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Airlines tumble as Coronavirus adds to the unprecedented headwinds

March 24, 2020
Editor(s): Jiamin Fang
Writer(s): Nuoya Liu, Richard Yuan, Huiqun Wang

COVID-19 pandemic, otherwise known as the coronavirus, has had detrimental economic ramifications for firms worldwide, and airline companies are undoubtedly among those that have been hit the hardest. Many airlines will simply not survive, even after the health crisis subsides, as severe liquidity problems have already emerged and are bound to worsen over time. According to Brian Pearce, an economist for the IATA, “seventy-five percent of the airlines (they) have looked at have less than three months of cash to pay their fixed costs.”

One of the most serious blows to the industry comes from the various travel bans that have been issued by governments all around the globe in an attempt to limit the rate of contagion. As a result of these bans, many airlines have reduced most, if not all of their international flights, and have also begun restricting domestic ones. For example, with non-residents being prevented from entering Australia and travel advice escalated to “do not travel”, international travel has been suspended for all airlines in the country. Financial losses arising from the bans could only be imagined: United Airlines (US), for instance, has lost an estimated $1.5 billion in revenue as a result of restricted and canceled flights.

In response to such economic turmoil, airline companies such as Austrian Airlines, Royal Jordanian, Ukraine International Airlines, and low-cost Philippines carrier Cebu Pacific have decided to halt all flights altogether, in an attempt to cut costs. Others have also had to freeze hiring and sack employees in order to survive in this current environment. For instance, despite the recent announcement of a $715 million rescue package to the sector, Qantas is still looking to dismiss two-thirds of its employees in an effort to remain viable, raising strong objections from unions.

Besides governments’ travel policies, unfavorable consumer sentiments also exacerbated the crisis. With concerns about the risk of cross-infection on flights heightening, consumers’ appetite to fly has virtually vanished within weeks. The fear of flying is further fermented, as the number of reports on confirmed coronavirus patients on flights increases. On 20th March, NSW health confirmed that a Jetstar flight to Ballina had a passenger on-board who tested positive for the coronavirus. So far, there have been fifteen other flights with confirmed cases in Australia.

Despite frequent ventilation on airplanes, confined space with little room between passenger seats still makes it easy for the virus to spread. Once someone carrying the virus gets on board, all passengers on the same aircraft become exposed to high risks of infections. The virus could be hidden in saliva, mucus, or other bodily fluids when the patient coughs, sneezes or even just engages in normal conversations. These droplets of fluids could easily enter human bodies through eyes, nostrils, and mouth, and could even remain on the surface of objects for days. This further increases the chance of infection as passengers presumably need to use the lavatory and eat on the tray table.

Facing a plunge in customer demand, Airlines are ramping up measures to boost confidence in travel by introducing on-flight social distancing, mandatory temperature checks and masks requirements for the passengers. Cathay Pacific Hong Kong has promised to offer passengers the option to sit next to empty seats, while other regional airlines across the Asia-Pacific region have made this mandatory. Stricter hygiene standards have also been put in place in order to minimize concerns regarding cross-infection: hand sanitizers are now made available at multiple locations on the aircraft. Flexible refunds and re-booking policies have also been introduced to rescue demand.

While the two factors aforementioned have had crucial impacts on both the demand and the supply, it should be noted that the aviation industry had already encountered some headwinds even prior to the coronavirus outbreak, pushing itself into a rather vulnerable position. Despite a record period of profitability, there has been a notable slowdown since 2019, with passenger growth rate (4.2% PRK growth) significantly falling behind the 2018 figure (7.4%). Analysts tend to attribute this decline in growth to the volatile macroeconomic and geopolitical environment, which alongside the Boeing 737 MAX grounding, have caused lasting damages across the industry.

