Company / Analytics

Analytics, 28 March 2020

Coronavirus brings shock to the airline industry

The airline industry is not immune to global disasters. The 9/11 attack and subsequent terror attacks, the SARs outbreaks, and the financial crisis have all posed a threat to the industry. So has the Coronavirus outbreak, which has impacted heavily on the BEACH industries — booking, entertainment, airlines, cruises, and hotels. The BEACH industries account for hundreds of millions of jobs around the world and underwrite many global business activities.

Life in the times of Coronavirus so far involves closed restaurants, cancelled festivals, sports and many forms of activities, city and nation-wide lockdowns, and restrictions on domestic and international air travel. As citizens across the world shelter under the government orders to curb COVID-19, the multi-billion-dollar global aviation industry has seen its profits and expected earnings crashing down.

As of March 5, the International Air Transport Association (IATA), the organization representing some 290 airlines comprising 82% of global air traffic, estimated the impact of COVID-19 on the industry to at least US$63 billion—$113 billion if the disease continues spreading, mostly due to a fall in global passenger revenues. This was a revision from the US$29.3 billion estimates in February which focused on markets associated with China. The estimates are only for passenger traffic and exclude the impact on cargo operations.

Financial markets have reacted strongly to the impact of COVID-19 in the global airline industry. Over $157 billion has been wiped off valuations across 116 publicly listed airlines.

As of March 5, IATA estimated that airline share prices had fallen by nearly 25% since the outbreak of the Coronavirus. The 25% drop is 21% greater than the decline recorded at a similar time during the SARS crisis of 2003.
Global passenger numbers are expected to plunge by as much as 30% this year, and a full recovery is not likely until 2022 or 2023, according to S&P Ratings as quoted by Reuters.

The industry has reacted to the imminent impacts of the COVID-19 pandemic by cutting capacity and taking emergency measures such as laying off workers to reduce costs, even as they try their best to perform the vital task of linking the world’s economies.

The industry is calling on governments for financial relief to stay afloat and prevent the loss of millions of jobs across the world, as well as international connectivity which is vital to the recovery of the global economy after the COVID-19 crisis. The aviation industry plays a crucial role in sustaining global supply chains and developing country industries such as perishable horticulture and tourism. In terms of global trade, 35% of international trade is flown by air while 57% of international tourists travel by air and each airline job contributes to 24 more jobs in the wider economy, according to IATA, in a note to G2O countries.

Globally, the airline industry requires approximately $200 billion in some form of financial relief - taxes, loans, loan guarantees and support for the corporate bond market, and direct monetary support to keep the industry afloat. IATA estimates that European carriers alone face a potential revenue loss of US$76 billion given a projected low passenger demand of 46% which is below 2019 levels. “A decline of this magnitude puts at risk about 5.6 million jobs and $378bn in GDP supported by air transport,” IATA estimated.

Some governments have already committed to providing some form of relief to the airline industry as part of stimulus packages to recoup their economies. Australia, Brazil, China, Norway, Sweden, Finland, Spain, and Italy, as well as the United States, are some countries that have committed to support their Arline industries.

In the United States, Airlines for America outlined concerns about the industry’s ability to maintain liquidity. From a starting point of $39.5 billion, the group forecast that airlines could burn $23 billion by year’s end in the optimistic case (revenue down and capital markets open), and $53 billion by year’s end in the pessimistic case (revenue down more and inability to borrow). Both cases involve the liquidity pressure being front-loaded (losing most of the money by June)” Fast Company reported.

President Donald Trump has committed to bailing out the airline industry. Trump was quoted saying that “it’s not their fault… and we’re going to be backing the airlines.” The proposed COVID-19 aid package is more than three times the size of the bailout airlines received after the September 11 attacks. The package would include $25 billion in grants, $25 billion in loans, and excise tax relief that could be worth tens of billions of dollars through 2021, according to some analysts.

There are mixed reactions, especially in the United States, on whether governments should bail out the airline industry from the impacts of the COVID-19. But globally, airlines took nearly five years to return to profit after the 2001 terror attacks. By then they had lost more than $40bn (£30.7bn), mainly in the US, in that time, according to the Guardian. The industry would later plunge back to negative territory during the financial crisis of 2008, losing an aggregate $8bn.

Post Coronavirus airline industry

The post-Coronavirus scenarios will offer unique opportunities to reframe the foundations of the global airline industry. The comeback time from the ban on airline travel will depend on the turnaround time from the novel Coronavirus diseased 2019. Some airlines will scale up their operations quickly while others could struggle to come back, or even scale down their operations completely.

Government-supported airlines such as Chinese airlines will remain solvent, as reflected in their share prices and defacto underwriting. For example, while major international airlines’ prices have dropped by 50% and more, the big three Chinese airlines’ shares have lost only a little over 10%, according to Australia based CAPA - Centre for Aviation.

In the United States, major airlines supported by unions are expected to continue lobbying for government subsidies; they are already working hard to achieve that. In Europe, various governments, and even the EU as a whole, will provide some selective support to the industry.

The Gulf carriers are also likely to receive support from their respective governments and owners. On the other hand, the prospects for the many private airlines are not always as bright.

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