“I think this crisis will lead to accelerated consolidation in European aviation, leaving a few large Airlines, just like in the US. They will adjust their networks and the regional airports will drop out.” (Olivier Jankovec, director ACI Europe)
Who will survive and who will not?
Most of the industry should pull through if the situation lasts one or two quarters. Any longer, and the future of air travel could be altered for good.
In a memo to staff on March 13th, entitled “The Survival of British Airways”, the carrier’s boss, Alex Cruz, spoke of “a crisis of global proportions like no other we have known”
The International Air Transport Association (IATA), an industry group, said two weeks ago that the coronavirus could wipe out between $63 billion and $113 billion in worldwide airline revenue this year.
However, since IATA’s revision things have got worse. Lucrative transatlantic routes, which earned airlines around $20bn in sales last year, have been hit by President Donald Trump’s 30-day ban on most flights to America from Europe, which took effect on March 14th.
Airlines are running out of cash, with 75 percent of them not having enough to cover more than three months of fixed costs. A brief view:
- American Airlines has cut domestic flights by 30% in April and international flights by 75%, with deeper cuts expected for May.
- Delta Airines stated that the airline will take a $2 billion loss for the month of March and plans to cut up to 70% of its flights and ground at least 600 planes, more than half its fleet.
- United Airlines is cutting flights by 60%.
- Southwest Airlines suspends international flying and cuts 1,000 flights from schedule.
- Air France issued its latest operational update on March 19, which will include a reduction of international and domestic flight capacity by up to 90 percent that is expected to last two months.
- IAG(Aer Lingus, British Airways, Iberia, Level and Vueling) will reduce its overall capacity by 75 percent between April and May compared to the same period last year.
- Qantas said it would cut all international flights.
- Cathay Pacific, based in Hong Kong, has cut capacity by 65% in March and April, and anticipates more cuts in May.
- Korean Air has lopped 80% of its schedule.
- Lufthansa has grounded 90% of its fleet.
- Turkish Airlines said on that 85% of the carrier’s passenger planes were not being used at the moment.
- Emirates will temporarily suspend all passenger services from 25 March 2020.
- Singapore Airlines reduced capacity with 96% until at least the end of April 2020. Singapore Airlines and SilkAir will ground 138 aircraft during this time, out of a total fleet of 147 jets – leaving just nine aircraft flying – with low-cost subsidiary Scoot parking 47 of its 49 planes.
- Easyjet to halt 90 per cent of flights.
- Ryanair said that it could also reduce seat capacity by 80 per cent across its entire network, and could ground its entire fleet in April and May.
A prolonged disruption presents an existential threat.
IATA Chief Executive Alexandre de Juniac called on governments to take some “extraordinary measures” to support the global aviation industry. “Time is of the essence. Governments cannot take a wait-and-see approach,” he said, adding, “We have seen how dramatically the situation has deteriorated globally in a very short time. They must act now and decisively.”
The stark warning comes after the CAPA Centre for Aviation said on Monday that most airlines would be bankrupt by the end of May without government intervention, amid an unprecedented slump in passenger demand.
“No one thought a month ago we would be facing an existential crisis. People are moving from disbelief, to grief, to anger, to hope, to denial, and to more anger. Trips are cancelled day to day, planes are empty, and passengers are nervous,” (quote from a Delta Airlines flight attendant).
The need for financial support: bailout from the government?
Governments world-wide have come under increasing pressure world-wide to provide financial assistance to airlines that have cut capacity of between 70 and 90 percent in coming months and made sweeping job cuts to try to protect their profits.
the US Airlines industry is seeking a $50bn bailout from the federal government in the form of direct aid and loan guarantees for relief due to the downturn in the industry caused by the coronavirus pandemic.
Separately, plane maker Boeing BA, said on Tuesday that it was looking for at least $60 billion to aid the U.S. aerospace industry as the plane maker, its suppliers and airline customers face fallout from the impact of the virus. Shares in Boeing were down 4.22% on Wednesday.
U.K. chancellor Rishi Sunak said he was discussing potential support specifically for airlines and airports on Tuesday as part a £330 billion package of financial measures unveiled on Tuesday aimed at shoring up the economy.
The news was welcomed by Johan Lundgren, Chief Executive of EasyJet, who said “Airlines are facing ‘significant pressure’ and without government action “there is a real risk to the industry.”
In Europe, Italy said it would renationalize its flagship carrier Alitalia under an emergency economic rescue plan for the coronavirus pandemic. In a government decree published late on Monday, the government said it would create “a new company wholly controlled by the ministry of economy and finance, or controlled by a company with a majority public stake, including an indirect one” to take over the airline.
Sweden and Denmark, which hold stakes of 14.82% and 14.24% stakes in SAS respectively, announced on Tuesday $300 million in loan guarantees for the struggling Scandinavian carrier. Shares in SAS were 1.30% lower.
Chinese airlines can also count on generous government support. Most of the big ones are state-owned (China Eastern and China Southern) or could be (there was speculation last month that struggling Hainan Airways’ parent company, HNA, may be nationalised). Beijing has already promised bail-outs to make up for their losses, estimated to be around $3bn in February alone.
