While geo-political issues cause occasional schedule changes for airlines, it’s very rare for an airline to have a reason to stop flying to multiple countries on different continents. The coronavirus outbreak is doing just this and it throws an unprecedented challenge at the aviation industry after what was a very shaky 2019. Can the airline industry survive the Coronavirus downturn?
Like all businesses, revenue is key to an airline staying afloat. If revenue drops significantly, because routes have to be cancelled and bookings decline, the health of an airline business quickly spirals downward.
The Coronavirus outbreak is showing no immediate signs of stopping before it becomes a global pandemic. Airlines are already paying the price, but will we see airlines folding as a result of this crisis? Given the precarious position of some airlines before the outbreak, it’s very possible one (or more) of them might run out of runway and won’t survive.
Passenger Numbers Falling
While the virus was contained within China, few in the west considered the need to change their travel plans. However, as the situation has evolved and the focus shifted to Italy, Japan and South Korea, the traveling public, including us, have come to the realisation that the outbreak would soon affect our own travel plans.
Popular tourist spots started to see cases emerging. In northern Italy, many feared that those who’d already visited could’ve been exposed to the virus.
The ensuing fear provoked many to cancel their flights to northern Italy, particularly when government advice and employers issued guidance to self isolate for 14 days after returning. A number of large companies have banned all non-essential business travel and many are now asking staff to ready themselves to work remotely.
As a result, seat bookings fell dramatically towards the end of February, amid reports of eerily quiet airports and pictures of planes flying empty. Passenger movements are also down by 80% in China. The International Air Transport Association (IATA) recently reported that demand for air travel will fall in 2020, following 11 straight years of growth.
Governments have revised their travel advice. This helpful summary from IATA highlights the extent of entry restrictions faced by air travellers.
Airline Stock is Crashing
Both IAG (the owner of British Airways) and Easyjet have issued warnings in relation to the Coronavirus outbreak. They anticipate severe disruption to their routes/schedules, and expect significantly reduced passenger numbers. While they haven’t shared explicit numbers, they’re preparing investors for the worst.
Aircrafts are sitting idle at airports around the world because they can’t fly to cities restricted by the virus outbreak. Aviation24 reported that Lufthansa has cut its short- and medium-haul flight schedule by 50% and grounded 23 long-haul aircrafts. Airlines are responding by trying to redeploy redundant aircraft to add capacity to existing routes, or launch new routes. However, there isn’t enough demand to warrant the extra capacity. Passengers are nervous about booking any travel at the moment and the extra capacity just isn’t being filled.
This has caused airline shares to fall dramatically, with 30% being wiped off some of the biggest names in aviation. The falling stock price shows just how much investors believe Coronavirus will hit the profits of airlines.
IATA has already suggested the virus outbreak could cost airlines $30bn in lost revenue. For context, airline revenue dropped by almost $20bn in the wake of 9/11. If, however, the virus isn’t contained and spreads beyond the current areas, the cost could be far higher. The unpredictability of how the virus will spread means further turbulence is inevitable for airline businesses.
An already Turbulent Aviation industry
The disruption caused by the Coronavirus outbreak comes when airlines had just experienced one of their toughest years in recent times.
23 airlines stopped flying in 2019, primarily because of the high levels of competition that now exist in consumer aviation. Reuters reported airline bankruptcies reached their highest rate in 2019. Jet Airways, Avianca Brazil & Argentina, Thomas Cook Airways, WOW Air and XL Airways were just a few of the big names that folded.
On top of that, two catastrophic crashes involving the 737 MAX left airlines with grounded aircraft and schedules they couldn’t fulfil.
Most airlines were glad to see the back of 2019. Little did they know, when compared to 2020, it would look like a good year!
Coronavirus has already claimed its first airline. The Chinese Government has bailed-out 5-star Hainan Airlines and the authorities have since taken control. The heavily indebted airline was struggling to stay on top of things even before the virus hit, but they stood little chance after China began restricting the movements of millions of people. With nobody flying, Hainan Airlines’ revenues weren’t enough to make ends meet.
The airline is still flying, after the Hainan authorities have taken control of the business. If you’re booked to fly, check with the airline and make sure your travel insurance covers you for airline failure. We would exercise caution around making new bookings on Hainan until future plans for the airline have been officially announced. We hope they continue flying, as they were very high on our wish list.
On 29 February 2020, Asiana Airlines flight 729 departed Seoul Icheon airport bound for Hanoi, Vietnam. Only 20 minutes into the flight, Vietnamese authorities told Asiana Airlines that South Korean airlines could no longer land at Hanoi airport. Flight 729 turned around and landed back at Icheon airport 2 hours later.
