Fitch Ratings-Singapore-26 August 2020: The weak liquidity position of some Indian airlines is likely to force them to curtail operations and allow stronger rivals to enhance their presence in the domestic aviation sector, Fitch Ratings says. A higher market share, apart from cost-cutting measures, will allow airlines such as market leader IndiGo to improve their performance after a sharp drop in earnings in 2Q20, even though overall travel demand is unlikely to rebound quickly.  

We think IndiGo is well placed to further consolidate its market position in the coming months due to the liquidity pressure at rival airlines. Its share of domestic passengers has already risen to 60% by end-July 2020 from 48% in 1Q20. The Tata group may also be consolidating its presence in the Indian aviation sector with a bid for state-owned Air India. The group, which already has 51% stakes in low-cost carrier AirAsia India and full-service airline Vistara, is evaluating whether to place a bid for Air India before the 31 August 2020 deadline.

Earlier bidding rounds to privatise Air India, which was owned by the Tata group before nationalisation in 1953, have been unsuccessful. However, the terms for potential buyers have been improved in the latest round. The government is offering 100% divestment, including Air India's real-estate assets. The airline's large debt burden will also be split and 60% will be retained by the government.

IndiGo reported a large EBITDAR loss in the quarter ended June 2020 after cutting back its operations significantly in April and May to cargo and chartered flights. The company's capacity as of end-June was around 25% of its capacity before restrictions were put in place to curb the spread of the coronavirus. The company mitigated the impact of an almost 90% fall in revenue by focusing on lowering its fixed costs for aircraft and engine leasing through capacity optimisation and re-negotiating lease terms with lessors, and employee expense through a mix of measures such as salary reduction, leave without pay and retrenchment. IndiGo also plans to boost its liquidity, which is robust as it has a net cash position after excluding capitalised operating lease liabilities, through measures such as the sale and leaseback of its unencumbered assets and equity raising.

IndiGo's position contrasts with that of SpiceJet, which had the second-largest domestic market share of 16% as of July, but is facing liquidity-related challenges. SpiceJet's standby letter of credit facility remained unpaid for more than 30 days as of end-June 2020 and the company asked the market regulator for a delay in the reporting of its financial results for the year ended March 2020 to July, from end-June. Another carrier, Go Air, which is privately held, has been asked by the Airports Authority of India to clear its unpaid dues and pay upfront for utilising airport services.

The Indian government allowed domestic flight operations to resume from 25 May 2020, two months after they were prohibited. However, capacity restrictions and fare brackets remain in place. The government initially allowed carriers to deploy only 33% of their capacity in place before 25 March and this was increased to 45% in late June. Fare brackets were also put in place to prevent price spikes and help airlines cover their costs. These restrictions have been extended until 24 November. Airlines have also been encouraged to keep middle seats or seats between passengers vacant. However, they must give passengers on these seats wrap gowns.

The fall in domestic air travel demand has been much sharper than the capacity cuts imposed for the industry. Domestic passenger traffic dropped by 82% yoy in July and most airlines reported passenger load factors of 50%-60%, compared with 80%-90% last year. The pick-up in domestic passenger volume since end-May 2020 has been slow, with traffic increasing by only 6% in July from the previous month. We think volume growth will remain in the single digits over the next few months, as the pandemic continues to spread in India and people forego non-essential travel.