As the Covid-19 pandemic continues to batter the global travel industry, lockdowns and grounded fleets are pushing airlines around the world to the brink of administration. The International Air Transport Association (IATA), which represents 290 global airlines, has warned that 75 per cent of airlines only have enough funds to cover at most three months of unavoidable fixed costs.
In light of this, European credit rating agency Scope Ratings has analysed the airline industry’s prospects and suggests that the overall outcome depends on individual airlines’ cost structures.
75 per cent of airlines only have enough funds to cover at most three months of unavoidable fixed costs
Due to the Covid-19 crisis, the travel and tourism market is nowhere near as fruitful a platform as it once was, and although many remain certain that air traffic will pick up after the worst of the crisis is over, Scope Ratings’ latest study suggests that Covid-19 will have a far more severe impact on global aviation than other virus events in the past such as H1N1 or SARS, as authorities’ reactions to both fell a long way short of the widespread travel limitations, social distancing and lockdowns that are currently in place. And, as Scope Ratings notes, high cyclicality is inherent to the airline industry, where fierce price competition means many have been forced to invest in the expansion of routes and fleets rather than building up cash reserves. As such, many airlines are faced with little room to manoeuvre when crisis hits.
Indeed, Scope Ratings’ study estimates that global aviation traffic will decline by 35 per cent in 2020, and IATA is expecting a global RPK (revenue per kilometre) decrease of 38 per cent for 2020, with Europe being the worst hit, with a 46-per-cent RPK decrease compared to that of 2019.
But the study also insists that some airlines will not be affected as badly as others. While the IATA highlights that 75 per cent of airlines will only be able to see themselves through until the end of June, it also notes that 10 per cent can withstand the current situation for another six months (assuming that the crisis abates by June) and that a small minority more are capable of withstanding zero cash inflows for more than six months.
The rescheduling of flights ... paired with consumer hesitation and a lack of clarity regarding travel bans and border controls, will lead to limited visibility in the coming months.
“The Covid-19 crisis is proving a severe test of airline strategy in recent years, with the industry divided between airlines which pursued conservative financial policies, keeping cash on hand as much as possible, and those which favoured returning cash to shareholders through dividends and share buybacks and/or borrowing to expand fleets aggressively,” said Werner Stäblein, Analyst at Scope, and Co-Author of the study.
“Airlines’ cost structures also vary considerably, particularly when it comes to owning aircraft outright or leasing them” added Azza Chammem, Study Co-Author and Analyst at Scope.
Scope Ratings notes that companies whose CEOs preferred to own rather than lease aircraft to maximise operating flexibility (such as easyJet, Deutsche Lufthansa AG and Ryanair) are looking ‘relatively resilient’ during the crisis, with Lufthansa asserting that about 60 per cent of its cost structure is variable, meaning 40 per cent of its operating expenses are fixed in nature.
Still, this is a very small minority, and so Scope Ratings endorses the IATA’s urge for governmental funding. It cites Germany’s roll-out of short-term working schemes during the financial crisis in 2009 as a successful means to maintaining employment. Scope Ratings’ analysts also reason that quickly adapting new regulations, such as amending those concerning coronavirus-related flight cancellations and altering the EU’s 80/20 landing slot regulation so that airlines don’t need to fly ‘ghost planes’ to maintain their landing slots, can all help support the global aviation industry.
What’s more, Scope Ratings’ study details that airlines have ‘hidden ways’ to preserve liquidity and raise funds. These methods include: managing liabilities from unused flight documents; scaling-back of fleet modernisation or expansion; and aircraft financing with unencumbered aircraft, to name a few.
In the long-term, Scope Ratings’ study reasons that it will take a long time for things to return to ‘normal’ – the rescheduling of flights (which will likely need to be planned over six to eight months in advance), paired with consumer hesitation and a lack of clarity regarding travel bans and border controls, will lead to limited visibility in the coming months. Scope Ratings also touches upon the possible relief of lower crude oil prices, but adds: “We caution, however, that lower jet fuel prices will prove to be a short-lived benefit for the industry at large.”
The GDP effect, which usually works in the airline’s favour, will likely work in the opposite direction in an economic downturn
All in all, the study concludes that it will take the airline industry several years to recover from the shock of Covid-19. “Airlines will emerge from the crisis to find a smaller economy in absolute terms due to the expected severe declines in national GDP worldwide. Surviving carriers will be under pressure to shrink.”
Scope Ratings explains that the airline industry is a GDP-multiplier industry, and so the GDP effect, which usually works in the airline’s favour, will likely work in the opposite direction in an economic downturn – airlines will be faced with a smaller global economy on an absolute scale after the crisis.
“What makes matters worse is the importance of travel and tourism as a key contributor to GDP worldwide,” added Chammem. “Travel and tourism contributed about $9 trillion to global GDP in 2019, up from $5.8 trillion in 2007 before the global financial crisis and equivalent to more than 10 per cent of global GDP.”
Read the full study here.