April 13, 2020 I Ratings

COVID-19 Impact: INDIAN

The global economy has been hit hard by the unexpected outbreak of
AIRLINE INDUSTRY
COVID-19, which has now posed fresh challenges across all geographies
and sectors. The airline industry which was already grappling with
Contact:
multiple issues will have to face a new problem of COVID-19.
Amod Khanorkar
Senior Director Also, the journey towards normalcy is expected to be tough for Airline
amod.khanorkar@careratings.com
industry given the uncertainty on the lock down and timelines of
+91-22-6754 3520
removal of restrictions by DGCA on domestic and international routes.
Authors:
Jasmeen Kaur
The impact of COVID-19, the mitigants to counter the damage and the
Associate Director possible impact on the credit rating and outlook is presented below.
jasmeen.kaur@careratings.com
+91-11-4533 3245 1. Impact of COVID-19
Kunal Arora
The sector was already grappling with reduced demand along with
Senior Manager technological challenges faced by different airline operators (Boeing
kunal.arora@careratings.com
+91-11-4533 3247 MAX 737 grounding impacting SpiceJet, P&W engine related issues
impacting operations of Indigo and GoAir). Transportation sector is one
Mradul Mishra (Media Contact)
mradul.mishra@careratings.com of the worst hit sectors globally and in India due to Covid-19.
+91-22-6837 4424
Given the widespread outbreak, the governments all over the world
have put various restrictions on travel including India. Initially, In India,
all international flights were banned from flying for a period of 1 week
starting from March 23, 2020 to March 29, 2020 as per the order of
Directorate General of Civil Aviation (DGCA). However, the same was
later extended till April 14, 2020 in-line with complete lock down across
India for a period 21 days ending on April 14, 2020. Also, with respect
to domestic passenger flight operations, the same were also suspended
by DGCA from midnight of March 24, 2020 till April 14, 2020. The above
mentioned restrictions are not applicable to cargo operations and
flights specifically approved by DGCA. The aviation sector revenues
have been hit significantly given the halt in full operations of
commercial flights across India and abroad with a possibility of travel
ban to be continued beyond April 14, 2020.
Airline business is a very high fixed cost business with major expenses
including fuel costs (~30-35% of total costs), lease charges (~30-35% of
total costs) and O&M costs (~15-20% of total costs) constituting more
than 85-90% of the total costs. Though airlines are not bearing fuel
costs given the lock-down scenario, costs related to fuel (ATF), lease
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 Ratings I COVID-19 Impact: INDIAN AIRLINE INDUSTRY

rentals (usually payable monthly) and O&M costs which are largely fixed in nature need to be borne by all the players
(lease rentals are fixed in nature whether availed under operating or financing lease arrangement while minimum O&M
activities needs to be done in all the grounded planes as per DGCA guidelines). Also, all such operating expenses (lease
rentals, O&M expenses) are paid in foreign currency (USD, EUR etc) and are largely unhedged exposing all airline
operators to volatility in forex rates (in last 1 year, INR has depreciated by around 10% against USD) which can have a
strong bearing on profitability.
2. Mitigants to counter the impact
Though the crude oil prices have eased significantly with Brent crude oil prices currently hovering around USD
30/barrel (as compared to USD 55/barrel in February 2020 and USD 60/barrel in December 2019), the airlines are
unable to benefit from the same as the operations are completely halted given the current national level shut-down.
Nevertheless, the operators will likely benefit from the low crude oil prices once the operations restarts though
uncertainty remains on ramp-up of traffic.
Also, possible deferment of lease rental charges could be an option, though the same would be dependent upon timely
approval of the lessors (airline operators would need approval for lease deferments via each individual lessor).
Additionally, rationalization of costs would be critical including employee expenses which form the remaining around
10% of the cost structure.
3. Impact on credit ratings /outlook
The overall impact on business and financial risk profiles of airlines is expected to be negative in short to medium term.
The travel bans within and outside India along with visa cancellations is expected to impact the cash flows of all the
airline operators as lease rentals are largely fixed in nature. Also, the airline operators will have to bear the O&M
related costs as the airlines would have to continue the regular O&M related activities as per DGCA guidelines.
Additionally, the impact of travel ban and restriction is expected to be felt even after the lock down is lifted as
travellers would avoid unnecessary travels till the time Covid-19 situation is stabilised. Also how social distancing norms
on flights will be addressed by the airlines remains to be seen.
Also, majority of airline operators in India were in aggressive expansion phase with plans of inducting newer advanced
planes having higher seat capacities and improved fuel efficiencies but higher lease rentals as well. Accordingly, ramp-
up of demand post removal of lock-down would be extremely crucial to maintain profitability.

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