Lufthansa is talking to European governments about financial support. That may require relaxing EU state-aid rules. Mr Trump’s vague talk of assistance to stricken industries, including airlines, remains just that for now.
Other countries that have introduced financial aid include the Australian federal government, which on Monday unveiled a $715 million relief package to help the country’s embattled aviation industry. Measures include refunding a range of government charges and waiving fuel excise, air service charges and regional security fees.
Taiwan’s civil aviation regulator said national carriers could apply for subsidies and loans backdated to Jan. 15.
Many carriers may not get government bailouts
Many carriers may not get government bailouts. These include airlines in the China-based HNA Group, such as its Hainan Airlines; Asiana Airlines in South Korea; Southeast Asian low-cost carriers such as Bamboo Airways and VietJet in Vietnam and Nok Air in Thailand; South African Airways, and Eastern European legacy and state-owned carriers such as Croatia Airlines and Romania’s TAROM.
The future of Norwegian Air is uncertain. To help Norwegian its home government has removed aviation taxes. There also has been speculation about the financial health of Virgin Atlantic. In addition, Cathay Pacific is fighting for survival, having seen its business start to decline when political protests began in Hong Kong, then plummet further as COVID-19 swept through Asia.
Recovery?
Many airline bosses cling to the hope that global passenger numbers will follow the same trajectory as in the wake of previous disruptions, such as the terrorist attacks of 9/11 or the global financial crisis of 2008. After a few months of disarray, travel patterns then reverted to normal and growth resumed.
That, more or less, is what has happened in China this year. Chinese carriers were hit hard at first. At the peak of the outbreak in mid-February around 70% of flights were grounded, according to OAG, a travel data firm. Now that infections are stabilising in the country Chinese passengers are getting back in the air, tempted by large discounts. The latest data suggest that capacity is now down by 43% compared with a year ago.
Few airlines, though, serve a vast domestic market like China’s. Only America’s is larger. The European Union’s single aviation market looks large, but is fragmenting as member states put up barriers.
At the moment most airlines are desperately trying to preserve cash. Besides cutting flights, many are asking or forcing staff to take unpaid leave. American, Delta, and United, are already asking employees to volunteer for unpaid leave. Norwegian has temporarily laid off half of its 11,000 workers. SAS is laying off 10,000 workers, 90% of its workforce, as it cancels most of its flights. KLM, the Dutch flag-carrier, said it would cut 2,000 jobs in the coming months. Lufthansa has suspended its dividend for 2019. It may sell some aircraft.
The steep fall in the oil price ought to help, but many airlines will only feel the benefit later, having previously locked in purchases at higher prices to hedge against the risk of pricier fuel.
In an effort to prevent wasteful ghost flights with no passengers, which some carriers have been flying to preserve valuable take-off and landing slots at busy airports, regulators around the world have temporarily waived rules that require slots to be used at least 80% of the time (use-it-or-lose-it-rule).
Plenty of carriers are also scaling back capital expenditure by deferring the purchase of new aircraft. Airbus has agreed to delay some deliveries to Chinese airlines. Cathay is discussing deferrals with both Airbus and its American rival, Boeing. Airlines are also asking leasing companies, which have grown rapidly over the past decades and now own around 50% of the global fleet, to show forbearance over payments.
Not every airline will survive the pandemic…
Not every airline will survive the pandemic. Europe has already seen one casualty. Flybe, a British airline with underlying financial-health issues, declared bankruptcy on March 5th. Norwegian’s share price, which had lost 80% of its value between 2016 and 2019, has now shed another four-fifths since February. In Europe’s fragmented aviation market a third of carriers, mostly small no-frills ones, either lost money or barely broke even in 2019 according to Citigroup (bank). Experts are predicting numerous insolvencies.
Carriers which do make it through will enjoy less crowded skies—and more pricing power. A shake-out in Europe, long plagued by overcapacity, would benefit companies with strong balance-sheets.
These include EasyJet, Ryanair and—despite Mr Cruz’s warnings—BA’s parent, IAG. On March 13th the Financial Times reported that two non-executive board members at IAG have loaded up on the group’s cheap shares, suggesting a modicum of confidence in its prospects. Weakened airlines like Norwegian, may become acquisition targets.
All that will only happen if the recovery is swift, however!
The longer the pandemic lasts, the less certain travel patterns are to revert to normal. In a worrying sign, the boss of one big leasing firm says that even firms with apparently robust balance-sheets have asked him to go easy on rent, suggesting at least some are worried about survival.
If more airlines start to fail, that would have knock-on effects throughout the broader aviation industry.
