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Can airlines weather the Covid storm?

Analysts believe that the government’s stance to cap ticket prices will affect the sector’s profitability.

, ET Bureau|
Last Updated: May 28, 2020, 04.26 PM IST
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Airlines
Travellers may also find additional costs associated with air travel during the pandemic unjustifiable.
Notwithstanding the government’s decision to resume air traffic in the country, demand for commercial airlines is least likely to revive anytime soon given the impact of the pandemic on leisure travel and fast adoption of technologies that enable remote working for enterprises.

In addition, analysts believe that the government’s stance to cap ticket prices will affect the sector’s profitability since airlines would be unable to cover fixed costs.

According to industry trackers, after resuming services amid a nationwide lockdown that has lasted beyond two months, airlines will largely have to cater to the stranded passengers for at least the first 15 days. Once this phase is over, they may face demand slump owing to two factors.

First, the rapid spread of Covid-19 has affected leisure travel, which constitutes a large part of total travel spending. Second, technological services such as videoconferencing, digital applications and frequent use of webinars for communication have reduced the need for business travel.

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Travellers may also find additional costs associated with air travel during the pandemic unjustifiable. As per reports, a passenger arriving at an airport will be quarantined for 14 days and will have to bear half of the cost of the quarantine stay. Another dampener is the limit set on ticket prices.

According to brokerage Prabhudas Lilladher, considering 51-80% occupancy, the profit margin before taxes of airlines would not exceed 0.2%. An Icra study noted that the sector incurs net loss of Rs 75-90 crore a day.

Airlines with cash on the balance sheet will be able to deal with these challenges better. As of December 2019 quarter, IndiGo had a cash of Rs 9,410 crore while SpiceJet reported Rs 86.3 crore of cash in the September quarter.

That puts IndiGo in a better position. IndiGo operated 40% of the total flights that took off on Monday.
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