Airlines expected to outlive COVID-19 pandemic scare with resized business; govt support vital to see through turbulence

Yesterday, an article by an Aviation Consultancy firm CAPA signed the death warrant of 75 percent of global aviation in an article titled: “By the end of May, most world airlines will be bankrupt”. Look, I agree with the sentiment that aviation is a very fragile business, but I don’t agree at all with the sentiment that airlines are going belly-up due to COVID-19. Especially since the article does not spend any time on which airlines will crash and back it up with any financials. That is the least you could ask of an aviation consultant making a doomsday prediction.

Aviation has been a profit-making sector, on an overall basis for the past many years. Aviation is also a great equaliser. In 2019, over four-and-a-half billion passengers and 61 million tonnes of freight travelled across a network of more than 22,000 unique city pairs connected by air, as per Alexandre de Juniac, the CEO of International Air Transport Association (IATA), the industry trade body.

Airlines, as a group, were expected to rake in $25.9 billion in profits in 2019, and the business was going to be in the black for 10 years in a row. However, as IATA Chief Economist Brian Pierce said in December 2019, “There is a long tail of airlines barely breaking even and a group making significant losses”. As a matter of fact, between 2010 and 2019, at least 26 major airlines have gone under, largely on account of bankruptcy.

 Airlines expected to outlive COVID-19 pandemic scare with resized business; govt support vital to see through turbulence

Representational image. Reuters

Aviation, as a business, involves making upfront investments in airports, product, licenses, staff, planes and so on, and have these recovered by flying people on a per-seat basis over the months and years. Like any other business, aviation has capital investments and ongoing expenses. However, capital investments are massive, and recovery takes place over a period of time.

Working capital requirements are met by forward ticket sales where the airline may have your money one day or even one year in advance of providing the service. Pricing power usually works in favour of the airline that is the only one, or the dominant one on a route. When many more airlines start operating on the route, it becomes a fight to survive.

In such a scenario, the winners are the big airlines, which are deemed too big to fail. Globally, airlines have focused on becoming bigger to ensure their customers don’t have to look elsewhere for their travel needs. Sometimes, there are conglomerates involved. For instance, Lufthansa is a group now, which owns airlines such as Swiss and Austrian, and British Airways is owned by a conglomerate called IAG which has 8 airlines under its belt including Iberia and Vueling.

In the times of coronavirus pandemic, airlines around the world are facing a precarious situation. Due to the contagious nature of the virus, it can spread through any contact, and carriers around the globe have many times been noticed to have travelled by air. This has lead to air travel taking a big hit, with borders being closed every day and hence passengers cancelling tickets.

Airlines such as Delta, one of the biggest carriers globally, are experiencing negative net bookings (i.e., more cancellations than new reservations) for travel over the next four weeks as per CEO Ed Bastian. Demand has evaporated at a swift pace, which means airlines need to also make refunds to customers who will not be availing their services. This measure would impact cashflow where more cash would be going back as refunds rather than coming in as ticket revenues. This will cause a strain on the liquidity of the airlines.

Fortunately, some sense has prevailed to allow for slot preservation which has encouraged airlines to not incur unnecessary flights at the moment. Historically, airlines are supposed to use a slot (one take off from one airport at a certain time and one landing at another airport at a certain time) at least 80 percent of the six-month period they get it for to retain it in the next cycle. In this case, fortunately, the European and American regulators have relaxed the rule to ensure largely empty planes don’t fly around the globe to make sure that the 80 percent rule is complied with.

To preserve liquidity, airlines around the globe have already cut down on discretionary spends, and some major announcements have come over the past few days to ground a majority of the fleet to ensure that airlines preserve everything they can.

Delta, for instance, has announced that they will ground 300 aircraft and cut at least 40 percent of their flights, which is the size of an Air Canada being put out for the time being. Many airlines such as Austrian, EgyptAir and LOT Polish will cancel 100 percent of their operations for varied periods while they assess the developments going further.  The likes of British Airways, Finnair, Air France KLM and so on are only maintaining 20 percent of their services and cutting 80 percent of their routes. Emirates has already started storing many of their A380s at the Dubai World Central airport.

The chief executive officers (CEOs) of major airlines are deciding to work for free for the coming months or take payouts and have a freeze on their headcount, as well as are asking employees to go on unpaid leave in many cases.

A quick look at the balance sheet of some big airlines globally shows they have enough cash and assets to survive the storm. For instance, Delta has $ 2.8 billion in cash, a credit line of $3.1 billion dollars and assets worth 20 billion dollars, such as aircraft and slots if it came to it. So, while it has cash for about two months, it also has money for the rest of the year if it chose to monetise its assets. And beyond that, like you would have already heard, the American carriers are already seeking $50 billion in a handout from the White House to save their skin. It is sufficient to see that these carriers are not going bankrupt anytime soon. Measures such as the Air Transportation Stabilisation Board exist to ensure they will survive.

Trump has said, “We have to back the airlines” in a press conference overnight.

There are, however, other airlines that might not survive. We saw Iceland Air be grounded just last year. Norwegian Air seems to be running on fumes right now. THe Korean Air management has told employees that “they cannot guarantee the company’s survival” if the coronavirus situation goes on.

Closer home, however, the situation looks different. I continued to hear reports of 80-90 percent full aircraft on domestic flights last week from readers of LiveFromALounge.com, and witnessed this behaviour as well while I got on a plane to return to Mumbai to put myself in quarantine. I am attributing this rush on aircraft to the fact that Indians have still not be advised to be isolated. Businesses are still making people travel for work at the moment. Also, airlines in India are still advertising forward sales to collect as much cash as they can possibly raise.

Even in these times where people should be refraining from travelling, IndiGo, SpiceJet and GoAir ran sales to raise cash. Thirdly, most airlines in India are not offering to refund the money of people for tickets already booked in full unless the flight is cancelled. They are only allowing changes to be made to existing tickets with new dates, but no blanket cancellations are allowed.

Only one airline, IndiGo, has stepped forward and commented on the situation, where they have witnessed a 15-20 percent decline in their daily bookings. While I hear of sporadic flights being combined with other flights, most carriers continue to operate their normal schedule at this point in time. While an airline such as IndiGo which has almost half of the domestic market share in India and over $2 billion in cash on its balance sheet will survive, it may be a hard time for others. For instance, it was reported that SpiceJet had only Rs 93 crores in cash as of 30 September 2019. SpiceJet did not release its balance sheet for the December 2019 quarter results.

Airlines and airports in India as well have already started clamouring from the government various concessions to ensure their survival. For instance, a representation was sent to the Ministry of Civil Aviation by Indian and global airlines, seeking a 30 percent cut on aeronautical charges for the next six months. More such demands will be made in the coming days.

Coordinated or not, many airlines will come out of the coronavirus situation with the government's help. They may have to rebuild their route map, their plane orders and downsize, but with government help, they will see through this period. And if similar past events are to be seen, demand comes back quickly once aviation is all clear again. So I am betting my shirt on most airlines surviving, and not 75 percent of them being wiped out by the end of May 2020.

(The writer is Mumbai-based business travel and aviation journalist and the founder of the Indian frequent-traveller website Live From A Lounge—www.livefromalounge.com. He tweets at @LiveFromALounge)

Updated Date: Mar 17, 2020 15:10:57 IST



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