Impact of Covid-19 on the airline industry
ADIEL MAMBARA – THE airline industry will wear the scars of the coronavirus pandemic for a very long time as airlines suffer from a fall of demand and travel bans around the world as a result of the coronavirus epidemic.
Since the last substantial influenza pandemic over 30 years ago, international air travel has increased significantly. During the 1968–1969 influenza pandemic, over 160 million persons travelled internationally on commercial flights. The IATA World Air Transport Statistics (2019 WATS) confirms that: 4,4 billion passengers flew in 2018.
This trend over the past few months has completely reversed, as a result of this new enemy called Covid-19 which has been like no other virus we have encountered in our lifetime.
For most airlines, the demand for airline travel is actually non-existent – the number of people cancelling flights exceeding the number of new travel bookings. As every carrier’s ticket sales disappear, so does the daily cash intake from those sales compounded by a high level of refunds. However, for all airlines, the bills have not gone away, although the revenue to pay them has.
Amid the sudden plunge in global demand, Airlines like Air Zimbabwe have started working on a post-Covid-19 master plan which will position the carrier reclaiming its regional and domestic routes. Air Zimbabwe has continued to remain in crisis mode and turnaround plans involving recapitalisation, aggressive marketing and restructuring, are not a new strategy for Air Zimbabwe. However, with all airlines in crisis mode, this might create a window of opportunity for Air Zimbabwe once the crisis is over.
Furthermore commercial Air traffic is poised to fall 8,9 percent this year, according to Jefferies Financial Group Inc. That would be the biggest decline in the 42 years of available data stretching back to 1978, dwarfing the impact of the Sept. 11 terrorist attacks.
That is not surprising at all, given that many governments worldwide have closed borders to foreign visitors and imposed lengthy quarantines that have resulted in most carriers suspending all inbound and outbound passenger flights. More worryingly is the fear of passengers being confined at 36,000 feet for several hours, seated next to a possible Covid-19 carrier.
There has also been an opposing argument from aviators who have highlighted that where restrictions on entry/exit and quarantines that makes air services untenable exist, common sense must prevail for governments and regulators to suspend consumer and other regulations that make airlines financially liable for schedule changes and cancellations.
Thankfully there has been some positive progress on changes to the 80:20 use-it-or-lose-it slot rules under Regulation 95/93. Airlines can now temporarily keep their slots even if they do not operate their schedules. This is a temporary measure to avoid ghost flights and help the airline industry and the environment.
The economic damage to the aviation industry, its supplier base and employees is catastrophic; the social impact of a pandemic such as Covid-19 is very severe especially when it comes to population mobility. The global shift of populations to urban centres has increased the population density of cities thereby favouring the spread of infectious diseases such as Covid-19, resulting in governments taking drastic measures to stop deaths and the spread of the virus!
However significant demand shocks aren’t new to the airline industry. The airline industry has been in a period of serious financial distress since the terrorist attacks of September 11th, 2001 and the aviation industry has weathered the storms caused by the 2002-04 Severe Acute Respiratory Syndrome (Sars) pandemic, but never before have we seen a shock of this magnitude affecting the entire aviation ecosystem for what looks as if it will be a very long time.
The International Air Transport Association (IATA) has already warned that passenger numbers and passenger revenues will be severely impacted. It is estimated that the Covid-19 situation will lead to a loss of $113 billion loss of passenger revenues worldwide in 2020. This is a pessimistic forecast which would represent a 19 percent drop from 2019 and even IATA’s best-case scenario assumes an 11 percent decline in passenger revenue equivalent to $63 billion.
A key policy priority for airlines should, therefore, be to plan for the long-term survival of their businesses. Airlines have already started to recognise this and have responded quite rightly by cutting capacity and reducing costs to slow the outflow of cash.
A raft of measures has already been imposed by carriers that include eliminating non-essential services, imposing salary reductions, furloughing employees and grounding aircraft. In combination, these measures will provide airlines with critical breathing space until the crisis recedes, but it yet remains to be seen if further measures will be needed. Only time will tell!
Most airlines only have enough cash reserves to cover a few months of their fixed costs (costs that have to be paid regardless of whether their planes are flying), however further support measures are urgently needed from governments to bail out airlines in the short to medium term. This view is supported by IATA who has stated that
“time is of the essence Governments cannot take a wait-and-see approach”.
Some governments have started to assist; Chinese regulators announced state funding for domestic and foreign airlines operating international services to and from China during the crisis; President Trump said on March 10 his administration will provide assistance to U.S. airlines as a result of the outbreak; Hong Kong Cathay Pacific Group is in line to receive HK$236 million (US$30,4 million) from a one-off government subsidy handing airlines HK$1 million per plane subsidy.
However, more needs to be done and governments will be faced with critical decisions in the next few months that include: let struggling airlines fail, offering loan guarantees, offering employer tax relief and rebates, freezing of taxes (particularly air passenger duty) and lastly nationalising carriers.
It is not all doom and gloom! On the opposite side of the spectrum, there is a huge price drop on crude oil and if an airline has not completely hedged their fuel price with their suppliers, they can take advantage of low oil prices.
In normal circumstances lower oil prices tend to help reduce costs for airlines and would be welcome news, however in the present climate, airlines will not benefit immediately from lower crude oil prices, because the reduced passenger traffic will far outweigh gains from lower oil prices.
There has also been an impact on air freight. The disruption of passenger flight schedules and, more recently, the complete grounding of planes is creating a supply and demand issue for outbound freight that usually piggy-backs on passenger aircraft.
Significant cargo capacity was lost as a result of airlines reducing passenger operations in response to government travel restrictions due to Covid-19, severely impacting global supply chains.
Air-freight capacity is expected to tighten further in the next six months resulting in an increased cost in air freight rates. There are reports that current Air Freight rates are currently up 8 times higher than the normal rates.
Trade bodies are lobbying governments to recognise the vital importance of air cargo and ensure that governments remove any blockers in the delivery of life-saving drugs, medical equipment, and support global supply chains.
The overall importance of air transport cannot be overemphasised. According to IATA, in normal times, airlines transport about 35 percent of global trade. And every job in air transport supports another 24 in the travel and tourism value chain—nearly 70 million jobs!
Considering all this evidence, prioritising air transport and helping airlines financially survive through these dark times will position the world for the eventual recovery.
The modern world is built on aviation connectivity and it is in everyone’s interest to ensure that airlines take to the skies again, despite the premonition that after we defeat Covid-19, the impact of this deadly virus will have long-lasting consequences on the entire industry and how it operates!