aviation sector

On account of lockdown, all International and National flights were cancelled. Since the past two months, there’s been no revenue generated.

The aviation sector is one of those sectors which incurs a huge amount of fixed cost. One of the most expensive parts of an airline’s operations are fuel cost, and change in fuel prices which can either help or break an airlines profitability goals. In India due to variability of fuel prices with high taxes on jet fuels, it makes profit earning more difficult. Since fuel alone accounts for 40% of Indian airlines total cost.

In spite of this several airlines lowered the prices to uncomfortable levels to stay competitive in the market. which resulted in the demise of many prominent airlines. Since then it’s been clear that full-service carriers in India face an immense struggle to maintain or regain the profitability.

In India, low-cost carrier (LCC) was firstly introduced by Air Deccan. LCC charged for traditional services such as food and seat allocation and offer low fares. Today LCC command a 65% share of India’s domestic air passenger traffic. The concept of LCC worked then since the domestic aviation market was predominantly filled with leisure traveller who was price sensitive.

With the current status quo, leisure travelling might reduce. For the upcoming times, people would prefer to travel only if it’s necessary. Even after the normalcy returns, there might be travel restrictions and a behavioural change in public spending which might cause a sharp decline in both Domestic and International passenger traffic. It is doubtful whether the airlines would be able to continue to regain profits with the same LCC strategy.

Providing LCC might be a difficult task for the airline’s companies as well. Due to the current situation, Domestic aviation is likely to face liquidity issues. The aviation industry is expected to see sharp lower revenue during Q4FY20 and Q1FY21. The revenue loss to the aviation industry spread across airlines, airports and retail, about 70% of which would also be borne by airlines.

However, there is a sharp decline in global crude oil prices which might turn to be in favour of the aviation sector. But it will only be benefitted when airlines operate at optimum utilization. Also, there are high taxes imposed on jet fuel in India due to which India is unable to get benefitted by the decrease in prices. Companies with strong balance sheet might get benefitted however the companies with weaker balance sheet have to struggle.

There might be chances of a decrease in global crude oil prices in the near future if the demand remains below. Maybe then India can also get benefitted by the low prices.

The aviation sector might have to welcome new strategies to compete against this pandemic situation.