Covid-19 crisis has severely impacted almost all industries but disruptions in the airline industry is so profound and it has manifold implications that it is assumed to be greater than the combined crises of 9/11 terror attack in the US and the 2008 global financial crisis combined to put together.
The Government of India (acting through DGCA) (“GoI”) has vide its (i) order dated March 23, 2020, passed under Section 88(1) of the Aircraft Act, 1934; and (ii) orders dated March 26, 2020, and April 14, 2020, directed inter alia all aircraft operators to suspend the operations of all the domestic flights and all scheduled international commercial passenger services until May 3, 2020.
The forward air travel bookings are far outweighed by the cancellations due to which the air travel demand is in its all-time low and drying up in ways that are unprecedented with no semblance of normalcy on the horizon.
CURRENT SCENARIO DUE TO COVID-19
For an industry which is already in stress, the Covid-19 pandemic has only accelerated the process of a bankruptcy filing by several companies (like Virgin Australia and Air Mauritius).
Those airline companies which are still in business have also suffered huge losses and misfortunes as the novel coronavirus-forced lockdowns due to which the airlines had to keep their fleets at bay and grounded.
As per the market sources, apart from the pay cut, several airline companies from the likes of Indigo, Go Airlines etc in India have also taken other cost-cutting measures including furloughs.
Due to the turbulence caused by the outbreak of Covid-19 virus, the airline industry must focus on the horizon as there is always a silver lining in these tough times so that it can successfully navigate a wide array of challenges (including legal, financial and operational) which are likely to surface once the pandemic is behind us.
Future flight plan post the COVID-19 pandemic for the airlines will be influenced to a great extent by factors such as avoiding the countries that have been the virus epicentres and gauging government responses on the type and duration of travel restrictions and the conditions under which they might be relaxed.
Governments across the globe may likely consider imposing specific restrictions/limitations which is akin to the security measures put in place after terrorism events for inbound and outbound passengers.
- Health screenings or certificates form prescribed by the medical practitioners before the boarding is a must. In the Post-COVID era, megatrends such as the dramatic rise in remote working, government or organisation-imposed limitations/restrictions on air travel, greater reliance on locally-oriented supply chains as well as avoiding non-essential travels will impact the recovery demand in the aviation industry and may lead to a major overhaul in the management and operation of the airline industry.
- To fly safely through this turbulent time, it is of utmost importance that the airline companies launch a crisis management team or as its being coined by some in the industry – “Plan Ahead Team”. This Plan Ahead Team will be responsible for collecting forward-looking intelligence and provide a Post Covid-19 flight plan to guide and accelerate decision making.
Following are some of the challenges/considerations which airline companies in India may consider while formulating their Post Covid-19 flight plan.
- Third-party contractor agreements/Hedging arrangement for jet fuel prices:
To determine the optimal size and dimensions of their networks and fleet, this will hold the key to the survival of airline companies. These companies may have to revamp their strategies vis-à-vis the air travel restrictions imposed by the governments to identify routes that are most likely to recover basis demand, regulatory and market structure scenarios.
The determination of routes that are most likely to recover will determine which fleet/route to recommission. For the routes that could not be recommissioned or are partially commissioned post-COVID-19 and withdrawal of lockdown orders, the airline companies may have to renegotiate/re-assess the legal risk that may arise according to their contracts with third-party contractors engaged for inter alia refuelling; catering; runway/taxiway construction and repair; aircraft maintenance and overhaul; crew training; and flight dispatch.
Further, airline companies must also consider revisiting/re-negotiating their existing contracts for hedging the jet fuel prices. Most of the airline are locked into contracts for hedging the jet fuel prices. There has been a steep drop and the prices of jet fuel is at an all-time low due to the upshot of the current crisis.
Accordingly, the airline companies will have to pay their higher hedged amount for jet fuel, creating hedging loses. In this context, the existing provisions of these contracts become relevant to determine the leverage of discussions from a legal rights perspective.
- Financing Arrangements:
Given that the airline companies have suspended all their business, it would be imperative to ascertain if defaults would get triggered under the various financing agreements entered by the airline companies.
