Airlines, Manufacturers Brace For Unknown As COVID-19 Spreads
The aviation industry likes certainty, predictability and long-term planning visibility for the big investments it is based on. The COVID-19 crisis, which has now turned into a global phenomenon, guarantees it has none of it for the near future.
With the situation changing daily, it is not even accurate to assume that the situation is “unprecedented.” It is not clear whether recovery will follow the pattern of the 2003 Severe Acute Respiratory Syndrome (SARS)—thereby having a precedent—or be much different and worse.
- COVID-19 turns industry challenges into drama
- IATA predicts up to $113 billion in revenue losses
- Flybe collapses and more consolidation is expected
To date, there is no World Health Organization (WHO) warning not to travel to China, yet demand is imploding along the virus’ path and beyond. Following the outbreak in Wuhan, China, the Asia-Pacific region was affected the worst first. Now there are similar developments in growing parts of Europe. And U.S. airlines are beginning to make substantial capacity reductions across the Atlantic and in the domestic system.
“The world economy is facing a sharp downturn in Q1 due to the impact of the coronavirus,” writes Oxford Economics lead economist Adam Slater in a March 4 research briefing. “A dramatic slowdown in China plus the damage to demand as the virus spreads internationally point to world GDP contracting this quarter.” Even if recovery is quick, Slater expects world GDP growth to contract to only around 2% for the year, “easily the slowest pace in the last decade,” he notes.
The International Air Transport Association (IATA) projects the industry could lose up to $113 billion in revenues in 2020 if the virus spreads further. This would be 19% of forecast revenues and “on a scale equivalent to what the industry experienced in the global financial crisis,” IATA states. A less dramatic scenario assumes a reduction of $63 billion or 11%. Both calculations assume that the recovery will be V-shaped.
“The turn of events as a result of COVID-19 is almost without precedent,” IATA Director General and CEO Alexandre de Juniac says. “In a little over two months, the industry’s prospects in much of the world have taken a dramatic turn for the worse.”
De Juniac asserts that “as governments look to stimulus measures, the airline industry will need consideration for relief on taxes, charges and slot allocation,” adding: “These are extraordinary times.”
If COVID-19 spreads extensively, IATA forecasts Australia, China, Japan, Malaysia, Singapore, South Korea, Thailand and Vietnam will suffer a $49 billion revenue reduction and a 23% decline in passenger numbers. Canada and the U.S. would see 10% fewer passengers and $21 billion less in revenues. Europe would experience a $44 billion revenue shortfall. Nominal fuel costs (not counting those achieved by flight cuts) could fall by $28 billion, providing some relief, although hedging could delay the impact for many airlines.
The COVID-19 crisis makes the already complex situation with which the industry has been dealing overwhelmingly complicated. Some factors, such as the already existing weakness in the widebody market, are being made far worse. Others cancel each other out partly but not everywhere: Airlines have been scrambling for additional narrowbody capacity in some markets as the Boeing 737 MAX grounding dragged on before the novel coronavirus outbreak. Now essentially everywhere in the world the last thing airlines need is more aircraft.
If traffic does not come back in the next few months, the MAX may hit the market at the worst possible time. Massive deferrals and cancellations are becoming possible for airlines following the one-year anniversary of the grounding this month. And why would they not make use of those options?
There is disruption everywhere in aerospace and air transport. Airbus’ narrowbody production meltdown, which would be considered a major industrial crisis in normal times, has almost been forgotten. And while most observers are awestruck by the sharp drop in traffic as COVID-19 proliferates, it is important not to forget that there were more gradual declines last year, before the coronavirus emerged. Air transport had been on the verge of a substantial slowdown from its 10-year above-average growth phase as trade conflicts took their toll.
For Airbus, Boeing (and lessors), there is huge risk that airlines scheduled to take delivery of new aircraft this year will not be able to afford them or will defer deliveries as a measure of caution. Airbus is targeting around 880 deliveries in 2020, of which 338 (or close to 40% of production) are supposed to go to Asian operators (see graph). This is not counting aircraft to be delivered to lessors that are intended to be flown by airlines in the region.
