How Covid-19 gives India's private airlines a chance to go international

Private airlines in India are battling losses. The crisis gives them an opportunity, but there are challenges, too. Sai Manish lists the challenges for an Indian private airline to fly international

SpiceJet and Vistara recently started flights to London after bagging slots at Heathrow airport, dubbed by Virgin Atlantic founder Richard Branson as the world’s most expensive piece of concrete that can be owned for 90 seconds. Many questions came to mind about India’s private airlines international plans.

Is the Indian government, which is only concerned with state-carrier Air India’s international presence, finally helping private airlines bag slots under its bilateral air services agreement with the UK? Are private airlines, despite domestic losses, looking to fill the void left by Jet Airways on long haul, non-stop flights across continental Europe to the UK and to the US without making the layover at Dubai or Abu Dhabi? Do private airlines have the financial strength and management acumen--not to mention the right fleets--to succeed as international brands?

Game of slots

Business Standard’s examination shows that more than 600 slots at three major airports—Heathrow, Dubai and New York’s JFK International—could be at stake if nine airlines go out of business. Most of these slots are at Heathrow and owned by Virgin Atlantic and Flybe, the defunct British domestic carrier.

“The government should ask private airlines to connect cities like Hyderabad, Bengaluru and other non-Delhi non-Mumbai routes with non-stop flights to the US and UK. Air India mostly connects Delhi and Mumbai to US. People from other cities have to go to the Gulf on Indian carriers and then use services of other airlines to fly to the US and Europe," said Jitender Bhargava, former executive director of Air India.

"This crisis is a golden opportunity for India’s airlines to start long haul operations. More airport slots are available. Aircraft leases will get cheaper as many airlines have simply parked their planes in deserts anticipating low demand for the next three years. If there ever was a moment to start non-stop flying for other Indian airlines, it is now,” he said.

The coronavirus pandemic has created an aversion for one-stop flights, so private airlines could be eyeing long haul non-stop flying: a role that has been the exclusive domain of Air India.

The industry reckons the mayhem from the coronavirus will continue till 2023, but airlines that survive will be quite like vultures circling over dying prey and swooping in. Their target would be airport slots vacated by airlines that fail to survive the $84 billion losses global aviation is expected to suffer in 2020 due to coronavirus-related travel restrictions. Virgin Atlantic, the UK-headquartered airline, has filed for Chapter 15 bankruptcy protection in the US even as it seeks to raise $1.5 billion from European investors to avoid going out of business. The airline has sold its Australian arm to Bain Capital, which in turn has suspended the airline’s domestic operations of its regional subsidiary Tiger Air. If Virgin fails to raise funds, its surviving global operations could well go the Australian way.

According to Airlines for America, a Washington DC-based trade group of North American Airlines, at least 17 other international and domestic airlines have had either to restructure their ownership to ensure survival or cease operations completely. Colombia’s Avianca, Mexico’s Aeroméxico, Chile’s LATAM, German Air, Alitalia, Air Mauritius, and South African Airways are other airlines in trouble.

The world’s busiest airports have coordinated slots during which airlines can land and depart. Slots are needed because an airport’s infrastructure isn’t sufficient to handle the demand for airlines to operate from that airport. Countries usually give lucrative daily slots to their domestic airlines.

For a pie of Heathrow

Heathrow is a rare airport to allow airlines to trade slots. A British Parliament report estimates that Heathrow’s slots can fetch anywhere between 5 million GBP to 15 million GBP depending on time. Airlines can pay for a lucrative morning slot, or lease it out. The morning slots arwe uually the coveted ones and fetch huge premiums.

In March 2020, Air India leased six evening and late night slots at Heathrow from Indonesia’s Garuda Air for an undisclosed amount. British Airways bagged most of Flybe’s slots. A handful of late evening slots were transferred to Virgin Atlantic. If an airline fails to use 80 per cent of its slots, it must returned them. This ‘use it or lose it’ rule has been suspended till October 2020 for the Covid-19 crisis. Alitalia has 68 slots a week at Heathrow: Italy’s national airline has been bailed out for the moment but questions remain on its future viability. Aeroméxico and LATAM, which have entered bankruptcy protection, have 28 weekly slots between them at Heathrow. Air Mauritius, which has been declared insolvent, has six weekly slots at Heathrow.

Vistara, SpiceJet and Indigo applied but none has slots at Heathrow yet, though Vistara and SpiceJet have announced non-stop flights soon to the airport under India’s travel bubble arrangement with the UK. SpiceJet, the most aggressive of the three airlines, applied twice for 14 slots in 2019, and for 42 for operating flights from October 2020 to March 2021. ACL’s reports and trading data don’t show SpiceJet either being allotted a slot or having purchased or leased one, but the airline told India’s stock exchanges that it had bagged a slot at Heathrow from September this year.

The catch is that this slot comes under the India-UK travel bubble arrangement and SpiceJet can use it for less than two months before the winter schedule begins October 24. The airline's stock market filing notes that it is in “advance discussions to secure slots for winter schedule for regular operations.” SpiceJet has also been designated as a scheduled carrier to the US and UK under India’s bilateral air service agreements with these countries.

