Sectors impacted

worst by COVID

Indraneel Mahanti
Finance
IIM Sambalpur
 Economy of India
India’s economy is characterized as developing market economy. Population of India is around 138 crores. GDP
in estimated 2020 is around 3.2 trillion dollars. The estimated GDP growth is around 3.2%.

India’s GDP is divided into three sectors: - Agriculture, Manufacturing, Services.

Agriculture contributed around 17 % in 2018-19 from 18.4% in 2014-15. Agricultureincludes crops,

horticulture, milk and animal husbandry, aquaculture, fishing, sericulture, aviculture, forestry, and related
activities. Gross value-added growth in agriculture is up from 1.6 percent in 2018-19 to 5.9% 2019-20.

Manufacturing contributed about 29.6% in 2018-19. This sector includes Mining & Quarrying, Manufacturing
(registered& unregistered), Gas, Electricity, construction and water supply. Gross valued added growth in
fourth quarter 2019 contracted by 1.4 % from 2.1% expansion a year ago.

Construction sector GVA has contracted 2.2 percent from 6 percent earlier.
Mining sector GVA expanded 5.2 percent from contraction 4.8 percent year ago. Utilities grew by 4.5 % as
against 5.5 % year ago.

Service sector contributed around 54.3 % in 2018-19. This sector includes Aviation, financial services,
Information Technology, Retail and wholesale trade, tourism, Media and entertainment sector and healthcare
and logistics.

Transport and communication services and trade decline to 2.6 percent in fourth quarter 2019 from
6.9% percent. Financial services, real estate fell to 2.4 % in final quarter 2019 from 8.7% last year. Défense fell
to 10.1% from 11.6 % last year.

So, from this we can see Transport and Financial services and trade and real estate are the worst impacted by
the entry of COVID.

Performance of Service Sector

Performance of India’s Key Services Sub-Sectors

SubSector Indicator Unit 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Trendline %change from 2018
IT –BPM IT-BPM service revenues US$ billion 118.6 129.4 139.9 151.4 161.8 NA
Exports US$ billion 97.7 107.8 116.1 125.1 135.5 NA
Domestic US$ billion 20.9 21.6 23.8 26.3 26.3 NA
Aviation Airline passengers million 115.8 135 158.4 183.9 204.2 111.3 -45.49%
Domestic million 70.1 85.2 103.7 123.3 140.3 95.7 -31.79%
International million 45.7 49.8 54.7 60.6 63.9 15.6 -75.59%
Telecom Wireless phone subscriptions million 969.9 1033.6 1170.2 1183.4 1161.8 1154.6 -0.62%
Wireless internet subscription million 283.3 322.2 400.6 472.7 615 665.4 8.20%
Tourism Foreign tourist arrivals million 7.7 8 8.8 10 10.6 8.6 -18.87%
Foreign exchange earnings from tourism US$ billion 19.7 21 22.9 27.3 28.6 24 -16.08%
Shipping Port traffic million tonnes 581.3 606.5 648.4 679.4 699.1 524 -25.05%

 This is the performance of the service sectors of the years and trendline is used to show the dip
in the graph and colour coding is used for showing the change from 2018. Red is for highest
decline in the numbers and green for lowest decline or positive
 Aviation Sector is the worst impacted as there is 45.49 5 decrease in passengers with 755
decrease in International passengers. This reason being to stop the spread of COVID so there
was shutdown of international flights
Bank credit Growth
Growth (YoY) in Bank Credit to Services Sub-Sectors
Services Sub-Sectors Fiscal Year-to-Date Apr-Nov 2019 (per cent) Fiscal Year-to-Date Apr-Nov 2018 (per cent)
Services -2.2 9.9
Transport Operators 0.9 6.6
Computer Software 2.8 2.8
Tourism, Hotels & Restaurants 11.4 5.3
Shipping -13.5 1.1
Professional Services -0.5 8.4
Commercial Real Estate 9.1 1
Bank credit to NBFCs 14 14.1
Retail Trade 2.3 2.3
Wholesale Trade -13.2 3.1
Other Services -20.7 16.9

 Bank credit growth shows the increase in loans for investment purposes to boost up the
infrastructure or other important part of the business
 Colour coding shows the growth in bank credit from 2019. Red shows the negative growth
and green shows the positive growths.
 Shipping and Trade industries are the worst impacted with 13.5% decline and 13.2% decline
respectively.
So, from the above analysis main weightage of study will be given to Aviation industry and
retail and wholesale trade Industry

Aviation Sector
Key points: -
 There is net loss of 84.3 $ billion in worldwide airlines
 Airlines expected negative operating income in 2020
 Fall in revenue has led to high cash burn due to high fixed costs
 32 million jobs supported by aviation are at risk
World Airlines Industry snapshot: -
Worldwide airline Industry 2019 2020F 2021F Trendline
Spend on air transport*, $billion 876 434 598
% change over year 3.60% -50.40% 37.70%
% global GDP 1.00% 0.50% 0.60%
Return fare, $/pax. (2018$) 317 254 257
Compared to 1998 -61% -68% -68%
Freight rate, $/kg (2018$) 1.82 2.31 2.26
Compared to 1998 -64% -54% -55%
Passenger departures, million 4,543 2,246 3,384
% change over year 3.80% -50.60% 50.60%
RPKs, billion ( Revenue passenger Km) 8680 3929 6099
% change over year 4.20% -54.70% 55.20%
CTKs, billion(Cargo & mail Tonne Km) 254 211 263
% change over year -3.20% -16.80% 24.60%
World GDP growth, % 2.50% -5.00% 7.10%
World trade growth, % 0.90% -12.90% 21.30%

