Policy needed to ensure airlines maintain 4-6 months of cash reserves: CAPA CEO

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The Indian airline industry will continue to be sick unless there are policies in place to ensure that operators have at least 4-6 months of cash held in reserve for continuity of operations, according to global consulting and aviation company CAPA.

CAPA said it estimates the national airline industry could incur losses in the range of $1.4 billion to $1.7 billion or more this fiscal year.

The two listed airlines, IndiGo and SpiceJet, have already reported losses of Rs 1,064.30 crore and Rs 789 crore, respectively, in the April-June quarter of the current financial year.

“Financial health is a fundamental criterion of operation (on a global scale)…India is the only country where technically insolvent companies can grow, can continue to operate,” said Kapil Kaul, CEO recently. for South Asia at CAPA, at an industry event in Mumbai.

He said that in line with global practice, airlines must ensure they have at least 4-6 months of cash reserves when no revenue is coming in while their air operator licenses are also renewed every year, while in India, the PDO comes for renewal only after 5 odd years.

“We don’t have a financial evaluation. We only have it when airlines are nearing the end of their operations. So, through a policy-making structure, you need to ensure that 4-6 months of cash, depending on the size of the business, must be fundamental in terms of operation. If you don’t have that (the framework), we will continue to have a sick industry,” Kaul said.

He pointed out that if such a best practice is not adopted at this stage where some of the airlines are injecting capital through various financing instruments, everything in the circle will spin out of control.

He noted that the airline industry was unsustainable even before the emergence of the pandemic, as except for one, no other airline had cash for more than 15 days of operation. . Covid had an unprecedented impact on the sector, which no one was prepared for, resulting in losses of $7-8 billion, he added.

“This fiscal year, we’re going to be looking at losses of $1.4 billion to $1.7 billion or maybe more,” Kaul said.

For a capital-starved industry, whose net worth is mostly negative and where it is very difficult to obtain funds, these figures call for radical measures and a different strategy, he noted.

“The more we celebrate growth without profit, the further we will get away from the kind of reforms the sector needs. We keep playing around the edges, not looking deep enough to change sectors,” Kaul said.

The impact of Covid is going to be long-term and structural and such losses with a very inadequate balance sheet cannot be swept away by the pre-covid recovery, Kaul asserted.

In many ways, pre-Covid was easy to navigate. Because each participant ensured its strategic cooperation. In fact, the entire value chain, such as staff, lenders, vendors and lessors, has been very cooperative, he said.

“Now that we’re out of Covid and starting to look at next year, you’re entering a post-Covid environment which I think is going to be more hostile with no possibility of cooperation,” he said.

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