Last man standing
The world has belatedly woken up to the consequences of the COVID-19 (coronavirus) pandemic now upon us.
The first of my columns that raised awareness of this issue was written in early February. At that time I anticipated that the impact would be much worse than the SARS epidemic, with airline losses estimated to be in the region of USD 20-25 billion. This has since proven to be laughably optimistic; in the final analysis actual losses could run into more than a trillion USD. It could even mean the end of the airline and travel industry as we know it.
Every airline in the world is reeling. Even the privately owned and hitherto most profitable carriers that had been expected to withstand the shock, are rushing to their national governments for assistance. Inevitably, their strident, impassioned pleas for support will claim that the airline industry is “strategic”, “vital” and “irreplaceable”.
The International Air Transport Association (IATA) has bluntly stated that losses will run into hundreds of billions, and that by the end of May 2020, most airlines will be “functionally bankrupt”.
Some regional differences are clear:
The Big Three (American, Delta and United) are healthy, though American must be bitterly regretting the ‘share buyback’, costing US$5 billion in cash, which the airline could have used now. Southwest Airlines, Alaska Airlines and JetBlue are also in a sufficiently comfortable financial position to be able to weather a long downturn. The domestic markets that all of them rely on should come back to life in two to three months, if the Chinese experience translates.
- American Airlines has already US$1 billion and looking to raise another $2 billion by ‘sale & leaseback’ deals on older aircraft.
- Delta has already made plans to raise US$3 billion and cut capacity by 70%. The airline has grounded 600 aircraft and is permanently retiring some older models. Executives have taken a 50% pay cut.
- Airlines for America, an industry lobbying group, has called for US$29 billion in loans and another $29 billion in grants and tax concessions, but this is meeting opposition from politicians who say the nation’s priorities are elsewhere.
North of the border, Air Canada should survive too. WestJet, a smaller Low-Cost Carrier (LCC), has announced a complete stoppage of flights from next week; but it too will probably endure. For all the other smaller carriers, however, this is probably the end of the runway.
The pandemic strikes hard at the heart of the ‘hub and spoke’ business plan that relies on building a huge airport and moving millions of people through it.
Their rivals have long accused super-connectors Turkish Airlines, Qatar Airways, Emirates and Etihad Airways of dumping capacity and pushing down revenues. COVID-19 will hit them very hard. Qatar has already walled off the country to everyone but its own nationals though the airline is still maintaining a reduced network. As the world’s wealthiest country (per capita) Qatar can afford to wait out COVID-19 and try to exploit the surge of travel that will ultimately result.
Turkey does not publicize the extent of the pandemic within its boundaries, but given its proximity to Iran (which is badly affected by the coronavirus), and with the world’s largest refugee population, chances are that the pandemic will cause havoc there.
Emirates Airline has been caught out with probably the worst mix of aircraft in its fleet. Most airlines have stopped flying the giant Airbus A380, but Emirates with in excess of a hundred of the type in its inventory, has little choice but to continue. They seem to hoping to fill the niche as many rivals cease flights altogether. One of the few airlines maintaining flights to Colombo is Emirates and they have stated they will do so “as long as permitted by the authorities”.
Etihad was already in dire financial straits, and tumbling oil prices will mean that the government of the UAE (owner of both Etihad and Emirates) will not have the petro-dollars to tide them over. A merger between the two giants and flydubai (a LCC owned by the government) is probably the best solution.
Both Qatar and an Emirates-Etihad-flydubai clone would be well positioned to flood the market with seats, if they can manage to sustain operations through what is looking like the longest stoppage of flying in the history of the airline business.
The stronger European LCCs, such as Ryanair, easyJet, and Wizz Air, have acted fast. Most of their aircraft are idle as they concentrate on reducing costs and hoarding cash.
The healthier European full-service airlines such as British Airways, Air France-KLM and Lufthansa will eventually prevail, though if COVID-19 is as bad in the rest of Europe as it is in Italy, recovery may be very painful.
- Norwegian has laid off 90% of its staff and grounded 85% of its flights, despite a US$ 265 million aid package from the government.
- International Airline Group (IAG) which comprises British Airways, Iberia and several other airlines has cut 75% of capacity.
- Lufthansa has grounded 700 of its 763-strong fleet and subsidiary Austrian has ceased flying totally.
- Air France has cut 70% of capacity and the unions are pressing for it to be nationalized.
- Alitalia, in dire straits with over US$6 billion of debt, has been nationalized. But how Italy, now the epicenter of the COVID-19 pandemic, can afford this is a moot point.
- Ryanair group will cease all activity from March 24th.
- easyJet had already grounded the majority of its fleet by March 16th.
- FlyBe, a British regional carrier, has gone into bankruptcy.