 Here are there are some important figures and trendlines used for depicting the sad state of
Airline Industry.
 Red colour is used for high decline and Green is used for low decline or positive figures.
 The average return fare (before surcharges and tax)of $254 in 2020 is forecast to be 68%
lower than in 1998, after adjusting for inflation.
 the share of world GDPspent on air transport to be halved in 2020, totalling $434 billion
(0.5% of GDP) amidst widespread lockdowns.
  Revenue passenger km has decreased by 55% from last year
 The recovery will most likely come from opening up of international flights
Government aid: - During the crises airlines has sought help from Government and received $123
billion in mid may worldwide. Airlines in North America has received 25% of the revenues and
Europe received around 15 % of the revenues while other countries have received around 1% of their
revenues.
Capital Providers: -
Worldwide airline Industry 2019 2020F 2021F
Industry ROIC, % invested capital 6.50% 5.80% -16.90%
North America 9.00% 9.90% -10.50%
Europe 8.80% 7.00% -14.30%
Asia Pacific 4.30% 3.50% -12.70%
Latin America 5.00% 3.90% -16.60%
EBIT margin, % revenue 5.70% 5.20% -23.40%
Net post-tax profits, $billion 27.3 26.4 -84.3
% revenues 3.40% 3.10% -20.10%
$ per passenger 6.22 5.8 -37.54
Adjusted net debt/EBITDAR 4.5 4.6 -7.13

 Even prior to the COVID-19 crisis, equityowners had not been rewarded adequately for
risking their capital in all regions.
 Industry expect at least to earn the WACC (weighted average cost of capital) but the
competition intensity is high.
 Asia pacific has very poor return on invested capital compared to North America and Europe
because of the structural improvements and low fuel costs in North America and Europe
 Forecasted Returned on invested capital for 2021 is -16.9% so it will be a setback for the
investors
 Also, $ per passenger is -37.54 means they are losing money with every passenger
Aircraft deliveries: -
Worldwide airline Industry 2019 2020F 2021F
Aircraft fleet 29,697 20,261
% change over year 0.70% -31.80%
Available seats, million 4.5 2.8
% change over year 1.50% -36.30%
Average aircraft size, seats 150 140
% change over year 0.90% -6.60%
Scheduled flights, million 38.9 23.1
% change over year 2.20% -40.70% 30.40%
ASKs, % change over year 3.40% -40.40% 31.90%
Passenger load factor, % ASK 82.50% 62.70% 73.80%
Cargo load factor, % ACTK 54.90% 50.80% 46.20%
Weight load factor, % ATK 69.50% 59.40% 65.00%
Breakeven load factor, % ATK 65.90% 73.30% 67.70%

 The Aircraft fleet forecasted for 2020 has decreased to 20,261 because as the demand has
decreased the older fleet has been moved backed to the storage
 Passenger load factor that is number of passengers divided by total passenger capacity has
reduced from 82.5% to 62.7%.
 Breakeven load factor that is number of seats that must be filled at current fares, the
requirement has increased from 65.9% to 73.3% in 2020.
Fuel: -
Worldwide airline Industry 2019 2020F 2021F
Fuel spend, $billion 188 78 85
% change over year 4.70% -58.80% 9.10%
Operating costs($ billion) 793.25 520.00 625.00
% operating costs 23.70% 15.00% 13.60%
Fuel use, billion litres 363 228 297
% change over year 1.00% -37.10% 30.30%
Fuel efficiency, litre fuel/100atk 22.4 22.1 21.9
% change over year -1.90% -1.00% -1.10%
CO2, million tonnes 914 574 748
% change over year 1.00% -37.10% 30.30%
Fuel price, $/barrel 77 36.8 51.8
% change over year -10.60% -52.30% 40.80%
% spread over oil price 18.50% 5.00% 15.00%

 Some of the key figures represented here are percentage change in fuel spending and fuel as
percentage of operating costs and percentage in fuel use.
 Due to less spending on fuel so % of operating costs have also reduced also the amount of
fuel used has also decreased
 Due to very less demand for the oil, the fuel prices have decreased drastically by around 52%
 Fuel efficiency will tend to improve as older fleet will get replaced by the new ones

Labour: -
Worldwide airline Industry 2018 2019 2020F
Labour costs, $ billion 174 187 103
% change over year 2.50% 7.50% -45.10%
Employment, million 2.79 2.9 1.87
% change over year -0.70% 4.20% -35.50%
Productivity, atk/employee 536,079 529,688 521,348
% change over year 6.80% -1.20% -1.60%
Unit labour cost, $/ATK 0.117 0.122 0.105
% change over year -3.40% 4.40% -13.60%
GVA/employee, $ 99,858 98,498 80,289
% change over year 5.10% -1.40% -18.50%

 Some of the key figures here are employment, productivity and unit labour cost
 By 2020 forecasted, there will be 35.5 % decrease in employment and about 1.6% decrease
in productivity compared to 6.8% increase in productivity in 2018. This will be a setback for
the airlines as demotivation will arise more
 The good thing is labour cost has come down but still due to less demand of flights profits
margins will remain squeezed

Recommendation: -
 International flights to less COVID regions can be opened
 As fuel costs have decreased, the frequency for international flights can be increased
 Beside meals and basic services, sanitizer and other essential items like masks can be sold in
the flights
References: -
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