Governmental and Sectoral policy measures to help India airlines survive and recover from the Covid-19 crisis.
The Covid-19 crisis has bought the entire world to a standstill. Countries around the world are curtailing the movement of people to prevent the spread of the virus. Unprecedented economic damage has occurred to industries across all sectors. The aviation industry is no exception to this. With no travel being allowed, the demand for air travel is negligible. As a consequence, the primary revenue stream of airlines and airports has dried up, putting them under serious economic strain. It is estimated that the Covid-19 crisis will lead to a loss of $252 billion to the aviation industry in 2020.
The situation is especially grave in India where airlines lost $600 million in the year 2019. It is important to note, airlines had reported losses despite the growing demand for air travel in India. Thus, Indian airlines were under economic strain even before the coronavirus pandemic. The crisis has only aggravated the situation to unmanageable levels.
The dramatic reduction in the passengers poses a threat to the solvency of airlines. Indian airlines, who are known to have weak balance sheets, are particularly prone to bankruptcy.
Additionally, it is reported that the pandemic will impact more than 29 lakh jobs in Indian aviation and dependent industries. Thus, it becomes imperative to devise a plan to protect these airlines from failing. In this piece I will try and explore policy measures that the government and the aviation sector can take, to save the airlines from their rapidly approaching doom.
What can the government do?
Firstly, why should the government save airlines? Airlines have for long played the crucial role of connecting people, places, commerce and culture. They act as enablers of global trade and are an important part of the aviation value chain. If the airline industry fails, it will concomitantly lead to the failure of various other industries that are heavily reliant on it ( e.g. Tourism). Additionally, without government intervention, only a few airlines would survive the crisis. Less number of players would mean less competition. Less competition will ultimately lead to a rise in ticket prices affecting Indian consumers. This rise in ticket prices will once again make flying inaccessible for many Indians. Thus, for India to restart its economy, it would need a financially healthy and competitive airline Industry.
The government’s plan to save the airlines should be two-phased : Phase ‘Rescue’ – The primary aim of the government in this phase should be to aid the cash flows of the airlines and help them survive. The government can take the following measures.
- Moratorium on all outstanding debt, tax and service payments.
- Direct financial assistance to airlines in the form of wage schemes which will cover the wages of the employees.
- Financial assistance in the form of loans and loan guarantees. The government can either have an industry-wide scheme as implemented in the USA or can have a case by case approach wherein the govt decides upon the individual requests of airlines. Owing to the limited resources and the large number of industries to cover, the government of India cannot afford an industry-wide package. Also, a case by case approach would enable the government to ensure that the resources are being properly allocated i.e. the loans and loan guarantees received by the airlines are in proportion to their need.
Phase ‘Recovery’ – After helping the airlines survive, the focus of the government policy should shift to help the airlines get back on their feet. Plausible measures that the government can take in this phase are:
- Offering tax waivers and tax discounts to all airlines.
- Deferring payment of airport charges for 3-6 months. However, airport charges provided by airlines are an important source of revenue for private airports in India. Such deference might adversely affect them. Airports are also an important component of the aviation industry and are under equal economic stress due to the rapid fall in air travel. A possible solution is for the government to pay these airport charges on behalf of the airlines and then recover them after the return of normalcy.
This creates a win-win situation for both the airlines and the airports.
- Bringing the Aviation Turbine Fuel(ATF) under the ambit of GST. Currently, ATF attracts an excise duty of 11 per cent levied by the Centre and a Value added tax (VAT) levied by the states. VAT charged differs from state to state. If bought under the ambit of GST, the airlines would then be able to avail an input tax credit on the ATF. An input tax credit scheme allows reduction of the taxes paid on inputs from the taxes to be paid on the output. As a result, the cost incurred by the airlines will reduce. Additionally, this change will also help in bringing uniformity as the airlines would pay a fixed tax rate unlike earlier wherein the tax to be paid differed from state to state.
It has to be noted here that none of the measures mentioned above form a part of the governmental relief package that was recently announced. The government has not provided airlines with any cash infusion or tax incentive. It hasn’t promised any further assistance as well. This puts the survival of several airlines in serious jeopardy. It is imperative for the government to reconsider its relief package to the airline industry and help at least those airlines which are on the brink of failure
What can the aviation sector do?
In case an airline apprehends that the government aid it receives is not sufficient to maintain its liquidity, it can try and raise money from financial markets. This is similar to what the airlines in the USA have been trying to do. E.g., Delta airlines has raised $5 billion in the debt markets. United Airlines has raised more than $1 billion in late April by selling some of its equity. As a step to further enhance liquidity, the airlines should try and renegotiate their aircraft lease agreements to defer payments.
Lack of demand will grapple airlines even after the current travel restrictions are lifted. German airline Lufthansa has warned that it could take ‘years’ for passenger numbers to return to pre-crisis levels. Travelling will be looked at with a hint of suspicion and travellers will be subject to norms which will impact their travel experience. The development of remote working will also play a part in decreasing demand. To tackle this, standardized norms and mechanisms should be adopted that will be applicable across all airports and airlines in India. This will help build passenger confidence by minimizing the risk associated with air travel. As a consequence, demand will increase. The airlines should stringently implement these norms. Any slip-ups will deeply affect their reputation and at the same will pose serious risk towards the health and safety of its consumers.
However, norms may also have a reverse effect i.e. they may deter passenger travel. Take for example the proposed rule of the UK government which lays down that all foreign travellers to the UK will be quarantined for 14 days. Such norms have the potential to ‘kill air travel’. Thus, while developing norms, Indian airlines, airports and the governments should adopt a balancing exercise. A norm can cause inconvenience to passengers to protect their health and wellness. However, norms should not cause such great inconvenience that the passenger might ultimately relinquish the idea of travelling.
Uncertainty is the buzz word at the moment. Owing to the unpredictable nature of the virus spread, flights might not run as per schedule even after the restrictions are lifted. Thus, airline operators have to be mindful of a variety of factors before scheduling their flights. They have to process information and decide to fly to those areas which pose the least risk of cancellation. High cancellation rates might lead to a loss of consumer confidence in air travel.
ConclusionThe Covid-19 pandemic has been a rude wake-up call to the entire world. Questions keep arising on how we can equip Indian airlines to tackle such crisis in the future. CAPA has suggested a regulatory measure wherein it becomes compulsory for the airlines to hold cash balances that can support at least three months of operations in the absence of revenue. Although logically the reform fulfills the purpose of helping the airlines during a crisis, the practical problems involved in its implementation are yet to be determined. It is highly unlikely that Indian airlines would agree to have cash reserves for three months if they are already operating in losses. Rather than implementing such one-off measures, the aviation industry in India requires major structural changes, that would enable airlines to be sustainable and profitable. The COVID 19 pandemic provides the perfect opportunity to start this process of restructuring and reformation.