We all know that COVID-19 is taking a significant human and economic toll. In economic terms, I’d predict there is no industry more severely affected than aviation. China, the original epicentre, was the first to ban certain domestic and international travel to prevent the spread of the virus. The financial implications on the global industry were relatively limited, due to the monopoly of state-backed Chinese airlines in that market. With the virus’ spread to the other big aviation markets in Europe and then North America, the situation has really hit home for all.
The US restriction on European flights, for example, equates to around US$20bn in transatlantic passenger revenue annually. National air traffic navigation service providers covering the North Atlantic corridor are preparing for a drop in total traffic of approximately 85 percent. Internationally, travel bans as of late March could represent closer to 98 percent of global passenger revenue – with a three month blanket ban equivalent to over US$250bn.
Can the aviation industry bounce back?
Previous epidemics such as SARS also caused a sharp decline in air travel demand, but that followed a v-shaped drop with a quick bounce back. The International Air Transport Association (IATA) predicts the effects of COVID-19 to be much more far-reaching with a slower recovery, as there will inevitably be an economic recession in its wake. Personally, I think there will likely be the pent-up demand for a bounce back (once governments and the public feel they’ve contained things, of course). What is less clear is how rapidly the supply side can recover – with multiple operators realistically dropping out of the game, lessors having to work through major redeployment of assets, and those operators that continue with state bailouts needing years to regain their independence.
The median airline in IATA has about two months’ worth of cash or cash-equivalents on hand, meaning 200+ of the IATA membership could struggle past May. Given known on-balance-sheet liquidity as a percentage of revenue, it’s also reasonably obvious which are more likely to need bailouts or face existential conversations:
Unsurprisingly, we have already seen casualties, like a regional UK carrier. Many operators are actively reducing their cost base to ensure continuity of business, with one North American operator laying off 6,900 employees, a major European LCC planning to cut their fleet size from 344 to 250, as well as major European flag carriers bringing forward the retirement of their B747s.
Passenger airlines and airports in the US have asked for bailout support of US$50bn and US$10bn, respectively, with OEMs asking for US$60bn to survive without having to cut jobs or file bankruptcy. A similar situation exists in Europe with the UK’s flag carrier asking for a £7.5bn (US$9.2bn) bailout, Norway providing support to its indigenous champion (US$2.75bn) and Italy agreeing to support the bailout of its flag carrier.
What lies ahead for the aviation industry
A small reason for optimism is the domestic market in China, which has begun to show signs of recovery. The freight market has also seen a surge with some players seeing a 50 percent increase in utilization in the past couple months. For those diversified operators with freight operations, this has presented an opportunity to at least offset some of the lost passenger revenue.
Just a few months ago, the aviation space was sensing a cyclical slowdown and realizing the scale of (somewhat disproportionate) scrutiny it was under from the environmental lobby. Biofuels, hybrids and batteries will still be the future, but operators at least can be forgiven for being rather distracted this year. A bigger question for me remains – will governments have the vision to go beyond short-term bailouts and use the crisis to link financial support with overdue structural improvements, like consolidated airspace control within the EU and international consolidation of legacy flag carriers? Probably not.