TLI Staff
New Delhi: Reduction in air fares along with the sharply lower passenger volumes in the wake of Coronavirus outbreak could lead to a sharp decline in the operating margins of the airlines.
As the economic impact of the deadly virus has been deepening by the day, the airlines may post large losses in the January-March quarter of the current fiscal and also in the subsequent quarter. The airlines which have a higher presence in international routes will clearly witness a larger impact, said Acuité Ratings & Research Ltd in its report on impact of Covid-19 on domestic airline industry.
The research and rating firm said that domestic aviation industry would witness a sharp plunge in demand during the peak tourist season (March-May 2020) given the rapid spread of the novel Coronavirus (Covid-19) globally and gradually across India. The drop in domestic passenger traffic over the next three months can be as high as 50 per cent and can pose a severe threat to the profitability of the airline sector unless there is a near-term moderation in the spread of the pandemic.
Covid-19 or the Coronavirus has hit the global trade and economy hard in the last two months and is set to further damage it. The global growth estimates has been substantially revised to 2.4 per cent from 2.9 per cent with severe economic disruption and recession risks in some developed nations.
There has already been a drastic impact on the global aviation industry since the outbreak in China in January 2020 with large scale flight cancellations and rising travel restrictions imposed by governments. Global airline grouping International Air Transport Association (IATS) IATA has estimated that the aggregate passenger revenue losses can reach $113 billion in the current calendar thereby impacting the sustainability of several global airlines.
Acuite Ratings said that with the announcement of drastic preventive measures that include the temporary suspension of foreign visas up to April 15, 2020 and shutdown of schools, malls and other places of public activity in some states, there is an increasing risk perception about airline travel, translating to rapidly rising ticket cancellations and a slowdown in fresh bookings.
“While the domestic airline industry started to benefit from the consolidation brought about by the exit of a large domestic airline and lately a drop in fuel prices in H2FY20, the emergence of Covid-19 poses a severe threat to the turnaround of a few players and even challenges the sustainability of a few others. With the continuing spread of Covid-19 virus, the average passenger load factor (PLF) may decline to 50%-60% in the summer season (Mar-May 2020) as compared to over 85% in the corresponding period of previous year,” said Suman Chowdhury, President, Acuité Ratings & Research.
With an expectation of sharply lower PLF, there is a risk of a sharp fall in fares with 15-20 per cent decline being already witnessed in some of the trunk routes.
The rating firm, however, noted that corrective steps such as temporary cessation of flights in certain routes along with the drop in ATF (aviation turbine fuel) prices may offset the margin pressures to an extent.