Where an event of default is only triggered upon a ‘voluntary’ suspension of business, it may be argued that such temporary cessation of business due to the virus outbreak is a direct consequence of the government regulations and therefore it is outside the purview and scope of such provision.
Further, it would be relevant to check if an event of default is qualified by a requirement that a suspension of business has a “material adverse effect” on the borrower’s ability to perform its contractual obligations.
If there is a significant impact on the borrower’s ability to pay, this will likely satisfy the test of ‘material adverse effect. Additionally, it is expected that post-COVID-19 and lifting of the lockdown orders, for reasons including financial and operational difficulties, the airline companies may not be able to commence operations in all the sectors or may not be in a position to recommission their entire fleet.
Given the aforesaid, it would be relevant for the airline companies to review an event of default provision relating to ‘cessation of business’ in their financing agreements.
Cessation of Business would typically include events where a company ‘threatens’ to suspend or cease to carry on its business and therefore, one may argue that such temporary closures post Covid-19 and/or lifting of lockdown orders, would constitute a ‘cessation’ of business. It would be prudent for airline companies to review their facility agreements when contemplating Covid-19 related measures and consider the impact of such measures may have on their financing arrangements. These tests can be carried out during the period of lockdown, such that the provisions can be re-considered by the parties.
- Aircraft Lease Agreements:
The airline companies may have to revisit/review their aircraft lease agreements. The airline companies may consider approaching the lessors for seeking concessions concerning the lease obligations including ‘rental holiday’ on account of liquidity crunch consequent to fall in ticket receipts post Covid-19.
While the lessors may be entitled to decline requests for concessions on lease obligations, the commercial reality may well be that lessors will have to assess whether supporting an airline in some way may improve their financial health in the aftermath of the crisis or whether such benevolence will only delay the end of a business that was struggling in any case.
It may be worthwhile to consider that the relief package/concessions which an airline company may seek from the lessors may include inter alia a standstill for an agreed period with an agreed repayment schedule to recapture the unpaid rents, forbearance on event of default at a cost.
- Governmental Support: Globally, the market structure for the airline industry is set to witness a major revamp. This change will be significantly influenced by government responses to the crisis and types and levels of support extended to the airline industry.
In the absence of specific announcements/ relief measures, the airline companies in India may consider approaching the Ministry of Civil Aviation and/or the GoI for relaxation/waiver concerning various fees/licenses including airport charges, AAI and Private Airport Operators’ space rentals and infrastructure charges which are to be paid by them.
This waiver may specifically be sought concerning air spaces/sectors, which the airline companies suspect will not be recommissioned or sectors where the travel demand likely to rebound slowly.
- Resolution/Restructuring: Globally there are several airline companies which have filed for bankruptcy. Per CAPA-Centre of Aviation, most world airlines would be bankrupt by the end of May. In this context, the Ministry of Finance (“MoF”) has on March 24, 2020, indicated that if Covid-19 crisis continues beyond April 30, 2020, it may consider suspending Section 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 for six months to stop companies from being forced into insolvency proceedings in such force majeure causes of default under the commercial agreements (e.g. financing agreements, lease agreements).
- Import Duties and Trade barriers: Government of India is considering putting in place several trade restrictions/embargo on the import of goods from China.
As COVID -19 continues to spread across the globe, the challenges triggered by it are numerous and unprecedented. As COVID -19 continues to spread across the globe, the challenges triggered by it are numerous and unprecedented. The Indian tourism and hospitality industry is severely affected by the outbreak of COVID-19.
Once the COVID-19 crisis is contained, the GoI may inter alia consider developing an appropriate messaging/advertising campaign (similar to ‘Incredible India’ tourism campaign) to provide the necessary impetus to the recovery of the aviation industry post-COVID-19.
- Covid-19: Flight Plan for Indian Aviation Industry by Subhojit Sadhu & Shrey Srivastava on May 6, 2020,
- The Government of India had vide its circular dated April 14, 2020, has decided that all scheduled international commercial passenger services shall remain closed until May 3, 2020. Additionally, a collated list of the Global and regional Government measures related to Covid-19
- Post 9/11, it is customary to have long lines at the airport and extensive security checks. The enhanced security measures are being monitored and implemented by the Transportation Security Administration (TSA). The TSA was created as a direct result of the 9/11 attacks