IndiGo, SpiceJet Stare At Rs 7,000 Crore Hit From Covid-19 Shutdowns

IndiGo, operated by InterGlobe Aviation Ltd. and SpiceJet Ltd. are among the worst-hit airlines as the coronavirus pandemic ravages travel demand. The government-ordered suspension of all domestic flights starting midnight of March 24, albeit for public health reasons, will hurt business further.

The novel virus, which has so far infected nearly 500 people in India and killed 10, led to a slump in domestic air traffic for the airlines, while international flights completely dried up following the government’s restrictions on travel.

ICICI Securities estimates that IndiGo and SpiceJet may report losses worth Rs 5,494 crore and Rs 1,412 crore, respectively, in the quarter ended June if there is a complete business shutdown. In that case, the only savings would be the variable costs, which depend on output, the brokerage said.

Variable costs mainly comprise fuel, supplementary rentals and landing costs, while fixed costs account for employee, aircraft rentals and parking charges, among others.

Though the losses for IndiGo are higher, the nation’s biggest airline is expected to tide over the crisis aided by the high cash on books. For SpiceJet, according to ICICI Securities, the losses are expected to be lower in the first quarter on account of compensation income from Boeing from previous technical disruptions.

If operations normalise from the second quarter (July-September), the airlines would be able to recoup most of their losses on account of lower fuel costs, ICICI Securities said. The pace of recovery for SpiceJet, however, will be slower than IndiGo because of its higher fixed costs and less fuel efficient aircraft.

To be sure, IndiGo had earlier this month issued a profit warning guiding its earnings for the March quarter will be significantly impacted due to coronavirus-led disruption.

Shares of InterGlobe Aviation and SpiceJet have tumbled 35 percent and 60 percent so far in March—their worst monthly decline since listings.

Both airlines have yet to respond BloombergQuint’s queries regarding the financial impact of the shutdown.

Also Read: Emirates Is Grounded, and Global Aviation With It

Here’s what other brokerages have to say:

JPMorgan

• Airspace closure may persist for even longer at the discretion of government.
• Grounding of fleet could still cost IndiGo up to Rs 12-15 lakh daily per aircraft.
• Other domestic airlines could be at a further disadvantage given higher cost base.
• IndiGo’s free cash is sufficient to sustain zero revenues for some time.
• Air travel typically bounce back after a crises

Morgan Stanley on IndiGo

• 60 percent of costs for the airline are variable and 40 percent are fixed.
• Assuming no revenue and using free cash, IndiGo could go through six-eight months of complete cash burn.
• IndiGo is well placed among peers to the weather the potential downturn.
• Further options to cut costs and generate cash could be: move to unpaid leave for staff, cut selling expenses and push out maintenance charges as planes are not in use and renegotiate lease terms.
• Maintains ‘Overweight’ with a target price of Rs 2,057 apiece.

Here’s what aviation consultants told BloombergQuint...

Mark Martin, founder and chief executive officer at Martin Consulting

• Still not sure how the virus will be terminated.
• China took at least six months and India is currently in phase 2.
• Do not expect any resolution up till September 2020.

Kapil Kaul, CEO, CAPA

• IndiGo has the ability to manage this kind of situation because of its cash reserves.
• If current situation sustains for six months or more then it would start hurting even IndiGo.
• Package for airline by government would be meaningful.