Indian government offers airlines support

The Indian government has extended a line of credit to the financially distressed domestic airline sector, subject to meeting certain conditions.

A credit line of up to Rs 15 billion from the Indian government is provided, subject to certain conditions. Scheduled passenger airlines with outstanding credit facilities, as of March 31, this year, and whose accounts are standard, will be eligible for a line of credit from the government.

This LoC is part of the Indian government’s relief package for many industries affected by the ongoing crisis in West Asia, including the Indian civil aviation sector. The package is called the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0. was approved on Tuesday evening.

The scheme aims to provide credit guarantee coverage of 90 percent for non-Micro Small and Medium Enterprises, as well as the airline sector, to Member Lending Institutions (MLIs) by National Credit Guarantee Trustee Company Limited (NCGTC) for the amount in default under the additional credit facility extended to the eligible borrowers to tide over any short-term liquidity mismatches in view of the West Asia Crisis.

The ECLGS seeks to provide the domestic airline sector with a 7-year tenor from the date of first disbursement, including a 2-year moratorium.  For airlines up to 100 percent (capped at Rs.15 billion per borrower, subject to satisfying certain specific conditions).

This is the latest in a series of steps taken by the Indian government to help the beleaguered Indian aviation sector.

On April 4, the Union Civil Aviation Minister Ram Mohan Naidu announced a series of relief measures for domestic airlines, including a 25 percent reduction in landing and parking charges, amid disruptions caused by the ongoing West Asia crisis.

The Ministry of Civil Aviation (MoCA) said the aviation sector has been impacted by a sharp increase in Aviation Turbine Fuel (ATF) prices due to global crude oil volatility.

To cushion the impact, the government had earlier capped the pass-through of ATF price increases for domestic airlines at 25 percent even as global fuel costs surged significantly.

As part of the latest intervention, the Ministry has directed the Airports Economic Regulatory Authority (AERA) to reduce landing and parking charges by 25 percent at all major airports for domestic flights.

The reduction has come into immediate effect and will remain in place for three months.

Similarly, the Airports Authority of India (AAI) has been instructed to implement the same reduction at non-major airports nationwide.

The government estimates that the move will reduce airlines’ expenses by approximately ? 4 billion over the three-month period.

Indian airlines have taken a number of steps to mitigate the fuel increase 

Indian airlines, like their counterparts abroad, have also hiked the fuel surcharge to offset rising fuel prices. From April 8, Air India introduced a graded fuel surcharge, which ranged from Rs 299 for distances up to 500 kilometers to Rs 899 for distances of 2000 kilometers or more. The fuel surcharge hike on its international flights varied more widely, ranging from $50 for destinations in West Asia/Middle East to $280 for destinations in North America and Australia. While the hike in fuel surcharge to West Asia/Middle East and other parts of the world took effect on April 8, the enhanced fuel surcharge for North America and Australia has been in force since April 10.

“According to the latest data published by the International Air Transport Association (IATA), the global average jet fuel price rose to $ 195.19 per barrel for the week ending 27 March this year, up from $ 99.40 at the end of February, recording a surge of close to 100 percent. ATF, produced by refining crude oil, has seen simultaneous increases in both its crude oil component as well as the refinery margin, known as ‘crack spread’, with the latter having nearly tripled within three weeks. It increased from $ 27.83 per barrel for the week ending 27 February to $ 81.44 for the week ending 27 March. This steep rise compounds the impact of rising crude oil prices, creating one of the most challenging fuel cost environments that airlines globally have faced in recent years,” the airline said in a statement explaining the rationale behind the hike in fuel surcharge, adding, “the fuel surcharges on international routes do not compensate for the exponential increase in jet fuel prices for international flights. Air India continues to absorb a significant portion of this increased cost”.

In addition, Air India has introduced a temporary cutback on its domestic flight schedule. While the airline has not issued any official statement on the cutback of flights. There have been various media reports in India saying that the airline was cutting back on flights

The Times of India, the largest English-language daily newspaper, reported that Air India is set to cut almost 100 domestic and international flights until July, as rising jet fuel prices and airspace restrictions make it difficult to operate international flights. The newspaper also quoted the outgoing airline Chief Executive Officer, Campbell Wilson, as telling employees that the airline has already reduced flights in April and May, and that the worsening situation meant the cuts would continue until June and July.

