The air cargo sector has been one of the hardest hit by the coronavirus pandemic that has rendered a death blow to the global economy. As the sector struggles to get back on its feet, we reached out to one of the former veterans of the Indian Economic Service, who talked about doing the needful in injecting life into the struggling economy. Dr Renu Singh Parmar, Former Senior Economic Advisor,Ministry of Civil Aviation, India, in this interview, offers her invaluable words of advice and suggestions on the structural changes that can ensure long term viability of the sector.
Air cargo, an important part of the global supply chain, has been facing the financial brunt of COVID-19. How prepared do you think is the aviation industry in pushing away the doomsday and staying afloat in the coming days?
Amongst all sectors, aviation is one of the hardest hit by the pandemic. The sudden grounding of India’s 650 aircraft in March of this year could very well be the death knell for a couple of airlines. The sector was ill prepared to face the pandemic crisis, particularly on account of the weak financial structure of its airlines, which operate on whisker thin margins. It’s a tough task for them to stay afloat, even with the calibrated opening up of the sector from May 25th 2020.
What trends should the aviation industry adopt in order to lift itself from the dire financial distress it is in, and be back on the track of development?
CAPA India has estimated that with the advent of the pandemic, India’s aviation sector could incur losses of USD 3.3 to 3.6 billion in first quarter of FY2021. They expect that the impact of COVID-19 will be so severe that even the stronger carriers like Indigo and Spicejet may not be immune, and smaller carriers may exit.
During the pandemic, airlines have resorted to ferrying cargo to keep themselves afloat: Spicejet, Indigo and Vistara have converted some of their passenger jets so as to carry cargo in cabin. Spicejet recently converted three of its Q400 Bombardiers into freighters and now has a freighter fleet of eight. They have transported around 12,000 tonnes of shipments on approximately 1760 flights so far. Indigo too has undertaken about 230 such flights and have also recently converted 100 passenger aircraft for cargo carriage. This is the trend worldwide. Earning from cargo operations has been the only silver lining for airlines during the lockdown period, but is likely to continue playing a significant role in airline strategy in the days to come. With the partial opening up of flight operations from 25th May, there is some further relief.
However, mandated floors and caps on air fares have been a major setback, as in so far they unnecessarily restrict market play. The situation is likely to continue till August, after which it is hoped that airlines would decide price points. International flights too are expected to restart around that time. Even with some modicum of normalcy returning to the sector in Q3 or Q4 FY21, CAPA estimates that there would still be a surplus of 200-250 aircraft for a period of 6-12 months. Given the bleak scenario, some immediate structural changes need to be undertaken for the long term viability of the sector. CAPA India have consistently pointed out the over reliance of our airlines on sale and lease back margins and advance sales to generate cash, with little or no liquidity to survive downward cycles and certainly not during the pandemic. When airlines expand without the strength of their balance sheets to support their growth, it results in excess capacity and loss-leader pricing which destabilises the entire industry. This reckless strategy of profitless growth in the Indian aviation industry in the past has weakened its foundation, making it highly vulnerable to external shocks. The immediate requirement is a recapitalisation of the airline industry. CAPA India estimates that this would be in the vicinity of USD 2.5 billion, including USD 1.5 billion for Air India, to tide over the current crisis. One of the recommendations that CAPA Advisory has regularly proposed is the introduction of a requirement for airlines to hold cash balances that can support at least three, and ideally six, months of operations in the absence of revenue, in order to be able to both obtain and to renew an AOP. This is an important and very pertinent advisory which the Government should take note of, so as to lay the foundation for a sustained growth of the aviation sector.
All sectors in aviation, apart from airlines, including airports, MRO, ground handling and cargo will have to rationalise and consolidate their operations, to bring down costs and improve efficiencies. Downsizing and greater use of automation/AI will be inevitable.
As the former Senior Economic Advisor for MoCA, what efforts and measures do you think should be taken to bring India on the path to economic recovery?
The COVID pandemic has knocked the bottom out of the Indian economy. Around 122 million people have lost their jobs, a majority being in the unorganised sector. The unemployment rate in the country has shot up to near 25%. The GDP in FY20 is down to 1.2% and estimated to take a further hit of 4-5% in FY21. The economic scenario couldn’t be worse.
The Government has taken a number of steps to ‘revive’ the economy. Although there is an attempt to tackle the supply side constraints through measures addressing the need of various sectors, prominently the MSMEs, and agriculture and allied sectors, there has been little demand side stimulus, which is crucial to reviving consumption in the economy. Even before the pandemic hit, consumption had plummeted in the economy, having gone down by 3.7% in 2017 -18 over 2011- 12. The NSSO data threw up the fact that the consumer spending fell drastically by 8.8% in the rural sector. Niti Aayog’s recent report on poverty endorses this, pointing out that poverty has gone up in 22 states and UTs. The situation has been further aggravated by the pandemic that threatens to send the economy into a tailspin.
To step up demand in the economy, the following should be pursued by Government:
1.Apart from the additional `4000 crore allocated for MNREGA, an unemployment allowance of around `200 per day should be made available to anybody seeking a job, and not covered under MNREGA. Alternatively, MNREGA wages should be paid to all job seekers, even if not covered under the scheme. This would include the urban poor and the massive number of migrants that recently went home, but have no jobs. State governments that have witnessed the return of the migrants should skill-map them and match them to the relevant local industry. Getting the employment numbers back on track will bolster demand.
2. Massive public infrastructure projects should be kick started, like watershed management, water conservation and irrigation related activities, afforestation, construction of rural roads land reclamation, sanitation and housing (as more and more migrants return home) etc. These will provide additional job opportunities and can be funded through existing funds for such programmes or the monies received from the World Bank. Financing through open market borrowings to fund the programmes will also be well worth it, despite the higher fiscal deficit it entails.
3. MSMEs will have to get back on their feet as soon as possible with the help of the collateral free loans and 100% credit guarantee cover offered by the government, so as to restart and re-employ those laid off. This is easier said than done, since shortage of workers is a real problem after the reverse migration. Banks too will have to go all out to facilitate MSMEs, which again is not very likely as they have become highly risk-averse.
Last month, our Finance Minister had announced that 12 airports in the country will be auctioned under the public-private partnership (PPP) model. What do you think will be the short term and long term impact of such initiatives?
In the short term, every outcome is determined by the pandemic, which will be deep and lasting. Therefore, the long term will also get impacted by what happens now and how aviation adapts to the new normal.
To begin with, privatisation of airports is hardly the need of the hour. If it is for raising resources for AAI, then it will not meet its objective in these pandemic-hit times; or for that matter, in the times to come. Adanis, who had won the bids of 6 airports earlier, are now in a quandary for being unable to pay asset transfer fees to AAI for some of the airports won.
Also, I don’t understand why so many airports, which are profit-making and doing relatively well, need to be privatized. Globally, most airports in the world are publicly held whether in most states of the US or Singapore, Dubai, Bangkok, Doha or Istanbul. What is the benefit of handing over land and other assets to entities who hardly have experience in managing aviation infrastructure? Further, the bidding process so far has been based on Per Passenger Fee; the one bidding the highest, wins the bid, as did Adani. This translates into higher airport fees for passengers and higher ticket prices definitely goes against the interests of consumers. With the coronavirus in the air for at least another year, it seems highly unlikely that any private party will see any merit in acquiring airports.
To read the full interview, click here.