Airlines and the Impact of the Coronavirus Outbreak

With the help of Flight Global and writers Graham Dunn, David Kaminski-Morrow, Pilar Wolfsteller and Cirium, we take a look at the impact of the Coronavirus on some airlines and one response from the International Air Transport Association (IATA).

Image - Kevan James

Lufthansa to cut short-haul operations by up to a quarter to counter coronavirus

The Lufthansa Group is to cut its short and medium-haul operations by up to 25% in the coming weeks as it moves to counteract the air travel impact of the coronavirus. The group has also pushed into April the suspension of its flights to China and Iran. It says this takes number of long-haul aircraft across the group currently not in operation from 13 to up to 23.

The majority of short-haul network cuts are on its Italian routes, following spike in cases reported in northern Italy.

Lufthansa is reducing frequencies across eight Italian destinations - Milan, Venice, Rome, Turin, Verona, Bologna, Ancona and Pisa - as well as some German domestic services.

Austrian is cutting its flight programme to Italy by 40% over the next two months, while Brussels Airlines will reduce flights across four Italian routes by 30% over the next two weeks.

Swiss ‘will probably’ reduce flight frequencies to and from Florence, Milan, Rome and Venice until the end of April. The Group’s budget unit Eurowings is cutting frequencies on its flights to Venice, Bologna and Milan over the next week, but its other Italian services are unchanged.

Lufthansa, Swiss and Austrian will extend their suspension of flights to mainland China until 24 April and to Tehran through until 30 April. It is also reducing frequencies to Hong Kong and the Korean capital Seoul - including suspending its Munich service to Hong Kong from 6 March until 24 April.

The group has also announced further cost reductions in the personnel area as well as for material costs and project budgets. It on 29 February said it is examining the possibility of reduced working hours in various areas. The group has not given any estimate on the potential impact on earnings from the cuts, but more details could come when it announces it full-year results on 19 March.

US airlines could experience short-term hit from coronavirus

Image - United Airlines

While Asian airlines have borne the brunt of the coronavirus crisis so far, US carriers are closely monitoring the situation, and will likely take a short-term hit as the US government sends mixed messages and bookings begin declining.

As of 27 February, 47 countries on all continents except Antarctica have been affected by the virus, also called COVID-19. More than 81,000 people have been infected, and 2,800 deaths have been registered, most of those in mainland China, according to the World Health Organization. “[The coronavirus] is going to hit US carriers the least,” says consultant Mike Boyd of Boyd Aviation international said last week (Wednesday). “The majority of revenues are domestic, and the US is actually taking this very seriously. Other airlines are international in revenue streams and that means one strange cough from a guy in Warsaw, and flights might get zapped.”

SHORT-TERM US IMPACT?

Major US airlines have cancelled many flights to China and Hong Kong, and Delta Air Lines and Hawaiian Airlines on Tuesday suspended flights to South Korea as well, where authorities have reported almost 2,000 cases alone. Hawaiian cited a decline in demand for the flights, making it financially unviable to operate them.

All US carriers with scheduled flights to Japan and Italy – two other coronavirus hotspots which reported large outbreaks in past weeks - are currently still flying there. But reported coronavirus cases in those countries are growing.

Among US carriers, United Airlines is most exposed to Japan, carrying 245,000 seats between the countries in both directions in February, schedules data shows. Delta will carry 132,000 seats on US-Japan routes this month, Hawaiian will carry 81,000 and American Airlines will carry 55,000. To Italy, Delta leads US airlines, carrying 37,000 seats between the countries this month, followed by American and United. Both American and United say on Thursday they have made no further adjustments to schedules, though they, along with low-cost carrier JetBlue Airways, are offering waivers and refunds for selected routes and cancelled flights, as well as for passengers who wish to change their travel plans.

Image - Tyler McDowell

Aerospace analyst Michel Merluzeau with consultancy AIR suspects the coronavirus could potentially have significant short-term impacts on the airline and aerospace industry, but thinks the industry’s broader, long-term prospects remain unchanged and positive, noting underlying demand for air travel and a growing middle class. “If there is any disruption, it’s going to be short-term disruption,” Merluzeau says. “For Airbus and Boeing, this is going to be a six-month blip of uncertainty that doesn’t take anything away from the larger trend.”

CHINA HIT HARD

Boyd notes that the US and China are the only two markets where airlines’ primary revenue is from domestic traffic. “China… is a mess. When this situation settles, our forecasts indicate at least 400 million fewer passengers through China’s airports, and the Chinese airline system stuck with 150-200 excess airplanes. No snapback – the bubble is bursting, and it’s also affected by the creaking Chinese economy.”

On Tuesday, United suspended its 2020 earnings guidance after it stopped all flights to mainland China and Hong Kong until at least 24 April. According to Cirium schedules data, United operates the most routes to mainland China and Hong Kong among US majors (nine routes to mainland China from the USA and two routes to Hong Kong). The China and Hong Kong routes represent approximately 5% of United’s planned capacity for 2020, with its other trans-Pacific routes representing an additional 10% of its planned capacity.

