The on-going Covid-19 pandemic has brought serious threats to all sectors of the world economy, one of the worst hits is the aviation industry. With the public healthcare measures such as movement control orders and lockdown in some countries, the Airlines’ revenues have been slashed and persons engaged within this sector have either been laid off or left unemployed.
The movement control and lockdown are directly affecting the demand for aviation services, led to drastic drops in passenger traffic. Based on recent data, the markets most hit are those in Asia-Pacific, Western Europe and the Middle East. The International Air Transport Association (IATA) estimates that the impact of the Covid-19 outbreak on the aviation industry will be “severe”, as revenues could fall up to 68%.
During this time of crisis, airlines are not able to cut costs fast enough to stay ahead of the Coronavirus impact. In the second quarter of the new decade, the aviation industry is expected to see a devastating net loss of $39 billion. Despite airlines trying to preserve their own workforce and businesses for future recovery, it will not be surprising if airlines reduce semi-fixed and crew costs by a third. In addition to unavoidable costs, airlines are also faced by thousands of cancellations, which requires them to refund sold but unused tickets. To avoid a slump in such times of crisis, airlines are, therefore, forced to turn to cash reserves. According to IATA, a colossal sum of $35 billion is estimated for airlines’ liabilities in Q2 2020.
Hong Kong-based Carrier, Cathay Pacific (CX), announced as the fifth-best airlines by the Airlines Excellence Awards, revealed new financial actions, delaying aircraft orders and cutting capacity, to diminish the financial impact of the Coronavirus. In addition, it was announced that in February, it had lowered its passenger capacity by 82%. The airlines recorded a whopping 82% drop in passengers in the current period. In the following month, it was reported that Cathay Pacific would slash passenger capacity by 96% in April and May as the coronavirus shuts down travelling across the world.
With regards to operations, the airline, in December 2019, had announced a new terminal in Hong Kong International Airport (HKG), which also serves as CX’s hub. Together with the Airport Authority of Hong Kong (AAHK), the project was planned to be operative on April 1, 2020. As a result of the current crisis, the carrier is speaking with AAHK for relief measures, planned to commensurate with the scale of the challenge we currently face. To date, there are no new announcements about the terminal’s launch. However, AAHK unveiled an HK$1.6bn relief package to help the industry through the crisis, including rental concessions and the waiver of fees.
Last year, the Asian Financial Hub was rocked by months of protests against the Anti-Extradition Bill which saw Hong Kong slump into a recession. Cathay, which has been facing headwinds prior to the outbreak, is one of the many airlines that have turned to their workforce to fight with the grueling impact and losses of Covid-19. Approximately 75% of its workforce has been affected, whereby 27,000 out of the total 33,000 have opted for 3 weeks unpaid leave between March and June. Others could be worse off, facing the risk of layoffs, which could ultimately lead to the collapse of Hong Kong’s largest airline. The layoff possibility of workers who do not opt for unpaid leave could help Cathay save an approximate amount of $163 million, based on last years’ wages.
Emirates, the Middle East’s largest airline and ranked 6th, just behind Cathay has also been deeply affected by the global pandemic. Dubai’s state-owned flag carrier announced in March that it was taking extra steps that go above and beyond industry and regulatory requirements to ensure customers’ health and comfort. As of now, flights to a total of 111 destinations out of 159 have been suspended, marking a 69.8% suspension. Some routes will be temporarily suspended, whereas some will be suspended for up to a period of three months.
As the Coronavirus affects one of the largest international airlines, Emirates has had little choice when it comes to their workforce, made up of over 145 nationalities. Emirates has asked its international workforce to either take holidays or go for one-month unpaid leave. It is estimated that as a result of the pandemic, the Aviation market in the Middle East has suffered a $100 million loss.
Singapore Airlines (SIA), the world’s second-best airline has cut capacity by 96%, ground almost its entire fleet and imposed cost-cutting measures affecting about 10,000 staff out of 26,500 based on its last financial year because of coronavirus travel curbs it described as the “greatest challenge” it has ever faced in its operational history which has forced the company to draw on its credit lines to meet immediate cash flow requirements. Aircraft giants, Airbus and Boeing have also had to stop the majority of production and experienced a drop in orders during this time.
What would be the future look like for the aviation industry?
With global tourism stalling, the outbreak of the coronavirus will undoubtedly have a devastating impact on the aviation industry due to the decrease in passenger traffic, which will leave a scar for time to come. Merge and acquisition between airlines are foreseeable while corporate restructuring and operation optimisation would be unavoidable. Government subsidy, divestment or refinancing would be some options to help the airlines survive, but they will definitely need more than that to get through this winter for the Aviation industry. Airlines as the first to get hit will need to do anything it takes to reserve the short-term cash flow and sustain for the upcoming months as the passenger traffic will remain low for the months to come. But the real challenges will be the New Normal in post-crisis recovery stage where the low passenger demand coupled with pressure from the high operating cost.
Written by Yasuna Ogimura, Intern at 27 Advisory, Bachelor of Business and Commerce (Accountancy and Banking and Financial Management), School of Business, Monash University. Yasuna has an interest and passion for financial services and investment banking. After her internship, she aims to pursue a career in finance.
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