Critics of the latest proposals

There are a few who feel that this government proposal has come too late to save two premier airlines —Kingfisher and Jet Airways—both of which received no government bailout and have since ceased operations.

In the case of Jet Airways, which ‘temporarily suspended’ operations in April 2019, it needed about Rs 12-15 billion to rebuild the airline it was. But it found it difficult to raise the funds and stopped operations. These critics, however, refused to be identified.

Comments

Commenting on the latest government initiative, Satyendra Pandey, Managing Partner, Aairavat Technology & Transport Ventures Private Ltd., says that India’s airlines are caught in a perfect storm driven by the West Asia geopolitical conflict, with fuel costs, financing constraints, and foreign exchange volatility creating a severe cash-flow crisis.

“The consequences extend well beyond individual balance sheets. Sustained operational disruption risks meaningful setbacks to employment, economic connectivity, and the broader infrastructure India has built to support aviation growth including two brand new airports in Mumbai and Delhi” Pandey says.

He adds that what makes this challenge even more complex is that India’s airlines have skewed network exposure to the Gulf, which is the most impacted by the West Asia conflict. “Indeed, the Gulf represents one of the most commercially compelling corridors for Indian airlines — combining high-frequency diaspora demand with stage lengths that make narrow-body deployment both operationally efficient and commercially profitable,” Pandey says.

To put the scale in perspective: the UAE alone commands 27 percent of India’s international seat capacity, at 1.2 million monthly seats — no other single market comes close, making the current disruption to this corridor particularly consequential.

Pandey feels that the 18–21 percent capacity variance on the India–UAE sector compared to the prior year is a material swing by any measure, and on a day-to-day basis, the volatility is even more

“As the industry adage rightly holds, ‘Cash is a fact; profit is an opinion” — and the current mismatch between outgoing cash-flow and forward booking revenues means working capital is a key challenge, pointing out that the Federation of Indian Airlines (FIA) has warned that carriers are on the “verge of closing down” — signaling systemic, not isolated, distress.

Pandey is of the view that in direct response, the Indian government approved ECLGS 5.0 on May 5, a sovereign credit backstop covering airlines and SMEs.

“For several carriers, ECLGS may represent their only viable credit access, given how prior restructurings and liquidations have led to restrained lending by banks. With airlines at the apex of the aviation ecosystem, an airline failure cascades throughout the ecosystem. As such, it is not a contained event,” he says.

Captain P. P Singh, Former SVP-Operations and Accountable Manager at Jet Airways, believes that the current business environment, including high fuel prices, is something no airline could have realistically planned for. “Even before the Iran crisis, the aviation industry in India was struggling with a sudden tapering of growth and increase in costs. The recent accidents and disruptions due to pilot shortages had cast their own shadow on the industry, although their impact is hard to quantify. It is also undeniable that the lack of competition in India has reached a stage where the Government cannot afford any more carriers exiting the market, and hence it is forced to treat the airline industry as a special case as evident from this policy” the Captain says.

He points out that most government policies, however well-intentioned, struggle to achieve their objectives due to implementation gaps and misuse. “The details of eligibility and quantitative criteria applied are not very clear at the moment, but some pertinent questions do arise. Firstly, how will the credit line help the players who have been failing for years, even when the oil prices were low? For example, one large player had already posted losses of about $2 billion in the last fiscal year before the Iran war even started, and another is long known to have almost no visible path to profitability. Secondly, how will the government get its money back? Post-COVID-19 pandemic, the US government provided loans and grants worth over $50 billion and received warrants convertible to equity in return. Finally, it was forced to auction the warrants for about $ 550 million, thus getting into a cents-to-dollar situation itself,” he says.

The captain adds that it is an unavoidable decision, but it should be remembered that providing bailouts to turn an entire industry around is different from propping up failed business models and incompetent managements.

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