’s position is that it
cannot pick individual winners and losers but will instead offer support equitably
to all industry operators, whereas the UK will offer bespoke support as a last
resort.
Article IV. In the case of city states such as Singapore and Dubai, where there is a
clear recognition of aviation as a strategic pillar of their economies, the
governments have committed to providing very decisive support. Their stated
objective is not only to help their carriers ride out the storm, but to prepare them
to emerge as even strong competitors in the post-COVID environment.
Examples of government support in selected global markets

Market Description

Under the Coronavirus Aid Relief & Security Act, passed by Congress on 25-Mar-2020, US passenger airli
can access up to USD25 billion of grants “for the continuation of payment of employee wages, salaries a
benefits” for a period of six months. A further USD4 billion is similarly allocated for cargo carriers, and U
billion for ground handlers and catering companies.
In addition, US passenger carriers, MROs and ticket agents can access up to USD25 billion in loans and lo
United States guarantees, while cargo carriers are eligible for USD4 billion. This debt is extended on the condition that
of America there are no stock buy-backs or dividends issued during the term of the loan, which can be no longer th
five years. And the number of employees cannot be reduced by more than 10%. The US Treasury can se
equity or warrants to secure these loans.
A further USD10 billion in grants have been made available to commercial airports “to prevent, prepare
and respond to coronavirus.”
The total value of the support package for the aviation sector is USD71 billion.
 No aviation-specific package has yet been announced. However, aviation companies can take advantage
Canada the Canada Emergency Wage Subsidy by which the government will subsidise 75% of salaries up to a cer
threshold, for a period of up to 12 weeks, to enable companies to maintain staff on their payrolls.

The government has indicated that it is not in favour of an industry-wide package for the 26aviation sect
but that it will be “prepared to enter into negotiations with individual companies seeking bespoke suppo
as a last resort”. Virgin Atlantic has reportedly sought government assistance for loans and guarantees o
United
over USD600 million.
Kingdom
However, aviation companies can take advantage of the COVID-19 Job Retention Scheme by which the
government will subsidise 80% of salaries up to a certain threshold, for a period of up to 3 months, to
enable companies to maintain staff on their payrolls.

 Various airlines have negotiated loan guarantees from their respective governments e.g. USD650 m
 Finnair; more than USD540 million for airlines in Norway; and almost USD500 million for Swedish
European .
Union  Air France and KLM are reportedly seeking a combined USD6.5 billion of loan guarantees from the
 and Dutch governments. Lufthansa Group is also understood to be in discussions with its home
 governments on support options.
United Arab  The Government of Dubai has stated that it “is committed to fully supporting Emirates at this critic
Emirates  and will inject equity into the company”, given the carrier’s strategic value as a pillar of the Dubai e

 The Singapore Government announced a support package in excess of USD500 million for the avia
 sector. This includes a Jobs Support Scheme by which the government will subsidise 75% of salarie
a certain threshold, to enable companies to maintain staff on their payrolls. In addition, there will be reb
on landing and parking charges and rental costs.
Singapore
 In a very decisive show of support for the national carrier, the government investment arm, Temas
 (which is the majority shareholder in Singapore Airlines) will support a USD10 billion rights issue in
 combination of equity and mandatory convertible bonds. A bridging loan facility of USD2.8 billion
 been secured.

 The Australian Airline Financial Relief Measures provides for USD430 million worth of waivers and
 for fuel excise tax, domestic air navigation charges, and domestic aviation security charges. A furth
 USD180 million has been allocated for grants to airlines to be able to maintain services to regional
 Aviation businesses can also apply for the Job Keeper wage subsidy.
Australia
 The country’s second largest carrier, Virgin Australia, has additionally requested a loan of USD850
 However, in contrast to the UK approach, the Australian government has stated that it can only pr
 support at an industry level which is equally applicable to all operators, rather than company-spec
 packages.
  The New Zealand government has announced a support package of USD350 million to cover waive
 passenger and air navigation charges, funding for the air navigation services provider, and to ensu
New Zealand
freight connectivity. No funds have been earmarked specifically for Air New Zealand, which has said tha
expects to shrink by 30% as a result of the impact of COVID-19.