Australia and Oceania
Qantas celebrates its 100th anniversary this year, joining an elite club of airlines of approximately the same age, the others being KLM, Avianca and British Airways. A lavish event had been planned to celebrate the centenary of the ‘Flying Kangaroo’, but COVID-19 has put a damper on that, with Qantas struggling to survive. All its wide-bodied aircraft (A380s, Boeing 747-400s and Airbus A330s) have been grounded; only the Boeing 787 Dreamliner is connecting Australia to the world, but this too is scheduled to cease next week. Separately, Qantas domestic traffic continues, but not at the levels of only a few weeks ago.
- Qantas’s CEO Alan Joyce is working for no pay until the crisis has abated.
- Two-thirds of its workforce are now to be sent on compulsory unpaid leave once paid-leave entitlements are exhausted.
- Virgin Australia has ceased all international flights and is only operating on domestic routes.
Having lost money for several years, VA is in poor financial shape and may not survive this crisis unless the Australian government steps in. Qantas CEO Joyce has publicly condemned any government offer of support to its rival at this time.
Across the Tasman Sea, Air New Zealand is in better shape financially, although overly dependent on international traffic. With ‘The Land of the Long White Cloud’ effectively cordoned off, the government (which owns 52% of the carrier), has proposed a NZ$900 million bailout plan.
As is widely known, the pandemic began in China, and to date that nation has borne the brunt of airline ‘pain’. But the country appears to be recovering and flights have restarted, albeit slowly. The Chinese national government owns the three huge airlines – Air China, China Eastern and China Southern – and has deep pockets, so those carriers will continue to be funded. But it is unlikely that the trio will return to their former glory for many years.
The smaller Chinese carriers (and there were many), which are either owned by provincial governments or private, will probably never recover. There will almost certainly be a spate of mergers and consolidations.
As we know, one of the reasons the COVID-19 pandemic was halted, was the draconian travel bans that China was able to enact, effectively sealing off Hubei province. With these being lifted, will the virus surge back? This is one of the great ‘Unknowns’ that could dictate where we go in the next few months, and the world will be watching closely.
Should the Chinese recovery proceed without a resurgence of COVID-19, China’s giant carriers will be well positioned to dominate the scene in the short to medium term.
Almost all Asian carriers were very dependent on China, and even profitable well-managed outfits such as Cathay Pacific, Singapore Airlines, Korean Air and Japan Airlines, may well become victims of COVID-19.
- Cathay Pacific has had to ground most of its fleet (see feature image) and may well collapse unless its owner, the Swire Group, rescues it.
- Singapore Airlines Group, has slashed capacity by 50% with some parts of its business, such as long-haul LCC Scoot, practically shut down.
- LCC Jetstar Asia, which is based in Singapore, is grounding its entire fleet from March 23rd.
- Cebu Pacific, the largest airline in the Philippines, has grounded its entire fleet.
- Air Asia X, the long haul part of Asia’s largest LCC, has ceased lease payments and grounded its fleet.
Most of Asia’s carriers are government-owned unprofitable dinosaurs. They are, in the dismissive words of Peter Harbison, the Chairman of the CAPA (Centre for Asia Pacific Aviation): “…almost a pyramid-selling scheme. In many cases, such carriers have little cash of their own, flying planes owned by aircraft leasing companies. When cash stops coming in the door, there are few or no owned assets that can be used as collateral for new loans and the carriers collapse financially in a matter of weeks.”
Most of Asia’s flag carriers such as Air India, Thai, Malaysian, Garuda Indonesia etc, are insolvent already.
What will a post-COVID 19 world look like?
Pandemics have changed the course of human history many times. From the fall of the Roman Empire, attributed by many historians to the Plague of Justinian around 500AD, through the Bubonic plague that wiped out about 50% of Europe’s population in the 1300s and the Spanish Flu that killed about 50 million a century ago, plagues have always been with us.
In many cases, the world that emerged after the pandemic subsided had changed seismically from before. Even our 21st century existence will be changed in unanticipated ways as the virus continues to spread.
It is now obvious that ‘containment’ or the suppression of the virus spreading, is the strategy most countries are adopting. This will mean the cessation of most travel between countries and even within nations. Tasmania (being an island) has sealed itself off. Even Australians from the mainland cannot enter unless sanctioned by the state government.
The testing and care regime that will be required to minimize the deaths caused by COVID-19 is going to be extremely expensive. It is also likely, should the prediction that the virus will ‘surge’ at least once or twice more (as the Spanish Flu did in 1918-1919) prove to be correct, that travel restrictions will be in place for at least six to nine months. It is possible they could last for one to two years – a timeline that is inconceivable for the travel industry.
Huge expenditure on legacy airlines, especially for smaller countries where surface transport can suffice, will be an expensive luxury at a time when national budgets are stretched to capacity and beyond.
With the health of its citizens and the country’s defense highest on the list of any government’s priorities, it is both a moot point and fascinating dilemma as to whether national governments can continue to afford the luxury of propping up the airline industry.