While much of the focus has been on Airbus A330neo risk, only seven of the aircraft are scheduled to go to Asia-Pacific carriers this year, according to the Aviation Week Intelligence Network Fleet Discovery database. The A350 is much more exposed, with 37 total deliveries—including many to mainland Chinese carriers and Cathay Pacific Airways, based in Hong Kong.
Boeing’s risk looks to be lower at first glance, with “only” 109 aircraft planned for Asia-Pacific airlines this year: 49 787s, six 777s and a notional 54 737s. But of course, the lower number is not voluntary and expresses the effects of the MAX grounding and China’s refusal to order more 787s until its trade conflict with the U.S. is resolved.
“People don’t buy aircraft to take delivery tomorrow,” Boeing Commercial Aircraft head of sales Isshane Mounir says, noting that “China conversations are on standby right now [as] airlines are in cash-conservation mode.” Mounir says he believes “this is a short-term issue for now.”
Airbus CEO Guillaume Faury set a different tone at a March 4 hearing of the French senate’s economic affairs committee, saying that industry-wide orders for long-haul aircraft could be affected in the current crisis. “When it comes to long-haul aircraft, between Airbus and Boeing we have a lot of supply and a market that is not quite as strong as was predicted a few years ago,” Faury said.
Airbus is expecting a massive hit to the A330neo program. Air Asia X—by far the largest A330neo customer, with 78 on firm order—said late last month it will defer A330-900 deliveries.
“Civil manufacturers could be affected for several years but with a limited impact to 2020, though airlines especially in Asia are already reported to be talking to OEMs about deferrals,” analysts at London-based Agency Partners write in a note to clients. “Comparisons with the impact of SARS are misleading and poorly judged: Asia accounted for only 10% of civil aircraft in 2000-2005 versus around 50% in 2010-2019.” Agency Partners expects a “sharp and rapid impact” on the civil aftermarket, which could be short, “as a traffic recovery quickly drives a need to catch up with deferred maintenance.”
Lessors are exposed, too. Early on, some larger lessors expressed optimism that they could shift capacity within their customer portfolio from affected operators to those in need of lift due to the MAX and other lingering issues, including A321 delivery delays and Rolls-Royce Trent 1000 engine problems that grounded some 787s. But the virus’ spread into Europe and North America has tempered that. Facing cash-strapped carriers, lessors have little choice about being flexible.
How bad things will get and for how long depends on how quickly air travel can recover. Different regions are in different phases of the crisis, and everything remains fluid.
China is preparing to go into recovery mode. The government will pay subsidies to support international air connections, as local airlines plan further restoration in domestic capacity. For the week of March 9, airlines are planning to run more than twice the domestic capacity they offered amid their period of maximum retrenchment in February.
Though more seats are being offered within China, aircraft appear to be flying less than half full. For international routes on which several airlines are operating, the government will pay a subsidy of 0.0176 yuan per available seat-kilometer (0.41 U.S. cents per available seat-mile), the finance ministry says. If only one airline serves a route, it will be paid three times as much, 0.0528 yuan. The support extends to foreign carriers.
About 80% of China’s international capacity, including that run by foreign airlines, had been shut down by mid-February, according to data from OAG and the Aviation Week Network’s CAPA – Centre for Aviation. No trend improvement has appeared since then.
Chinese domestic capacity, by contrast, is rising from week to week, up from a mid-February trough of about 30% of the precrisis level. The government is demanding that the country get back to business: Factories and offices have been reopening. Airlines have likewise been putting aircraft back in the air. For the week beginning March 9, airlines are offering 9.9 million domestic seats, about two-thirds of the pre-epidemic volume.
Data on loads is not available, but on a typical day during the week of Feb. 24, Chinese airlines carried only 22% as many passengers on domestic and international services as they had a year ago, according to Chinese aviation data firm VariFlight. Comparing that with seat offerings in the same week suggests loads of less than 50%.
