COVID effect: When the weakest quarter becomes the strongest for airlines

Asia's Tech News Daily

#aviation, #Business, #coronavirus, #India, #Tourism, #Travel

Representational image.

Traditionally, Indian aviation has been divided into two ‘good’ and two ‘not good’ quarters. More often than not, this is also reflected in airline results. The April-May-June quarter or Q1 of the financial year is the one with summer holidays and the post-exam season, while Q3 is the one with festivities, comprising Dussehra, Navratri, Diwali and Christmas.

The alternating quarters — Q2 and Q4 — are characterised by lower traffic, with Q2 being the start of the educational calendar and characterised by monsoons across the country. Q4 is filled with examinations, which hamper Visiting Family and Friends (VFR) traffic and subdue business traffic.

These trends have gone for a toss post COVID-19. There was a total lockdown in the country starting from March 25, 2020. The resumption of air services two months later meant that the majority of Q1-FY21 was washed out. The remainder of the year was muted with airlines allowed to operate only 33 percent of their pre-COVID capacity.

A year before that, the industry saw a dip in passengers due to the suspension by Jet Airways. The perceived benefit that other airlines were expected to get long term was negated by the pandemic.

What changed?

The pandemic and waves of COVID-19 are not in sync with the Indian holiday season. The pandemic-induced lockdown started during peak season. When things started improving towards the end of 2020, the complex rules of travel led to passengers taking other modes of transport.

When things started looking brighter at the end of February, the second wave hit hard, washing away the entire quarter and negating any gains that had been made.

Good for revenue

This is results season and IndiGo and SpiceJet, the two listed airlines, are likely to announce their quarterly results soon. The last quarter was a disaster for IndiGo. The airline recorded its highest-ever loss of Rs 3,179 crore. The numbers show that it actually saw losses balloon with higher operations. Most other operators muted capacity deployment while trying to plug cash flow.

IndiGo carried 107.18 lakh passengers during the quarter, 80 percent more than the previous quarter. For SpiceJet, growth was relatively slower with Q2-FY22 showing an increase of only 39 percent in passenger numbers over the previous quarter. While it is standard to map data against the same quarter for the previous year, the way traffic moves, it is important to understand the change sequentially.

The airlines will also benefit from the increased floor prices for fares, which were raised in June to cater to the increased input costs of the airlines. IndiGo could see its operating revenue in the range of Rs 5,250 to Rs 5,400 crore, while SpiceJet could see revenue range between Rs 1,100 and Rs 1,350 crore. These airlines have also been focusing heavily on cargo operations, with SpiceJet continuing some wet-leased wide-body operations, despite the challenges that cropped up after the events in Afghanistan and subsequent closure of airspace over that country.

Profitability still elusive?

While airlines will see their revenue go up, costs have also gone up, too. Aviation Turbine Fuel (ATF) costs, which account for 35 percent of total costs in airline balance sheets, have gone up over 95 percent from last October. The price of ATF is now at its highest level in four years. For an industry that is not attracting enough passengers, and that has planes grounded, any addition to input costs has an adverse impact.

Adding to this, the rupee has depreciated nearly 3 percent against the dollar, year on year (YoY). Some of the bills of airlines, such as leasing costs, are dollar denominated, and a sliding rupee therefore has an adverse impact. Some of this is buffered with income in foreign currency, which an airline gets by flying international. But international flying has either been off limits or is very limited for all airlines.

Tail Note

India has just crossed the 100-crore vaccination mark. While the second wave had a long tail, there are some concerns about a third one. Neither virologists nor data scientists have been able to predict the behaviour of the virus. Will the higher vaccination rate help prevent another wave?

Tourism is opening up and so is business travel. States have relaxed regulations for those who are fully vaccinated, and international travel is set to resume next month. The real question then is: how long will it take for airlines to return to profitability?

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