A Bumpy Ride For Airlines
Strap in For most of us, the new year has not exactly had the best start. And if you think this year started off on a bad note for you, spare a thought for the aviation industry. Your travel plans not materialising isn’t the only thing adversely affecting airlines. From airfare and input costs to a rapidly changing competitive landscape, the Indian aviation sector will have to brace for turbulence in 2022. You better strap in for this ride.Â
Cancel culture We all know what happened to airlines during the lockdown. If you don’t, try getting a refund for a cancelled flight. The industry is yet to fully recover from the previous two Covid waves but it was certainly getting there, until now. From owning or leasing aircraft to paying for routes and slots at various airports to ground services, airlines are an asset-heavy business. So, the asset turnover ratio, which measures the value of assets to the value of sales, is an important indicator of efficiency. And with over 4,000 cancelled flights across the globe last week, this indicator isn’t faring too well.Â
Woebegone Like any business, profit margins are also important for the aviation industry. This is where the issue of airfare comes in. The Indian market has one of the lowest airfares in the world. Through the pandemic, the government capped airfares along with the capacity airlines could accommodate per flight, affecting asset-turnover ratio as well as margins. Increasing cost pressures from sky-high fuel prices squeezed airline margins even more. But the industry’s woes don’t end there.Â
New kids on the block Another major factor affecting airfares is competition. Even the government was concerned about sustainable air ticket prices back in 2018 when it estimated per kilometre fare at ₹4, less than autorickshaws. The privatisation of Air India might bring in saner pricing to the industry. But the entry of billionaire Rakesh Jhunjhunwala-promoted airline, Akasa and the return of Jet Airways later this year is expected to negate any gain in pricing power. Experts don’t expect a rational pricing regime in the Indian aviation sector anytime soon.  Â
Who’s Most Afraid of a Third Wave?
Third wave is nigh Let’s face it, India’s third Covid wave is upon us. New cases seem to be hitting fresh daily highs. And just like earlier times, there are people out and about (even though they don’t have to) sans masks or any other precautions. But there’s one group of people taking the new wave very seriously - lenders. Banks and other lending institutions are wincing at each fresh restriction imposed by various states. Let’s take a look at what’s got them so worried.Â
Of NIMs and NPAs A bank's main source of revenue comes from lending. The difference between the interest it earns from products like loans and the interest it pays out on things like deposits is called Net Interest Margin (NIM). Lending products include retail loans, commercial loans, business loans and others. There is always the risk of these loans becoming non-performing assets (NPAs), where banks make losses on those accounts. And while these are generally low in normal times, they pose a huge risk during crises like the pandemic.Â
Two down, third to go? But we’ve been through two waves already so, what’s the problem now, you ask? Well, that’s precisely it. Businesses and households were badly hit by the previous two waves and had only just begun to recover. The Reserve Bank of India, like many other central banks, appears to be reversing their pandemic support as concerns over inflation increase. So, measures like a loan moratorium may not be possible again. A severe third wave might cause a spike in loan defaults, leading to a deterioration in asset quality for banks.Â
Concerns of excess This means banks and other lenders will not be able to release the excess capital provisions they maintained as a precaution during the pandemic towards credit growth. On the contrary, they may have to increase such provisions against a potential rise in NPAs if the situation worsens. Credit growth was beginning to recover in the Sept-Dec quarter, in tandem with business sentiment and the investment cycle. But the recent developments have come as a major dampener. For now, lenders are in wait-and-watch mode.Â
Drop it Like it’s BoughtÂ
It’s a Skyfall  The Lira (Turkey’s currency) has been in freefall this year. And we’re taking a no-parachute 40% plunge in value sort of freefall. To understand how this situation came to be, we need to go back a little while in time.
Previously on 'Turkey' Modern-day Turkey was founded by Mustafa Kemal Atatürk. He guided the fate of the country towards a parliamentary, and secular system (rare for a Muslim majority country). On the back of his policies, Turkey showed growth marked by investments, increased income levels and improved employment rates from the 2000s.Â
Recent events however threaten to diminish this growth.Â
Trading on thin ice Turkey is a country that imports more than it exports, creating a trade deficit. So much so that a 2013 study listed Turkey as one of ‘The Fragile Five’; a list of countries that were too dependent on foreign investment for their growth.Â
And there’s a direct correlation between a country’s trade deficit and the value of its currency. If Turkey isn’t exporting too much to other countries, there’s no demand for Lira in these countries to buy their exports. A decrease in demand for Lira eventually led to a steady decline in its value over the years.Â
Going down the wrong way  Now, here’s where things really went south. Turkish president, Recep Tayyip ErdoÄŸan, hates hiking up interest rates with a burning passion. So, because of this, the interest rates remained low. Really low. This meant people could borrow easily, which led to an excess supply of Lira in the market. Too much of a currency, while everything else remains the same, brings in inflation.Â
When a currency is already weak because of the long-standing trade deficit, a policy like this brought about a nose-dive in the value of the Lira in the last year.Â
Who let the watchdogs out? You’d think, with all this chaos, the central bank would take action, hike up interest rates, mop up excess supply, all that stuff. But unfortunately, Turkish central banks aren’t independent anymore. They are faced with a ruler who makes his own fiscal decisions, and any backlash results in their jobs being sacked.Â
The most recent of president Erdogan’s policies, however, has brought some reprise in the value of the currency. With the value of the Lira decreasing, citizens started selling it for stronger stores of value like Dollars, or even Crypto. This further worsened the currency’s situation. So the president has basically told the citizens to stop selling out Lira, and in return told them that the government would step in and make up for the loss in value of their currency.Â
Beyond the curve Although this helped the value of the currency improve by about 20%, it is an extremely short-sighted policy. More importantly, it doesn’t target the root cause of the inflation and puts the burden of the fluctuating value of the currency on the government’s treasury and the central bank. This means that if the government doesn’t have enough money to compensate for the loss of value, the entire country could become bankrupt.Â
*Fit-Bit starts blinking*
New Rules on the Block
Ghosts of the past Can you imagine 2021 without people giving you unsolicited advice about the best IPOs in town? There were north of 60 IPOs listed last year. These brought to light a few regulatory gaps that the good folks at SEBI want to tackle this year.Â
One of them is barring large shareholders with more than a 20% stake in a company from selling 100% of their holdings on the IPO listing day. Exit by a prominent shareholder can lead to dwindling investor confidence, especially if this company is a start-up without a prominent track record of profitability. Â
Disclose to the bone As we saw with Zomato, companies tended to go on an acquisition spree after their IPO. When plans for such acquisitions aren’t disclosed in the offer document, it leads to ambiguity for retail investors (individual investors). To solve this, SEBI has said that only a maximum of 35% of capital raised through an IPO can be deployed for unidentified acquisition/ strategic investments. If, however, the proposed acquisition has been identified, and specific disclosures about these investments have been made in the offer document, no such limits apply.Â
Anchoring the anchor  Anchor investors are those who buy substantial shares in the company just before an IPO opens for a subscription. As the name suggests, once they make an investment, they anchor the price of the stocks because of their sheer volume. Retail investors also follow in their footsteps before making an investment. So, naturally, when these investors exit after their 30-day lock-in period, the stock price sees a sharp dip. SEBI proposed an increase in the lock-in period to 90 days in hopes of increasing investor confidence.Â
Here’s hoping these rules make for a bigger and better flurry of IPOs for investors this year.