Southwest Airlines does not fly to any Asian destinations, but its wide network across the western United States connects to locations where US cases have been reported. In addition, it caters primarily to leisure travellers who may be more likely to cancel discretionary travel as the crisis drags on. A spokesman says that the airline’s experts “are keeping apprised in real-time of CDC guidance, always are engaged in contingency planning, and utmost are focused on the safety of our customers and employees.”

Aircraft lessors and other leisure carriers like Spirit Airlines, Allegiant Air and Frontier Airlines could face more of an impact than major US network carriers since leisure travellers will be more likely to scrap discretionary plans, says Merluzeau. “We are going to see, over the next 60 days, unpredictable [airline] schedules driven by the fact that people are going to start cancelling their trips,” Merluzeau adds. “Delta, American, United, they are more resilient because they are more diverse in terms of their customer base.”

On Wednesday, the US government announced a coronavirus task force designed to keep tabs on the spread of the disease, but in the past few days, government experts have been inconsistent in messages about the potential spread as well as making contingency plans and taking protective measures. The Centres for Disease Control and Prevention issued a warning earlier this week that outbreaks of coronavirus in the USA are inevitable, however top government officials dispute those expectations.

European carriers have taken more drastic measures. Budapest-based Wizz Air and British Airways are cutting their capacity to Italy, where 17 people have died, while Lufthansa Group is freezing new hiring and offering staff unpaid leave.

IATA, which represents 290 carriers comprising 82% of global air traffic, said in a statement last week that carriers outside of the Asia-Pacific region are forecast to bear a revenue loss of $1.5 billion, assuming the loss of demand is limited to markets linked to China. “This would bring total global lost revenue to $29.3 billion (5% lower passenger revenues compared to what IATA forecast in December) and represent a 4.7% hit to global demand,” the organisation said.

The only blueprint for this type of situation was the SARS outbreak in 2003, which hit Asian economies but did not have the strong ripple effects around the world that the coronavirus is having now. However, analysts note, total air traffic to, from, and in Asia today is considerably greater than it was 17 years ago, and social media was not then a factor in the rapid dissemination of information.

FEAR FACTOR

“The group thinking and the hysteria and paranoia is really, fundamentally the most disruptive” factor of the current crisis, Michel Merluzeau says.

He warns that a fresh outbreak in a US city with a major aerospace cluster could significantly impact US aerospace production. “If you got a cluster of contamination that happens in Seattle… people could stop [coming] to work,” continued Merluzeau. “Entire communities could be put under quarantine.”

IATA’s estimates are based upon a similar V-shaped impact on demand as was experienced during SARS – a six-month period with a sharp decline followed by an equally quick recovery. In 2003, SARS was responsible for the 5.1% fall in Asia-Pacific airlines’ revenue passenger kilometres (RPKs).

United’s capacity reduction in Asia extends beyond China

United Airlines has suspended some of its flights to Tokyo, Osaka, Singapore and Seoul and extended its flight cancellations to mainland China and Hong Kong until 30 April. The Chicago-based airline has cancelled flights from Los Angeles and Houston to Tokyo Narita between 8 March and 24 April, and flights from Chicago O’Hare to Tokyo Narita between 8 and 27 March. After 28 March, the Chicago route will switch to Tokyo Haneda. As of 28 February, United states that it will proceed with its regularly scheduled flights to Tokyo Haneda in March and April. Flights from Newark to Tokyo Narita will be reduced to five times weekly from daily in April, and flights from Honolulu to Tokyo Narita will be reduced the same month. Daily flights to Osaka Kansai from San Francisco will be reduced to five times weekly in April. San Francisco-Singapore flights will be cut from twice daily to once daily between 8 March and 24 April. United will reduce San Francisco-Seoul Incheon flights to three times weekly between 8 March and 30 April, from daily in March and twice daily in April. In addition, San Francisco-Taipei Taoyuan flights will be reduced in March and April. Last week, United withdrew its full-year 2020 guidance because of unexpected business losses from the coronavirus outbreak in the Asia Pacific region. United operates the most routes to mainland China and Hong Kong among US majors. The China and Hong Kong routes represent approximately 5% of the carrier’s previous planned capacity for 2020, with its other trans-Pacific routes representing an additional 10% of its planned capacity, the airline stated in a 24 February US Securities and Exchange Commission filing.

El Al predicts deeper financial impact from coronavirus

Image - Kevan James

Israeli flag-carrier El Al is looking to take cost-saving measures after predicting a deepening financial impact on its operations from the coronavirus outbreak. The airline is forecasting a $50-70 million cut in its revenues for the first four months of this year, January-April. This includes a reduction of $40-50 million for the airline’s first quarter – a substantial increase from the $30 million it had estimated in mid-February. El Al’s first-quarter revenues in 2019 amounted to $429 million, with net losses of $55 million. It says it is taking steps to offset the decline and is estimating a $25-45 effect on its results for January-April 2020, including $15-30 million in the first quarter.