Airports & retailers
Even before Mr Trump’s prohibition American airport operators were expecting to lose at least $3.7bn between them this year. Weaker airports could come under pressure and may not survive, making some regions less accessible even if conditions eventually improve. As airlines continue to suffer from depressed demand, so too are the retailers and other airport businesses that rely on steady footfall to turn a profit. Airport authorities, particularly in Asia, are increasingly turning to relief packages to help businesses weather the storm. At Hong Kong International Airport, where relief for retailers was launched last year amid massive anti-government protests, an expanded HK$1.6bn ($205.4m) package of rental concessions, waivers and fee reductions has been offered to help offset the Covid-19 effect. Similar support has been offered to other Asian airports, including those in Thailand and South Korea. As part of the Singapore Budget 2020 Stabilisation and Support Package, Changi Airport Group (CAG) is extending measures such as a 15% property tax rebate and a 50% rebate on rental costs for six months.
Aircraft manufacturers
Airbus and Boeing are making fewer planes and look likely to rethink plans for ramping up production of narrow-body airliners; falling profits will weigh on efforts to invest in new climate-friendlier models.
Leasing firms
Even leasing firms, which have plenty of capital and could repurchase planes from straitened airlines and then lease them back, could be hurt if widespread insolvencies flood the market with second-hand aircraft, depressing leasing rates.
Ground Handling Agents
In India there is now an imminent threat of unemployment for nearly 35,000 GHAs associated with various international airlines, till regular flight operations begin again. The ground handling (GH) industry in India totally employs over 70,000 people, with over half of them working for international airlines. In the rest of the world all GHA’s are struggling to survive.
Perhaps the greatest uncertainty concerns shifting attitudes to business and leisure travel.
If corporations detect that they can operate with fewer executives flying round the globe, and holidaymakers get a taste for “staycations” or trains, compounded by “flight shame” over aeroplanes’ carbon emissions, the industry may struggle to keep doubling passenger volumes every 15 years, as it has done for the past three decades. The coronavirus is already proving to be quite the braking parachute. It may arrest momentum more dramatically still.
Containment COVID-19
Experts say it is very hard to predict how long it will take the airlines to recover. It depends on what more intensive testing tells us about the number of cases we have and have had, on whether we discover drugs that aid recovery, on mortality rates, and on when we get a vaccine. But even if the COVID-19 outbreak turns out to be seasonal and relatively short-lived, experts warn it could return in the fall of 2020 or possibly the following winter, imposing an even bigger burden on the industry. No one knows, but we know it is going to be a prolonged struggle.
Economic recession
With the economy now disintegrating further by the day, there is a credible risk of an economic recession. If we see an extensive number of layoffs, a substantial increase in unemployment rates, a sputtering return of business travellers and a slow hiring pace as we recover from the crisis, it could take years for the industry to reach precrisis levels of both traffic and revenue.
Decline Business travel
Business travel might be permanently dampened once travellers unable to fly today become accustomed to holding meetings or attending conferences via teleconferencing rather than in person. The technology has gotten so much better with the likes of Zoom, Google Hangouts, MS Teams and Skype, that we’re getting to the point where a lot of business travel is going to be conducted virtually. This will have a material effect on business travel, especially long-haul travel. Other experts are noting that traveling on business is “how stuff gets done” and that technology will not replace it. They believe it will rebound.
There will always be demand for leisure travel
People are social animals and always have the desire to meet in person when possible. There will always be demand for leisure travel, stimulated by millennials seeking new experiences, and baby boomers visiting family and taking ‘bucket-list trips.”
(source: ACI Europe, IATA, The Economist, New York Times, The Guardian)
How to survive as an airline or airport company in the world after the CORONA CRISIS?
Your company is or is likely to be in financial difficulties because of the measures taken to prevent the spread of the COVID-19 virus. Orders and deliveries are not forthcoming and your customers also struggle to survive or go bankrupt; in the worst case, even without you having paid. You still see opportunities in the market, but you cannot make a start with the current costs. Fixed costs, such as rent and personnel costs, continue, but are no longer geared to the shrinking income of the company.
How can ENADT help you with this?
Of course, you can wait for a bailout, but there’s no such thing as a free lunch. The sooner you realize that you have to make radical changes in order to survive this crisis the greater the chances are that you actually do. We can help your organization and advise you on the steps to be taken to deal with the crisis.
Taking the right steps in the right order will be essential:
We will help you:
- Develop a Profit and Loss statement: defining the benefits, the costs, and the time to deliver, demonstrating usefulness and necessity of the reorganization and plan communications across all steps of the reorganization;
- Understand your current Weaknesses and Strengths: take the time to self-diagnose
- To consider Multiple Options: change the entire organizational model or change only those elements that don’t work or come at a high price;
- Get the Plumbing and Wiring Right: knowing all the elements that need to change and planning the changes in the right sequence;
- Launch, Learn, and Course Correct: You have to live with and digest it, and rapidly course correct when you find issues.
You owe it to your shareholders and employees to follow a rigorous process rather than do something without proper preparation or trial and hope for the best, as so many leaders do. You’ll make better decisions, keep your people more involved and engaged, and capture more value.
The sooner you start, the more likely you are to survive this crisis!
Goed overzicht, goede analyse en vooral een “helpende hand” in het ENADT Statement.
Prima!