Smaller airlines, such as SpiceJet Ltd, will be under far greater pressure. It had practically no cash to speak of before the lockdown. And its net worth was negative ( ₹850 crore in end-September 2019), owing to past losses. A two-month freeze on revenue has made things far worse. Varun Ginodia, an analyst with Ambit Capital Pvt. Ltd, said SpiceJet may well flounder. In essence, there will be little left for equity investors, even in a best-case scenario of a buyout. “In all likelihood, we believe SpiceJet will go down the Yes Bank way, leaving very little for equity investors. The only thing that can probably save SpiceJet now is an equity infusion from a large government-owned airline or a deep-pocketed private equity investor."
But merger and acquisition (M&A) interest could be really low given the high competitive intensity in Indian aviation. It’s little wonder the company’s shares fell by the maximum permissible of 5% on Monday.
What’s more, another big problem for the sector is the uncertainty over when airlines can resume operations. The curbs on air travel have been extended yet again.
Not operating for two months would mean that the June quarter, which is a slightly better quarter for airlines, is a complete washout. After this, we have the seasonally weakest September quarter.Whether demand revives in the second half would depend on how the virus situation shapes up. Passenger load factors are expected to be low initially.
IndiGo’s large cash pile is helpful in these times and puts as among the best-placed in the Indian aviation sector to deal with this crisis. As on 31 December, IndiGo had free cash worth ₹9,412.8 crore. At the end of September 2019, IndiGo’s net worth was over ₹6,000 crore.
While there was no direct support for airlines, some reform measures were announced. A key announcement for aviation was that restrictions on utilization of Indian air pace will be eased. This can help save costs.
“The announcement would lead to more direct routes between cities, thus increasing average aircraft utilization rates (block hours/day) and reducing fuel expenses (35-40% of sales)," said analysts from Motilal Oswal Financial Services Ltd. The government also emphasized on making India a global hub for aircraft maintenance, repair and overhaul. This will help reduce maintenance costs for airlines in the long run.
The immediate concern, however, is on the revenue front, as well as capital. The outlook for both have become weaker in the past week.