Domestic Airlines reeling under the pressure of deficit cash flow

Domestic Airlines in India has facing the burnt of the pandemic induced lockdown. It has caused major companies to report losses in Q1 FY21.

Domestic Airlines reeling under the pressure of deficit cash flow. Domestic Airlines in India has facing the burnt of the pandemic induced lock down. It has caused major companies to report losses in Q1 FY21 due to deficit cash flow.

Airlines across the world have sought government support to cope with the crisis. According to the International Air Transport Association, or IATA, airlines worldwide were estimated to have received $123 billion of government aid as of mid-May.

“Globally, all airlines are getting some or the other form of leeway or moratorium on the payment of lease rentals, and Indian airlines, too, are likely to receive this. Employee costs have been curtailed through salary cuts or at worst, job cuts,” said Mahantesh Sabarad, head of retail research, SBICAP Securities Ltd.

In an emailed response, SpiceJet Ltd had said, “We have restructured our lease fixed costs and continue to do so to align the same with our reduced operations.” Besides, SpiceJet’s cargo operations have increased, which helps cut overall losses to that extent.

IndiGo won’t be paying dividends in FY21 to conserve liquidity. It has put discretionary expenses on hold, deferred certain capital expenditure and is cutting employee costs.

According to a Business Standard report, Air India has begun a cost-cutting drive and will send around 600 staff on furlough in the first such move by the state-owned carrier.

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Analysts at Goldman Sachs said in a report this month, consolidation in airlines is imminent. Tata group may buy out Air Asia’s stake in their Indian joint venture. “This opens up a potential for merging slots with Vistara. And Tata group to focus on full-service and reduce a low-cost competitor in India (7% market share)”. Therefore, analysts at Credit Suisse Securities (India) Pvt. Ltd said in a 10 July note to clients.

Tata group may be involved in another consolidation move, given that they are so far the only bidder for Air India.

Shares of IndiGo and SpiceJet have declined 33% and 49% since their respective highs in February.

For IndiGo, analysts at Kotak Institutional Equities estimate a nearly 90% year-on-year drop. Furthermore, in revenue. And a net loss of ₹2,401 crore. After adding back depreciation, the broker’s estimates suggest a cash loss of about ₹1,400 crore. Centrum Broking Ltd estimates SpiceJet’s June quarter net loss at ₹1,011 crore.

Also in end-March, IndiGo’s total cash was ₹20,376.9 crore. Hence, out of which free cash was ₹8,928.1 crore and restricted cash was ₹11,448.8 crore.

“Even with large cash reserves, IndiGo will have to worry if losses persist even after Q1FY21. Estimates peg IndiGo’s profit before tax breakeven at a passenger load factor of 67-73%. In the coming quarters, utilization won’t be that much, as demand is really low,” said SBICAP’s Sabarad.

“(The) industry needs support to weather near term turbulence,” said Credit Suisse analysts.

Moreover, relief measures by government and the RBI is the need of the hour. However, with the Unlock stage, the revenue is expected to be on track soon.

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