There are high expectations from the industry that the Indian
government will bailout the sector, but this may be unrealistic.
 The nature and scale of any support package will have a significant bearing
on the outlook for the industry. Levers available to the government, based on
global practices, include the following:

Initiative to support the industry Likelihood of initiative in India

Direct equity infusions  Unlikely

Loans or working with banks to extend

 Likely
lines of credit supported by guarantees

Waivers/moratoriums on airport and en

 Waivers unlikely
route charges
 Moratorium likely

 Waivers unlikely
Waivers/moratorium on fuel charges
 Moratorium likely

Waivers/moratorium on interest and  Waivers unlikely

principal payments  Moratorium likely

 Waivers unlikely
Waivers/moratorium on tax obligations
 Moratorium likely

1.
  To date, the government has not objected to the practice whereby Indian carriers have
Permission to retain
been issuing
advance sales revenue
 credit notes rather than refunds. However, in the US and the EU airlines have been
as a credit rather than
asked to refund
refunding cash in the 
 cash, to which IATA has expressed “deep disappointment” arguing that this is not
event of cancelled
feasible given
flights
 force majeure conditions

Source: CAPA India research and analysis

 But despite its best intentions, the Government of India has multiple competing
calls on its limited resources. There is only so much that it can offer to the aviation sector
given that numerous industries across the economy are under severe stress. And the
priority will understandably be on providing a basic health and economic safety net for
the most vulnerable segments of society.
 As a result, rather than a strategic package involving direct cash infusions and loans,
the government may only be in a position to offer more functional relief consisting of
waivers and moratoriums on liabilities. Given the massive structural dislocation faced by
the aviation sector, this may not be sufficient to rescue operators, particularly weaker
companies.
 Due to the fact that it is still too early to predict the full extent of the impact on the
industry, any government support may be announced incrementally as greater clarity
about the state of the industry emerges over time.
 CAPA Advisory continues to believe in the need for the government to provide
decisive support to airlines – with Air India and private airlines being treated equally –
comprising of three phases, as outlined in our previous update:
o Emergency relief: consisting of wage subsidies to protect employment;
o Survival relief: consisting of waivers and moratoriums on various charges, taxes,
and interest obligations;
o Set-up for recovery: bring Aviation Turbine Fuel under the GST framework with full
input tax credit (in the interim, VAT should be reduced to 4%); direct cash injections;
arrangement of credit lines with banks; temporary waiver on airport charges.
 There is a need for a coordinated national aviation industry response that
addresses the requirements of all elements of the aviation industry and not just airlines,
which tend to have the highest-profile. Potential support measures include:
o PPP airports (public-private partnership airport) : waivers/moratorium on
revenue share payable to the Airports Authority of India, on interest and principal
payments, and on GST and other taxes;
o Airports Authority of India: cash infusion to the offset the loss of revenue resulting
from the impact on traffic and from waivers on aeronautical charges for airlines;
 o Ground handlers: waivers/moratorium on revenue share payable to airport
operators, on interest and principal payments, and on GST and other taxes, and
possible cash injections to protect jobs;

o Travel distribution: Travel agents (offline and OTAs), tour operators and travel
management companies, will be devastated by the evaporation of demand and will
require support. Without a strong travel distribution network, the recovery of principals
such as airlines and hotels will be compromised.
Airlines will have to make quick and difficult decisions for their
short-term business plans
 Network and fleet strategies will require urgent attention, as retaining pre-COVID
operations will not be feasible. Scheduled aircraft deliveries will need to be deferred for at
least 12 months. These decisions may need to be taken in the absence of much forward
visibility about the direction of the market and the economy. International operations,
especially long haul services, will likely be the most difficult segment for which to project
demand.
 With FY2021 set to be an exceptionally challenging year, all segments of the aviation
value chain will need to immediately start planning for much smaller scale operations,
supported by serious enterprise-wide restructuring. High profile airline failure such as
Kingfisher and Jet Airways were arguably brought down because they did not right-size
when necessary.
 As the saying goes: ‘never let a good crisis go to waste’. This may be the best
opportunity for Indian carriers to make difficult calls to rationalise their operations and
clean up their balance sheets. Consolidation, collaboration and supply-side correction
should enable airlines to move away from market-share driven strategies such as loss-
leader pricing. Aggressive expansion without the necessary cash and balance sheet has
been repeatedly shown to be a very high-risk strategy. The US has been the world’s most
profitable airline market in recent years largely as a result of the consolidation that took
place in the aftermath of the Global Financial Crisis.
 The government will also need to take important policy and regulatory decisions.
One of the recommendations that CAPA Advisory has regularly proposed is the
introduction of a requirement for airlines to hold cash balances that can support at least
three, and ideally six, months of operations in the absence of revenue, in order to be able
to both obtain and to renew an AOP.