How Indian airlines are getting by without a bailout, Indigo is the only one to maintain its robust balance sheet during COVID-19

It is challenging to run an aviation business even under normal conditions, now that many countries including India have stopped airlines for almost three months. How will they manage to re-start such a business? Due to the pandemic, the business is gasping for breath. In this crisis, airlines across the world have the government’s help to cope up with the damage. According to the International Air Transport Association (IATA), airlines worldwide were estimated to receive $123 billion from the government as of mid-may.

Whereas in India, the airlines have been largely left behind to ward off for themselves. This further raises the question of – how were they even manage to survive their businesses so far? As some of them had no cash reserves to speak of before the crisis. 

Worldwide, all airlines are getting moratorium or leeway on the payment of lease rentals in some way or another, India is no special. They are likely to receive this. The employee costs have been reduced to the salary cuts or even worsen, job cuts.

Every airline is working on strategies to re-built their business. Such as SpiceJet Ltd. has reconstructed its lease fixed and tend to do so to align the same with their reduced operations. Additionally, they have changed their pay structure to align with the operations where employees will only be paid according to the work hours contributed. Besides, there is an increase in SpiceJet operations, which helps cut the overall losses to that extent. 

On the other hand, Indigo claimed that it will not be paying dividends in 2021 to conserve liquidity. They are cutting employee cost, have put discretionary expenses at hold, and deferred certain capital expenditure. Meanwhile, according to the Business Standard report, Air India has begun the cost-cutting drives, mainly by sending around 600 staff on leave. Imagine how much unemployment this will generate!

Even though many companies are moving to cost cuts drives majorly by eliminating their manpower. But, cost cuts can only help to a limited extent, especially when there are no revenues left. While, many firms haven’t been straightforward about it, but it seems like they will be getting some liquidity support from India’s banking system. But obviously, it will come with some conditions and limits. 

But according to the analyst at Goldman Sachs, the consolidation in airlines is about to happen. It has been viewed that Tata Group may buy Air Asia’s stake in its Indian joint venture. It shows the potential for merging slots between Vistara and Tata Group, reducing a low-cost competitor in India about 7% of market share. Turnout that, Tata Group is not only putting his hands on Air Asia, but he may also be involved in another consolidation move with Air India. 

According to the analyst, Indigo is the only one who was able to maintain its robust balance sheet under the current environment. While the crude prices are low, airlines don’t gain much unsettled due to the reduced scale of operations. According to the Crisil Research, in 2021, the profit margin of airlines will decline and move in sync with the crude oil prices for the first time.

However, shares of SpiceJet and Indigo have declined 49% and 33% respectively since pre-COVID highs in February. With no operations for most of the June quarter, such results were expected. Analyst at the Kotak Institutional equities estimated that Indigo will face a 90% year-on-year drop in its revenue and a net loss of Rs. 2,401 crore. It was estimated that there will be a cash loss of Rs. 1,400 crore after adding back the depreciation. And, SpiceJet will be facing a net loss of Rs. 1,011 crore in its June quarter. 

While Indigo is enjoying an envious cash position, SpiceJet has hardly any cash to speak of. At the end-March, Indigo’s total cash was 20,376.9 crore, out of which restricted cash was Rs. 11,448.8 crore and free cash of Rs. 8,928.1 crore. SpiceJet hasn’t recorded their March earnings which makes it difficult to analyze its financial health. Indigo has plenty of cash under their reserves, but if their operations don’t boost, the investors should be ready for coming disappointments. 

This industry needs support to weather near term tempestuous.