By Aditya Tiwari (Brunel University London), Usha Padhee (Ministry of Civil Aviation, India) and Dr Manoj Dora (Brunel University London)
The International Air Transport Association’s (IATA) global passenger traffic data for February 2020 reflects that passenger demand fell by 14.1%[1], when compared to February 2019. The United Nation’s International Civil Aviation Organization (ICAO) forecasts that the direct impact of the COVID-19 outbreak is expected to be greater than that caused by SARS in 2003 due to higher scale of flight cancellations and bigger economic size/air travel market of the Asia Pacific region. As governments worldwide look to suppress the transmission of coronavirus with the closure of borders, it presents a grim outlook for the global aviation sector. At a time during which people are avoiding travel, it has become nearly impossible for the airlines to run businesses that operate with the sole purpose of connecting the world.
The aviation sector has always struggled to make significant profits – hyper competition, susceptibility to geopolitical shocks, low margins and a high level of capital intensity make the industry one of the most challenging to play in. An industry where fixed costs are high and profit margins are slim, cash flow is the fuel and if that stops, airlines die. The airlines are distinctive in the sense that they collect money beforehand and the service is offered at a later date which essentially means that an airline sells for cash-flow and flies for profit or loss.
With forward bookings already down by 80% and international capacity down by 70%, IATA forecasts the global demand to drop by 50% ahead and yields by 25%. Thus, airlines are compelled to look at provisional measures to produce cash, pin faith on their balance sheet robustness or ensure that the cash flow impact is alleviated via other preventive interventions such as capacity cutting which is the last resort for an airline on the road to stay sustainable.
With unprecedented aftermaths, many airlines have grounded almost all of the planes in their fleet while some have permanently retired a few of the wide body aircrafts. As of 13 April 2020, 47 commercial airlines had temporarily suspended operations and the number is increasing with each passing day. Emirates, a super connector Gulf airline that operates with the world’s largest fleets of Airbus A380s’ and Boeing 777s’ with over 1800 flights per week catering to 140+ destinations in over 80 countries from its global hub in Dubai has closed down passenger operation after the UAE Government decided to suspend all inbound and outbound passenger flights.
India, which is currently the fastest growing aviation market with 650 aircrafts, has grounded the entire fleet for commercial operations after the Indian Government announced a 21 day complete lockdown on 24th March 2020. The preventive measures have lead the international air passenger traffic falling to near zero while the domestic traffic fall to 30%, which is sharply accelerating towards 75%. Aviation consultancy firm CAPA estimates that despite the fall in crude oil prices, the current lockdown in India could lead to a 9% loss in passenger volumes and $3.6 billion loss in passenger base revenues in the first quarter of fiscal year 2021. The pandemic has led to cancellation of over 500 weekly flights between India and Dubai, a lucrative route which recorded 11 million passengers in 2019 remains to be the top international destination for Indians and is one of the busiest air traffic routes. The latest IATA figures voice that UAE has 23.8 million fewer passengers resulting in $5.36 billion revenue loss, risking 217,570 jobs, while Qatar has 3.6 million fewer passengers resulting in $1.32 billion revenue loss. Jordan has 2.8 million fewer passengers resulting in $0.5 billion revenue loss, risking 26,400 jobs.
What measures are the airlines adopting?
To ease the ongoing tensions, Emirates, Cathay Pacific, British Airways and Delta have asked staff to take voluntary leave, British Airways’ CEO has voluntarily denied to receive salary for the next two months citing conservation of funds a primary objective and major airlines from the Asia Pacific region have terminated pilots serving on 6-8 months notice period while some have announced pay cuts at all levels in order to keep the sinking ship sailing. Indigo, the largest airline in India by passengers carried and fleet size could stand to lose near about 34 billion INR in revenue in a single quarter. The airline, which was on its way to achieve 32% quarterly revenue growth, could end up on losing a month’s revenue from 2019.
Evidently, no amount of cutting costs or capacity will cut the mustard to compensate for the extraordinary decline in demand. As per estimates by The International Air Transport Association, airlines that have been forced to ground their birds and cut jobs would need an injection of more than $200 billion in liquidity support simply to make it through. Given the severe, protracted and global nature of the economic impact, this figure is likely to increase. It is almost clear that governments will have to step forward and start working on rescue plans to save the sector and the governments worldwide are exactly doing the same.
What are the possible solutions?
Government involvement remains the only way to make sure that the airlines are able to survive for the long term and countries are already planning to extend their support to their aviation industries in order to protect the airlines. In order to save the sinking industry, the governments should invite its airlines to submit capital requirements and financial plans with the vision to providing them aid, such as rolling over loans and providing operating funds.
The International Air Transport Association has issued an urgent call for government support to airlines in the Middle East and Africa, mentioning that it is vital for the governments to step up their efforts to aid the industry. Many airlines will be bailed out by their respective governments but many of the smaller ones will fail with their parked fleets never to take the skies again. Governments around the globe are formulating action plans for the restoration of the aviation industry. The Indian government is planning to bailout $1.6 billion for the aviation sector, the United States has proposed an injection of $58 billion, Singapore has undertaken relief measures valued at US$82 million and similarly governments from Australia, New Zealand, Qatar and Brazil have stepped up with more governments to follow.
Apart from bailing out rescue funds, the governments along with the other stakeholders should consider the exemption of several taxes and service plans for the aviation sector to provide immediate interim relief by significantly reducing the operational costs the airlines incur.
- Pass on aviation turbine fuel price and tax reductions immediately – this single move can provide relief to the airlines as expenses incurred on jet fuel forms a major part of their operating cost. One could take example from the oil companies in India where jet fuel prices were slashed by 12% to reduce the burden on airlines, the lowest since September 2017 but this move will certainly not help single-handedly because the tax regime for ATF in India is the highest in the world. The single taxation (GST) on fuel still remains pending in India therefore the authorities should work on abolishing the current multiple taxation on ATF and provide the much needed relief to the airlines.
- The authorities should reduce take off and landing charges, as well as flight operation service fees for departure and arrivals of flights.
- The authorities should apply a minimum tax for aviation services including catering, ramp and pushback services in order to reduce the operational costs airlines incur.
- Parking charges should be waived off completely while the fleets stand grounded and charge a reduced fee for six months once the operations commence.
- The adherence to the government guidelines on operation of routes should be suspended for the time being so that airlines can optimise and restructure the network along with their fleet.
- The International Air Transport Association’s suggestion of abrogating of the use-it-or-lose-it approach for slots which would allow airlines to cancel flights and retain the slots even when not utilized should be implemented immediately.
- The credit allowances and period to airlines by oil companies and other vendors should be extended.
The airlines on their part should put big spending plans on hold until passenger demand is back. While the aviation industry is haemorrhaging to a point of near complete demise, the fortunate reality remains that it will always rise from its ashes like the phoenix. However, stakeholders within the industry need to critically examine their current model with a view to reinventing it in such a way as to guard against future shocks on the scale of the current pandemic. This is where innovation needs to be deployed to guard against or possibly reduce to the barest minimum the possibilities for far reaching spread of future disease outbreaks.