11 Mar what does The coronavirus mean for aviation now?
by David Kaplan MARCH 4, 2020
This article originally appeared on Kambr Media – check out this link and more for the latest news on the intersection of commercial aviation and tech.
“Take the aftermath of 9-11 and combine it with what we saw during the 2002 SARS outbreak, and that defines how this current situation looks,” says Atmosphere Research’s Henry Harteveldt.
It’s impossible, and perhaps feels a bit pointless, for anyone to gauge the impact that the novel coronavirus known as covid-19 will have on the global aviation industry.
Nevertheless, we can say where things stand: as of this writing on March 3rd, the U.S. has seen 120 cases of coronavirus across 16 states with nine deaths related to the disease, according to a variety of reports, including the NYTimes. The World Health Organization (WHO) has counted 90,000 cases globally, 80,000 of which are in China, where covid-19 was first spotted; WHO listed close to 3,000 coronavirus-related deaths in China and 238 across 50 countries.
Airlines Bid For Travelers’ Confidence
IATA’s initial assessment of the impact of the covid-19 outbreak suggests a potential 13 percent full-year loss of passenger demand for carriers in the Asia-Pacific region. The global aviation trade group expects that to translate into a $27.8 billion revenue loss in 2020 for carriers in the Asia-Pacific region. That hit is primarily confined to carriers registered in China, with $12.8 billion lost in the China domestic market alone.
On Wednesday March 4th, IATA reported global passenger traffic data for January 2020 showing that demand (measured in total revenue passenger kilometers or RPKs) was up a mere 2.4 percent compared to January 2019.
This was down from 4.6 percent year-over-year growth for the prior month and is the lowest monthly increase since April 2010, “at the time of the volcanic ash cloud crisis in Europe that led to massive airspace closures and flight cancellations,” IATA said. January capacity (available seat kilometers or ASKs) increased by 1.7 percent. Load factor was up 0.6 percentage point to 80.3 percent.
“January was just the tip of the iceberg in terms of the traffic impacts we are seeing owing to the COVID-19 outbreak, given that major travel restrictions in China did not begin until 23 January. Nevertheless, it was still enough to cause our slowest traffic growth in nearly a decade,” said Alexandre de Juniac, IATA’s Director General and CEO, in a statement.
Given the severity of crisis, IATA has asked global aviation regulators that the rules governing use of airport slots at 200 facilities be suspended immediately and for the 2020 season.
In an update on March 5th, IATA estimates that 2020 losses on the pax side of the airline business due to the coronavirus could range from $63 billion (in a scenario where covid-19 is contained in current markets with over 100 cases as of 2 March) to $113 billion (in a scenario with a broader spreading of covid-19).
The trade group had no estimates on how cargo operations are faring, though sources have told Kambr Media that has been little financial impact so far.
As losses that began in Asia-Pacific – as Ch-Aviation data shows – start spreading to the rest of the world, airlines have reacted cautiously, but quickly, noted Henry Harteveldt, principal for global travel consultancy Atmosphere Research Group.
“I think the airlines have done a very careful, thoughtful job in responding to the virus,” said Harteveldt, who was preparing to take a flight to London. “They have drawn down flight destinations where there are travel restrictions or where demand has fallen off. They’re making it as easy on passengers as it can possibly be at the moment.”
To give ambivalent fliers a little less to worry about in the U.S., Delta Air Lines, United Airlines, American Airlines, JetBlue Airways, Alaska Airlines, Hawaiian Airlines, have taken steps to help with containment by announcing they would waive ticket change and cancellation fees for passengers amid the scare.
In the face of those announcements and the abandonment of hundreds of thousands of planned trips, Europe, Lufthansa, easyJet, British Airways, and Ryanair have cut hundreds of flights due to plummeting demand, the Financial Times has reported.
“Seeing American, Delta, Alaska and JetBlue taking steps such as stating they could waive change fees and other cancellation penalties for people who book flights during the next few weeks creates some confidence among travelers,” Harteveldt told Kambr Media. “So, if the situation were to get worse, a person can book their flights and get a travel credit for the full amount without worry.”
Sudden route cancellations around the world have reverberated for individuals and businesses. The last-minute termination of Barcelona’s Mobile World Congress last month has led to a domino effect with major conferences and events —such as Google’s I/O and Facebook’s F8 May developer gatherings — scrapped in the face of increasing worries about Covid-19.
“The good thing about the airline industry is that airplanes are a very flexible asset,” Harteveldt said. “You can ground them, if you have to, under the kind of extreme circumstances that we are experiencing now.”
Worse Before It Gets Better
As the U.S. Centers for Disease Control and Prevention (CDC) starts to expand testing for the coronavirus across the country, the mystery of how difficult it will be to contain the disease is crushing already volatile financial markets and creating a consumer frenzy for hand sanitizer, disinfectants, and non-perishable foods.
In light of disastrous national and global catastrophes, from pandemics to terrorism, is there any way to put the early stages of the coronavirus crisis in context for airlines?
“Take the aftermath of 9-11 and combine it with what we saw during the 2002-2003 SARS outbreak, and that comes close to defining how this current situation looks,” said Harteveldt. “Unlike SARS, we are now seeing a lot of companies, worldwide, suspend employee business travel. And we’re seeing the cancelation of large scale industry conferences.”
Even in the broader travel industry, Harteveldt pointed to the shutdown of Berlin’s 54-year-old ITB Tourism Trade Show, which was scheduled for March 4-8. That event was expected to draw 160,000 attendees, 10,000 exhibitors from over 180 countries, and 5,000 journalists, Travel Weekly noted. At the time of this writing, Austin, Texas tech conference SxSW was still going on, but prominent brands such as Facebook and social media news and marketing company Mashable were pulling out.
