Wednesday, August 26, 2020

Further Consolidation in Indian Aviation on Slow Demand Rebound

Singapore: The weak liquidity position of some Indian airlines is likely to force them to curtail operations and allow stronger rivals to enhance their presence in the domestic aviation sector, Fitch Ratings says. A higher market share, apart from cost-cutting measures, will allow airlines such as market leader IndiGo to improve their performance after a sharp drop in earnings in 2Q20, even though overall travel demand is unlikely to rebound quickly.

We think IndiGo is well placed to further consolidate its market position in the coming months due to the liquidity pressure at rival airlines. Its share of domestic passengers has already risen to 60% by end-July 2020 from 48% in 1Q20. The Tata group may also be consolidating its presence in the Indian aviation sector with a bid for state-owned Air India. The group, which already has 51% stakes in low-cost carrier AirAsia India and full-service airline Vistara, is evaluating whether to place a bid for Air India before the 31 August 2020 deadline.

Earlier bidding rounds to privatise Air India, which was owned by the Tata group before nationalisation in 1953, have been unsuccessful. However, the terms for potential buyers have been improved in the latest round. The government is offering 100% divestment, including Air India's real-estate assets. The airline's large debt burden will also be split and 60% will be retained by the government.

IndiGo reported a large EBITDAR loss in the quarter ended June 2020 after cutting back its operations significantly in April and May to cargo and chartered flights. The company's capacity as of end-June was around 25% of its capacity before restrictions were put in place to curb the spread of the coronavirus. The company mitigated the impact of an almost 90% fall in revenue by focusing on lowering its fixed costs for aircraft and engine leasing through capacity optimisation and re-negotiating lease terms with lessors, and employee expense through a mix of measures such as salary reduction, leave without pay and retrenchment. IndiGo also plans to boost its liquidity, which is robust as it has a net cash position after excluding capitalised operating lease liabilities, through measures such as the sale and leaseback of its unencumbered assets and equity raising.
26/08/20 Fitch Ratings

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