Projecting the potential financial impact of COVID-19 on Indian Aviation

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.