Like a lot of carriers, Asiana’s finances aren’t looking healthy. The Korean carrier’s execs have been forgoing chunks of their salary, with the rest of the company forced to take 10 days unpaid leave. Prolonged aircraft grounding is going to make things very tough for the cash-strapped 5-star airline.
There’s little cause to think Korean will fair any better than Asiana through this crisis. The extended period of disruption in South Korea shows little sign of improving, especially when travel restrictions appear to be tightening around the world. With empty cabins, cancelled routes and costly aircraft sitting idle, Korean is unlikely to weather this unprecedented downturn without help from the government.
2019 was a tough year for Cathay. The protests that shut down Hong Kong seriously damaged the airline. After being forced to cancel 40% of its flights due to Coronavirus, Cathay has already issued a profit warning to investors. With much of its fleet under utilised and aircraft still sitting idle at airports, 2020 shows no signs of improving.
Will they make it? They have the potential to, but cashflow is going to be critical. Grounding 40% of the fleet for an extended period of time isn’t going to help. Aside from the virus outbreak eventually being contained, the solutions may lie in redundant aircraft being redeployed and whether the share price can be propped up to ward-off hostile bids.
Norwegian Air Shuttle
After the woes of the 737 MAX grounding in 2019, Norwegian Air Shuttle had to abandon some transatlantic routes as it parked-up 18 of its aircraft. The airline is also carrying significant debts, which it has amassed through rapid expansion.
Coronavirus has made a tricky situation a lot more critical for Norwegian. Their low-cost operating model is all about filling every seat on the plane. Operating half-full or empty planes loses the airline money. Without much cash lying around, and a truck load of debt, Coronavirus really has Norwegian on the ropes.
Investors are clearly very worried about whether or not Norwegian Air Shuttle can made it through this crisis. Their share price plunged 46% at the end of February.
Defunct British regional carrier Flybe became the first airline to cease operations in the Coronavirus downturn. Beleaguered Flybe had been fighting off administration through most of 2019 and had already received a bailout from the British Government. Many saw it as a stay of execution rather than a long-term solution to the airlines continuing financial problems. Other UK airlines complained that the government support was unfair.
On 5th March, Flybe told passengers that all aircraft had been grounded and the business had ceased trading with immediate effect. Passengers with tickets had to find their own way to their destinations, with some having to take lengthy ferry crossings and train journeys. With refunds looking unlikely, many passenger are seeking assistance from travel insurers and credit card issuers.
What does it mean for passengers?
As things stand, the Coronavirus hasn’t yet been declared a global pandemic. That said, passengers are very uncertain about whether they should be traveling and whether any future bookings will be cancelled. Faced with this, they’re being cautious and holding off on booking.
If an airline goes bust, travel will automatically be cancelled. At that point the passenger will be responsible for getting themselves to their destination, and at their own expense. While a refund may be received from the airline, the more likely outcome is a travel insurance claim. If the ticket was paid for using a credit card, the card issuer may accept some responsibility for the loss.
During this period of uncertainty, airline passengers should familiarise themselves with:
- The cancellation rules for the ticket they have purchased
- Ensure they have travel insurance and it covers them for “airline failure” and “pandemic”
- The protection their credit/debit card issuer can offer them
The airlines’ response to Coronavirus is to slash their fares and opening-up extra seats for miles redemptions. While great news for passengers looking for a bargain, it doesn’t remove the uncertainty about whether or not travel will be possible in 2, 4, or 6 months’ time. Our advice to bargain hunters is to read the fare cancellation rules carefully.
IAG’s boss recently stated there wouldn’t be a panic seat sale amongst the group’s airlines (British Airways, Iberia, Aer Lingus and Vueling). He’s holding the view that demand will quickly bounce back after the worst of the virus has past.
Interestingly, the early March British Airways luxury sale showed prices were lower than preceding New Year and Black Friday sales. If the crisis continues through March, we suspect prices will slip even further downwards. Large businesses are telling employees to cancel all but essential travel. Holiday makers are already making plans closer to home. We think the bounce might not be as strong as others hope.
Survival of the fittest
Whether airlines survive the Coronavirus outbreak depends entirely on how quickly the virus can be contained. When governments start relaxing their advice, passengers will probably regain their confidence. With that, the aviation industry can return to growth.
If we see the outbreak reaching global pandemic, we can expect restrictions on the movement of people to tighten before they’re relaxed. With airlines grounded for extended periods of time, it’s inevitable that some will run out of cash. The longer this goes on for, the more the airlines will be tested. Only the fittest airline businesses are likely to survive.
Once we’ve seen the threat of infection pass, the return to normal is likely to require stimulus from airlines. Expect reassuring campaigns and enticing promotions from the airlines who weather Coronavirus.
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