On a macroeconomic level, the performance of the industry has traditionally been closely linked to the overall economic cycle, and the most recent trends are indeed showing no exception. Confronted with a broad economic downturn with global GDP growth rate dropping below 3% towards the end of 2019, the global demand growth in the airline sector shrank from 7.4 in 2018 to 5 according to International Air Transport Association (IATA)’s report, followed by a $1.4bn plunge in net profit. This is also partially due to the rising trade tension among the world’s largest economies, especially the prolonged fallouts of the US-China trade wars and Brexit. Not only have excessive trade barriers created massive distortions on the air cargo market, but the associated uncertainty has also disrupted business growth around the world, indirectly increasing airlines’ potential cost base as the exchange rate fluctuates.

On top of that, the capacity growth rate went down to 3.5% from 6.9% in 2018, which though can be viewed as a “voluntary” adjustment made by airlines to the new slower-growth environment, was nevertheless largely a result of the grounding of the 737 MAX. That is, shortly after the two dreadful crashes in October 2018 and March 2019, the Boeing 737 MAX aircraft was forced into grounding along with subsequent investigations. In spite of the effort by Boeing to update the aircraft’s software and safety measures, the expected recertification date has been postponed multiple times over the year and remains uncertain even today. Its grounding has left a number of airlines struggling to meet their expected operating capacity, as pointed out by John Plueger, CEO of Air Lease Corporation, “the disruption to the airlines has just been horrible. They’re not able to make their schedules, they have to get substitute lift.” Indeed, airlines planning to have the aircraft in service for 2019 are now stuck in a difficult position coping with the uncertainty “not only as to when MAX will return but also on airline fleet capacity and feet planning”.

Projections of losses for the aviation industry

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Given how vulnerable the aviation industry was prior to the coronavirus and how hard the pandemic struck it, it is not entirely surprising that a loss of as much as $63 billion USD to $113 billion USD was projected by the industry watch group. It will most likely take several months or a few years for the airline industry to recover such losses, even after the virus situation improves. For now, the uncertainties remain huge for the future of the airline sector, as the current state of the coronavirus is yet to reach its peak.

References:

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Chamberlin, C. (2020, 2020-3-18). ‘Virgin Australia Grounds All International Flights’. Retrieved from http://executivetraveller.com/news/virgin-australia-grounds-all-international-flights

Flynn, D. (2020, 2020-3-20). ‘Here Are Virgin Australia’s Domestic Flight Cancellations From April’. Retrieved from http://www.executivetraveller.com/news/virgin-australia-domestic-flight-cancellations

IATA. (2019). ‘Slowing Demand and Rising Costs Squeeze Airline Profits’. Retrieved from https://www.iata.org/en/pressroom/pr/2019-06-02-01/

Joseph, L. (2019, 2019-10-24). ‘Airline Chiefs Grow Frustrated as Boeing 737 Max Grounding Cost Nears 1 Billion’. Retrieved from https://www.cnbc.com/2019/10/24/airline-chiefs-frustrated-as-boeing-737-max-grounding-cost-nears-1-billion.html

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The Associated Press. (2020). ‘United Airlines’ Coronavirus Loss Already Costing It $1.5 Billion in Revenue’. Retrieved from http://www.dallasnews.com/business/airlines/2020/03/16/united-airlines-coronavirus-loss-already-costing-it-15-billion-in-revenue/

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Wade, et al. (2020, 2020-01-09). ‘Seven Trends That Will Reshape the Airline Industry’. Retrieved from https://www.bcg.com/en-au/publications/2020/seven-trends-reshape-airline-industry.aspx

Wichter, Z. (2020, 2020-3-20). ‘Virgin Australia Joins Qantas, Suspends International Flights and Scales Back Domestic Network’. Retrieved from http://thepointsguy.com/news/virgin-australia-coronavirus-cuts/

Worthington, B & Snape, J. (2020, 2020-3-20). ‘Australia Blocks Arrival of All Non-citizens, Non-residents in Expanded Coronavirus Travel Ban’. Retrieved from http://www.abc.net.au/news/2020-03-10/coronavirus-non-resident-travel-ban-australia/12071640

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Jiamin Fang
Editor
Nuoya Liu
Writer
Richard Yuan
Writer
Huiqun Wang
Writer