The airline says it has been reviewing services to the Asia-Pacific region, to match capacity with demand, suspending flights to Beijing and Hong Kong and adjusting operations to Bangkok, following guidelines from the Israeli health ministry. “[We] continue to monitor regularly other developments in the world in connection with the coronavirus and examine the implications for activities,” it adds.

El Al points out that the outbreak is a “changeable event” that is out of the company’s control, and the airline remains subject to decisions by authorities in various countries.

Strong IAG full-year profits dip but coronavirus clouds 2020 outlook

British Airways and Iberia parent IAG’s operating profit before exceptional items slipped 5.7% for the full year in 2019 to €3.29 billion ($3.6 billion) as its fuel costs rose. However notably the group says the impact of the coronavirus outbreak, which has already caused a drop in air travel demand in its short and long-haul business, makes it impossible to issue guidance for the year ahead. For 2019 IAG lifted group revenues 5.1% to €25.5 billion including positive currency effects, while total costs rose 7% to €22.8 billion. Notably its fuel, oil and emissions costs were 10% higher, largely as hedging benefits from 2018 unwound. The Group’s operating margin slipped by 1.5 points to 12.9 per cent.

”These results reflect the industrial action at British Airways and disruption at London Heathrow in the summer, which had an adverse impact of approximately €170 million. In the second half of the year, weakness and disruption faced by the Group’s low-cost segments had a further adverse impact of approximately €45 million,” IAG says. BA still delivered the bulk of group profits for 2019. The UK carrier delivered an operating profit before exceptional items of €1.92 billion - down 5.1%. Iberia profits were down 6.7% to €497 million; Aer Lingus profits fell 11.4% to €274 million; while Spanish low-cost operator Vueling recorded a 9.3% fall in profits to €240 million.

Image - British Airways

IAG chief executive Willie Walsh - who steps down in June - says: ”These are good results in a year affected by disruption and higher fuel prices. We demonstrated our robust and flexible model once again through additional cost control and by reducing capacity growth to reflect market conditions.”

But the group adds the earnings outlook is adversely affected by weaker demand as a result of coronavirus outbreak. ”We are currently experiencing demand weakness on Asian and European routes and a weakening of business travel across our network resulting from the cancellation of industry events and corporate travel restrictions,” IAG says. The carrier has suspended flights to mainland China and reduced capacity on some other Asian services. It has also reduced capacity on Italian routes, following the spread of the outbreak to northern Italy. “Further capacity reductions will be activated over the coming days. We also expect to make some capacity reductions across our wider short-haul network. Short-haul capacity is not being redeployed at this stage,” it adds. ”Our operating companies will continue to take mitigating actions to better match supply to demand in line with the evolving situation. Cost and revenue initiatives are being implemented across the business. ”Given the ongoing uncertainty on the potential impact and duration of COVID-19, it is not possible to give accurate profit guidance for full-year 2020 at this stage,” IAG says.

IATA seeks freezing of slot rules to aid coronavirus capacity cuts

IATA director general Alexandre de Juniac (image - IATA)

The International Air Transport Association (IATA) is contacting aviation regulators to request the suspension of rules governing airport slots for the remainder of the current season and for the upcoming summer timetable as airlines pull back capacity in the light of the spread of the coronavirus. Existing slot rules at co-ordinated airports require airlines to operate at least 80% of their allocated slots under normal circumstances or risk losing the slots for the following season. IATA says 43% of all passengers depart from the more than 200 slot co-ordinated airports.

Airlines have been paring back capacity as a result of the drop in air travel demand related to the coronavirus outbreak. Many carriers had suspended flights to mainland China, the source of the initial outbreak of the virus, through to the end of March and are now extending these suspensions into April. But capacity reductions across wider networks are becoming increasingly common as new pockets of incidence of the coronavirus emerge.

”Given these extraordinary circumstances as a result of the public health emergency, the collective view of the airline industry is that the application the 80% rule during the upcoming season inappropriate,” IATA argues. ”Flexibility is needed for airlines to adjust their schedules according to extraordinary demand developments.”

It notes regulators have already been waiving the slot rules on a rolling basis during the crisis primarily for operations to China and Hong Kong. It argues suspending the requirement for the entire season running to October would enable airlines to respond to market conditions with appropriate capacity levels, avoiding any need to run empty services in order to maintain slots.

”IATA research has shown that traffic has collapsed on key Asian routes and that this is rippling throughout the air transport network globally, even between countries without major outbreaks of COVID-19,” says IATA director general Alexandre de Juniac. ”There are precedents for previous suspension of the slot use rules and we believe the circumstances again calls for a suspension to be granted.”

In initial guidance issued on 20 February, IATA indicated air travel could fall for the first year in more than a decade if the coronavirus had a similar impact as the SARS virus had on demand.