Helping aviation tide through the ‘Corona’ pocket
• Leading global airlines are stalling/shutting down international operations in the wake of the novel coronavirus pandemic.
• IATA estimates a total loss of around US$ 113 billion to global aviation, which could be higher as more and more countries take steps to curb travel.
• Indian airlines are also expected to face grave repercussions, with a projected hit of US$ 600 million on their first quarter earnings.
• Reduction of ATF taxes and facilitation for cargo-only flights could be pivotal in helping airlines tide through this present crisis.
For those increasingly strident voices against globalisation over the past few years, the novel coronavirus would seem like a blessing in disguise. A crisis like this would be a lesson for every country on maintaining greater self-reliance and lowering dependence on global sourcing. However, with the unprecedented disruption it is unleashing on global trade, economy and life in general, this ‘globalisation antidote’ comes with way larger and wholly unwanted side effects.
Among several industries figuring out the possible repercussions of the virus on their near term business sustainability, aviation is one sector that is taking the blow on the chin. With countries closing their borders and discouraging unnecessary travel, the very survival of the industry is deemed to be at risk. Aviation has seen through crises like 9/11 and SARs with much bloodshed on the balance sheets and bankruptcies, but this one could humble them all.
Estimated impact of Covid-19 on global passenger traffic and revenues
|Market||Impact on passenger numbers||Impact on revenues (US$ billion)|
|Australia, China, Japan, Malaysia, Singapore, South Korea, Thailand, Vietnam||-23%||-49.7|
|APAC excluding the above||-9%||-7.6|
|Austria, France, Italy, Germany, Netherlands, Norway, Spain, Switzerland, Sweden, the United Kingdom||-24%||-37.3|
|Europe excluding the above||-9%||-6.6|
|Bahrain, Iraq, Iran, Kuwait, Lebanon, the United Arab Emirates||-23%||-4.9|
|Middle East excluding the above||-9%||-2.3|
|Canada, United States||-10%||-21.1|
Source: IATA Economics; Revenue numbers do not add up to the US$ 113 bn global total because of route overlaps e.g. China and Japan include revenues on the China-Japan market. Revenues are base fare revenues for all airlines serving routes to, from and within each country.
British Airways CEO Alex Cruz made this clear in no uncertain terms in a letter to his employees on March 13:
“Some of us have worked in aviation through the global financial crisis, the SARs outbreak and 9/11… What is happening right now as a result of Covid-19 is more serious than any of these events. It is a crisis of global proportions like no other we have known.”
He warned that the airline would have to cut jobs, suspend routes and ground aircraft due to the pandemic.
The situation is similar with airlines across the world. Atlanta-based Delta has asked the US government for assistance, as cancellations are outnumbering bookings for flights in the coming two weeks. The airline is reducing capacity by 40% in the coming months. German airline Lufthansa has decided to ground 2/3rd of its airplanes, and has already cancelled over 30,000 flights. Air France-KLM has drawn down € 1.1 billion of its revolving credit facility.
Earlier this month, the International Air Transport Association (IATA) estimated revenue losses to the global aviation industry at US$ 113 billion, and that was before US announced travel curbs for passengers from much of continental Europe. Amid the uncertainty over how long the travel curbs will last, airlines may take heart that Chinese airlines are beginning to experience a surge in passenger numbers again, as compared to the peak of the outbreak when 70% of flights were grounded. This is both due to relative stabilisation of the situation and discounts on offer from these players.
But most airlines across the world enjoy neither the support of the central government nor the vast domestic market that is available to state-owned Chinese airlines. Airlines that rely on traffic to and from China are still struggling. An instance is Cathay Pacific, which has reduced its capacity by 65% in March and April. Similarly, Korean Air has cut capacity by 80%.
The global aviation industry is now asking for a generous emergency support of US$ 200 billion from governments to stay afloat. According to IATA, global airlines would stand to run out of liquidity in a span of 2 months due to the cut in international flights by governments. Boeing has additionally asked for US$ 60 billion for manufacturers to fulfil commitments to suppliers and maintain a healthy supply chain involving 2.5 million jobs and 17,000 contractors.
Squeezing revenues for Indian airlines
India has also imposed a series of measures for curbing inbound travellers and controlling the spread of the virus. It has barred entry of all passengers from Afghanistan, Philippines and Malaysia on March 17, after instituting similar curbs for EU, EFTA, Turkey and UK. This will further discourage many flyers from booking their air travel, making more and more flights unprofitable on low occupancy. Air fares to coronavirus affected locations have already declined by 20-30%. Vistara and GoAir have suspended international operations, while IndiGo and Air India have suspended 65-70% of overseas flights. This situation is particularly unpleasant for SpiceJet and IndiGo, since they have recently taken up capex on their books with new planes.
Centre for Asia Pacific Aviation (CAPA) has confessed in a note, “As the impact of the coronavirus and multiple government travel reactions sweep through our world, many airlines have probably already been driven into technical bankruptcy, or are at least substantially in breach of debt covenants. Cash reserves are running down quickly as fleets are grounded and what flights there are operate much less than half full.” It further warned that without government support, most airlines across the world could be driven to bankruptcy by the end of May.
Indian airlines are expected to ground at least 150 aircraft initially, with the number expected to go up in the coming weeks. Losses in the first quarter are expected to be significant despite low fuel prices at around US$ 30 per barrel. CAPA projects losses of around US$ 600 million for all carriers except Air India. The state-owned airline’s disinvestment process has also been postponed to April, compelling the government to invest more to keep the airline afloat in the coming two months.
This is expected to make around 30% of airline and 50% of ground handling staff redundant. While airlines can tide over 1-2 months with initiatives like leave without pay, but beyond that, job cuts may be the only way out. Sources state that the Indian government could be planning a rescue package of around US$ 1.3-1.6 billion for the aviation sector, with temporary suspension of most taxes levied on the airlines. Waiver of taxes on aviation turbine fuel (ATF) in this period could be a major support, since it accounts for around 40% of operational costs of airlines. Combining central and state levies, the tax on ATF comes up to 30-50%.
Moreover, airlines may have ferried the coronavirus pandemic across borders, but they can also play a major role in transporting essential supplies (prominently food and healthcare) and people. This movement should not be disrupted at any cost and countries should support freight only flights. IATA director general Alexandre de Juniac urged governments to “take urgent measures to ensure vital supply lines remain open, efficient and effective”. This would also involve exemptions for such cargo-only airlines from restrictions like quarantines applied on passenger airlines. Besides this, they are also seeking exemptions from things like overfly charges, parking slots and restrictions. Steps like these could help keep airlines afloat, maintain international supply lines, keep the global and also help save lives in this crisis period.