Vistara and Indigo also applied for 14 weekly slots each at Heathrow’s 2020 summer schedule, from March to October. Vistara again applied for 14 slots for the 2020-21 winter schedule but didn’t bag any. That’s not surprising considering that just 10 per cent of the 9,000 odd weekly slots at Heathrow are available for new entrants like SpiceJet, Indigo and Vistara. New entrants are supposed to get slots free, but airlines like Air India continue owning the quota practically forever under "grandfather" rights. Indian private airlines will most likely have to buy or lease slots at a time when such trade would be lucrative for carriers looking to raise additional financial resources.

India’s next international airline

India’s private airlines may aim to fly long haul international, but pandemic has dented their finances. The Centre for Asia Pacific Aviation (CAPA) has slashed domestic and international passenger forecasts to 70 million and 27 million respectively in 2020-21: a fall of almost 30 per cent over its projections before the damage of the pandemic became evident. CAPA estimated that barring Indigo, Indian airlines would have to raise $2.5 billion for survival.

“IndiGo is well-placed in terms of cash reserves ($1.13 billion of free cash and $1.33 billion of restricted cash) compared with other Indian carriers. However, it too is not immune to risks in the event of a prolonged crisis,” said a CAPA report in May.

"If it is only able to recover variable costs up until the end of the second quarter of 2020-21, IndiGo’s free cash may approach exhaustion and it could eventually need to dip into its restricted cash in the second half. The timing of this could be extended by a few months by negotiating deferrals on some payments to ride out the storm. But if risks remain elevated, IndiGo may consider enhancing its liquidity, such is the nature of the crisis,” said the report.

Indigo reported a loss of $370 million in the first quarter of 2020-21 and burnt almost $190 million of its cash reserves.

“You need deep pockets for long haul flying. You can’t just lease planes and start flying. There are associated operational costs and getting slots is paramount. Only Indigo has deep pockets. Vistara has great backing so it can also invest more. What’s perhaps more pertinent is whether there will be sufficient demand for airlines to even think of starting long haul direct operations” said Sanat Kaul, chairman at International Foundation for Aviation, Aerospace and Development.

India’s airlines do not seem to have a concrete plan to augment their fleets to fly non-stop to the UK and US. Their order book consists largely of narrow-bodied planes like the Airbus A320 Neos or the Boeing 737 Max, which would be deployed either domestically or to short-haul international destinations in the Gulf and South East Asia.

“Vistara has two Boeing 787s. SpiceJet and Indigo don’t have these planes. SpiceJet recently flew to Amsterdam by wet leasing a plane. Wet leasing wide-bodied planes for long haul flying is 30 to 40 per cent more expensive than dry leasing them. Eventually they will need to have their own pilots and crew operating these flights and would have to dry lease wide bodies” said Ajay Awtaney, an aviation analyst. (Dry is leasing an aircraft without the crew. Wet is leasing a plane with its crew.)

SpiceJet vs Vistara

SpiceJet did not respond to specific queries, but an employee said the airline has been wet leasing for years. SpiceJet became the first Indian budget carrier to fly non-stop to Canada on August 9 by transporting over 350 Canadian nationals on a wet-leased wide-bodied, twin-aisled Airbus A 330 Neo.

If Vistara bags slots at major US airports or Heathrow, it could be a shot in the arm for the airline considering its fleet strength. “Our wide-body aircraft--the Boeing 787-9 Dreamliner--are intended for use on long-haul international routes, covering destinations within 11 hours of flying time from India. Vistara is operationally ready to offer direct connectivity to long-haul destinations, especially with our second B787-9 Dreamliner joining our fleet,” said a spokesperson.

Almost six million passengers fly in and out of India monthly. Indian carriers garner 42 per cent of this traffic, which is mostly to Middle East nations. All Indian airlines fly to this region, but Air India Express and Indigo carry much of the traffic. Only state-owned Air India runs non-stop flights to much of continental Europe and the US. In 2018-19, India’s airlines carried 18 million passengers: up from 10 million in 2014-15. Air India and its subsidiary Air India Express carried 11 million of these passengers on their 172-aircraft fleet. As many as 49 of these aircraft were wide-bodied Boeings deployed on non-stop flights to Europe, US, Japan and other long-haul destinations. Indigo carried almost 5 million international passengers, up from 1.5 million during the same period.

As Air India’s share of international passengers stagnated, Indigo increased its proportion by a percentage point to seven per cent. While that maybe explained by Indigo’s massive expansion domestically, SpiceJet’s international growth came at the cost of its shrinking domestic operations. While Indigo claims to operate to 37 destinations globally, Air India operates to almost twice as many. SpiceJet operates to 10 cities worldwide: half of them in the Middle East. Vistara started flying internationally in 2018-19, serving five cities in Asia with its 42-fleet aircraft.

Indigo’s CEO Ronojoy Dutta, in a call with investors on July 29, spoke of cutting costs in most spheres except reducing commitments on leasing aircraft. Dutta, in November 2019, had indicated that buying wide-bodied planes to fly non-stop to London and Tokyo was “on the drawing table.” However, the pandemic seems to have put to rest those ambitions for the moment.

Awtaney said, “Right now Vistara looks better placed than others to start long haul international operations. If Indigo enters this game by leasing wide bodies that would definitely make things a lot more interesting.”