Tuesday, September 28, 2021

Govt cuts airline capacity to 50% with effect from June 1st, 2021 owing to Covid-19 pandemic

by Staff Correspondent

As a part of its new directive GoI has decided to cut down the capacity for airlines to operate from 80 per cent to 50 per cent from 1st June, 2021 in order to safeguard viability of airlines with weak finances. Simultaneously it has increased the upper cap of airfare to go up by around 14 per cent due to the rise in fuel prices.

“In view of sudden change in the number of Covid-19 cases, and decrease in number of passengers and reduced occupancy, the existing capacity cap of 80 per cent is reduced to 50 per cent,” the Ministry of Civil Aviation said in an official statement.

The directive comes at a time when airlines suo moto have reduced capacity with some even flying less than 50 per cent capacity. Industry sources said that government’s direct intervention on fare and capacity have severely divided the airlines with SpiceJet, Go Air supporting the move whilst market leader Indigo and Tata Sons-owned Vistara opposing it.

Airlines like SpiceJet and Go Air’s finances are at an uncertain stage with both airlines on thin cash balance. Wadia group’s Go Air is planning to raise around Rs 3,600 crore to pay off debts and vendors, as reported earlier.

Aircraft lessors have sent notices to both Go Air and Spicejet for defaulting on lease payments. Sources said that in a meeting between secretary Pradeep Singh Kharola and airline executives, Spicejet and Go Air said that with flights being empty and fuel costs increasing it has become unviable to keep operations sustainable and the government should cut capacity.

In the said situation, airlines operating only a fraction of their aircraft in the near term, there is a possibility that stronger airlines will outnumber weaker airlines and distort pricing to fill up their aircraft, potentially affecting the financial viability of carriers as well as that of the industry. This situation needs due attention as envisaged.

India deregulated the aviation industry in 1994, allowing market forces to determine the fares. However, a clause in the Aircraft Act, 1934, which governs aviation in India, allows the government to frame any rules, including those related to the regulation of tariffs. However, last year when the airlines could restart operations after a closure of two months, the government had started the practice of controlling capacity and airfare.

With 250 aircraft and a healthier cash balance compared to its peers, IndiGo has the cushion to operate flights on one way with a lower load but make money on directions where it gets full capacity. The airline has a free cash balance of Rs 7,440 crore as on December 2020 and plans to raise Rs 3,000 crore through QIP which puts its solvency in a relatively comfortable position to tide through the Covid-19 crisis.

A network planner of a domestic player explained that at current fare levels, flights need to be at least 80 per cent full for an airline to have a chance to break even. But IndiGo’s cash balance allows it to operate a flight which has load on one way but virtually empty on return.

“Currently we are almost at 50 per cent occupancy as most of the metro cities are under lockdown but while IndiGo may not be able to recover the full cost of the trip, it can at least recoup the variable cost from one way,” an official expressed.

Variable costs go up or down, depending on how much the aircraft have been used. They include fuel, landing charges at airports, and crew allowances. India’s civil aviation minister Hardeep Singh Puri had earlier said that both passengers and airlines benefited from capacity and price caps set by the government

“Fare caps have benefited both the passengers and the airlines. There was a complete disruption of civil aviation traffic. And if you had not had the cap, you would have had some people utilising the resources to produce irrational fares,” he had further added.

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