IATA is reportedly gathering airline leaders in Geneva in a united effort to draft strategies that will help the industry cope with Covid-19 panic and the potential spread of the disease. On Wednesday, March 4th, Washington, DC-based trade group Airlines for America will meet with Vice President Mike Pence to discuss what the Administration can do to assist airlines in responding to the emergency the industry finds itself in.
“My concern is that it will get worse before it gets better, in terms of bookings and continued productions in routes and flight capacity,” Harteveldt said. “What started as a health issue could spiral into an economic slowdown.”
“What we don’t know is what happens after the virus starts to abate – how quickly will travel will be back? I do believe that people still want to travel,” Harteveldt said. “My hope is that travel will pick up again. I mean we are heading into the all-important summer travel season but right now we are right at the beginning of the primetime planning and booking period for people to make their summer travel plans.”
Labor Challenges Loom
As A4A notes on its site, the commercial aviation industry in the U.S. drives $1.7 trillion in economic activity and supports 10 million jobs nationwide.
That is a source of strength that can bolster the industry over a the next few months. But even in the near term, the industry faces enormous logistical challenges, from dealing with route and network disruptions amid falling passenger demand, to managing its uniquely trained workforce.
Hotels and restaurants and many other parts of the hospitality trade don’t experience staff complications as acutely as airlines do.
“What does an airline do in terms of its overhead? You don’t just give highly trained, highly valuable employees such as pilots, flight attendants, mechanics, and customer service employees their walking papers,” Harteveldt said. “Airlines may be adjusting different customer lines and telling their people to take extra leave or use all their vacation.”
Case in point: United, which CNBC’s Leslie Josephs notes has more flights to Asia than other U.S. carriers, is offering its widebody pilots the month of April off at reduced pay. United’s China flights have “collapsed” as other business in Asia-Pacific is down 75 percent.
As CNBC’s report adds, United, American, and Delta are all in the middle of contract negotiations with the pilots union.
Airlines Enter This Crisis In Greater Health
Worst case scenario is if the virus spreads with no treatment or containment on the horizon, and air travel is halted along with every other major industry, there will be some difficult decisions facing airline leaders.
“I don’t think you’re going to start to see them do massive furloughs,” Harteveldt said. “Is this the event that causes an airline to invoke the force majeure and cause any new contracts to terminate leases of older, less efficient aircraft? Possibly. Is this an event that causes an airline to reassess its route network and make adjustments in terms of markets that are only marginally profitable, not truly profitable to serve? Possibly.”
Contained in Harteveldt’s “possibly” is the mitigating fact that, unlike the aforementioned crises that came from terrorism in 2001 and the global recession of 2008, the airline industry currently rests on much more solid footing, having been profitable since 2014. The industry has learned a lot from past upsets.
“When you talk about the last recession, that was really a wake-up call to airlines,” Harteveldt said. “Since 2008, airlines have invested in new aircraft, they have improved their financial positions, reduced debt, improved their cash balances. There are several carriers that have made cross-airline investments in one another.
“Airlines also have lot more technology – and at a much higher level versus a decade ago – at their disposal to manage their way through this,” Harteveldt added. “I’m not expecting any of the large airlines to declare bankruptcy or unexpected drama like that. There may be some airlines, depending on the scope and severity of the fall in travel, that this may be too much for, but it’s too early to speculate on that. Whether or not airlines do decide to shut down or not, there are certainly some that are more at risk of this than others. I think airlines will be able to withstand a short period, at least, of fall off in demand.”
To that point, the digital transformation that airlines have undergone in the last three years may also help the industry manage demand and adjust quickly to increased volatility.
“This moment does point to the improvements that airlines have been making in the 19 years since 9-11 in terms of their revenue management systems, demand forecasting software, and other similar types of business tools,” Harteveldt said. “Certainly, having websites, email, and mobile apps makes it easier for airlines to stay connected with their customers and keep them advised of changes in service, health advisories, and any other important information.
“But in terms of digital transformation, this is a crucial matter that will test the analysts as they look at the volume of bookings that are coming across the threshold and respond to where cancellations are occurring and which destinations are most effected,” Harteveldt said.
What Does Covid-19 Mean For LCC’s?
Harteveldt will also be closely watching the impact on low-cost carriers.
“On one hand, these airlines tend to be local and regional, as opposed to international, so they may not be feeling the drop off in demand as much as legacy carriers,” Harteveldt said. “But they’re still going to see a fall-off in demand either way. And the larger ones that compete with them may become more aggressive on price.
“For example, legacy carriers may leverage their basic economy products with lower prices to compete directly with the budget airlines,” Harteveldt added. “It will be interesting to see if a consumer, considering a trip, sees these options when shopping for a flight and whether they will choose to book with a larger airline or a budget airline.”
At issue as well is the matter of how flexible LCCs are due to their lower overhead. Despite efficiencies that are the hallmark of LCCs, these smaller airlines may not have any cash reserves to cushion the steep drop off in demand.
Overall, even with all the ambiguity associated with the second week following covid-19’s presence in the U.S., Harteveldt remains as cautiously hopeful as an airline industry analyst can be.
One source of Harteveldt’s guarded optimism is that the heads of the major airlines have long memories and deep experiences forged in the past crucibles of vast industry-altering upheaval.
“The airline management that are in place all remember the 2008 2009 financial crisis all too well, “ Harteveldt said. “They’re not going to let their airlines get to a position where they are on the ropes quite like that again.”