The crisis has overcome attempts by HNA Group to save itself. In talks for investment by the Hainan provincial government, the authorities are expressing interest in acquiring stakes of HNA Group’s foreign aviation assets, though nationalization of Hainan Airlines remains the focus, say three sources familiar with the discussions. The foreign HNA aviation businesses in which the province could invest could include lessor Avolon, say sources associated with the group, the government and creditors.
Other markets in the Asia-Pacific region are also suffering massive declines in air service. South Korea has been particularly hard hit, reflecting the fact that it has the second-highest number of coronavirus cases behind China. International seat capacity in the South Korean market almost halved in the space of just six weeks, CAPA and OAG data indicate.
South Korea-based airlines such as Korean Air have cut back schedules dramatically: Korean Air has suspended more than 100 of its international flights, with frequency reductions on at least a dozen more.
Japan is another market severely affected. International seats were down 34% for the week of March 2 versus Jan. 27, CAPA and OAG data show. The decline initially hit only international traffic, but on March 4 All Nippon Airways announced domestic cuts, too.
The service reductions are a particularly tough blow for Japan, as the country’s airlines and government were targeting a wave of traffic growth in 2020. The government created 50 new slots at congested Tokyo Haneda Airport for use from late March to boost international service.
Almost all Asia-Pacific governments have introduced travel restrictions, and new measures announced by India are among the most stringent, suspending visas for travelers from China, Iran, Italy, Japan and South Korea.
In Europe, Flybe became the first airline to collapse since traffic began to plunge. After years of distress, the continent’s largest regional airline went into administration March 5 and stopped flying immediately.
Elsewhere in Europe, airlines have made deep, short-term capacity cuts. Ryanair, for example, is taking 25% of capacity out on a rolling basis to adjust to the new lower demand levels. Lufthansa Group is grounding the equivalent of 23 long-haul aircraft and 150 narrowbodies to reduce short-haul capacity up to 25%. Demand to Italy has suffered the most.
Yet airline CEOs were trying to reassure themselves March 3 that the spread of COVID-19 and the consequent demand slump will be short-lived and followed by a quick-recovery.
“I am quite confident we will get through this in a relatively short period of time,” Air France-KLM CEO Ben Smith said at the Airlines for Europe (A4E) Aviation Summit in Brussels. “It is a big event with a huge impact but relatively muted in other regions.”
Ryanair CEO Michael O’Leary expects “deflated bookings for the next 2-3 weeks,” adding: “Then people will get bored about COVID-19 coverage. Bookings through summer are reasonably solid right now.”
IATA requested slot rules be suspended globally for the entire summer timetable (from the end of March to the end of October). A4E argued this would give airlines the necessary flexibility to cut back flights without the risk of losing access to slot-constrained airports in the summer of 2021. Airlines are generally required to use a slot at a regulated airport for at least 80% of the time or lose it for the next period. The rule was suspended after the outbreak of SARS in 2003, though.
Henrik Hololei, the European Commission’s director general for transport and mobility, pointed out that there is no immediate pressure on regulators to act. He expects to make a decision in April at the earliest.
North American commercial carriers that operate in the Asia-Pacific region suspended all flying to China and Hong Kong in early February and slashed capacity to affected regions including Japan, Northern Italy and South Korea.
United Airlines, the U.S. carrier most exposed to the Asia-Pacific region, took still more aggressive moves March 4, cutting its international schedule by 20% in April—on top of previous cuts to Asia-Pacific service—with “similar reductions planned for May.” The airline will also reduce its schedules across the U.S. and Canada by 10% in April, citing the decline in international bookings combined with lower demand from U.S. travelers. Domestic capacity cuts are also expected to extend into May.
—With Helen Massy-Beresford in Paris, Adrian Schofield in Auckland, and Ben Goldstein, Sean Broderick and Michael Bruno in Washington