Effects of the possible virus crisis to aviation industry
The aviation industry is an ecosystem which consists of 800 commercial airlines around the globe. The total labour power is over 25 mln people. Added to that including the surrounding industries like tourism and complementary businesses there are about 65 mln jobs dependent to this $800 bn industry. Since January China reported a mysterious virus outbreak which looked like an increasing issue. In February China reported also that its 4th biggest airline Hainan Airlines has financial problems.
Airlines will face liquidity problems
The aviation industry is a high cost structure & low margin industry since years. Airlines have huge assets (aircrafts) and have high fix costs. That means for any company in this field the most important thing to ensure is the liquidity. Airlines live from the sale of tickets (sold tickets= cash/revenue) far in advance prior departure to cover their costs. The crucial parameters to determine the financial stability of an airline are: A) did the airline build up huge cash reserves in its best times and does it have low liabilities B) the leasing ratio of the total fleet. In the last 5 years’ airlines across the world could make high profits in the booming market (since 2014 the ROI was higher than WACC). Some big players established cash reserves to invest for organic and inorganic growth. The second parameter; many airlines just lease the aircrafts instead of putting huge amounts into aircrafts. The difference is; if you own an aircraft you can “easily” park them down with low fix costs but if you just lease you have to continue to pay no matter if you fly or not. In the upcoming crisis the biggest determinations will be the financial stability of the airlines. Depending on that several airlines will not survive without any financial support. The financial crisis of 2008 showed that governments are somehow willing to support strategic important industries and also in the future there will be a need for airlines. The survival of the airlines will be in interest of the governments and nations as well.
Will there be an aviation crisis?
The “coronavirus crisis” will not be a V form of crisis, it will more be a long U form of a crisis. The reason for that is simple. It growths very fast compared to sars and mers and is difficult to get under control (missing symptoms in the first week etc). If/When China gets it under control other countries will just have it started. There is worldwide no joint action to stem the spread of the virus for time being. In addition to that the global travel/nations are much intertwined and more intensively connected than 10 years ago. The international travel numbers just doubled. If the spread of the virus can’t be kept under contro immediately; the aviation industry might experience its biggest crisis ever. The Hainan airlines struggles shows us how fragile the industry is. Usually the airline industry develops similar to the world GDP growth (RPK to GDP). IATA announced that the airline industry will face a loss of $29 bn. This is just a big underestimation because IATA only made its simulation based on existing cases without any indication of what would be a scenario of a wider spread. The perspective into that needs to be multidisciplinary. Briefly it means instead of expost view sources you need to consider also an ex ante anticipation based on the possibility of not getting it under control. Considered that this virus differs from the previous ones the situation can become very serious. We need to calculate that will have losses at least in the months Mar, April and May. The second biggest market is China with over 600 mln passengers a year and there was a dramatic decrease in January, February and March, April might continue. In a basic scenario of one quarter total loss per region/country would make at least a total loss of over $200 bn or over in the airline industry as I said it in a conference at Bosphorus University on 22nd February. The more sensitive question would be the effect of the virus to to world economy if the virus continues to spread.
What will happen during a crisis?
The financial strong airlines will obviously survive as above described. The financial weak airlines (high liability ratio) will may ask for loans/credits from banks or financial aids from governments. The ones they don’t get rescued financially, will vanish from the market. Since years the demand increased, also the number of flights, available seat kilometers (ASK), aircrafts and number of airlines increased. There is a big offer placed and a high intense competition existed in the market as well (the RPK –revenue passenger kilometer increased, but the profit per passenger/ yields decreased). The market needed a consolidation which was predicted to happen between 2020 – 2030. This potential crisis could be the situation where the consolidation can happen much quicker. There will be a vanish of regional unstable airlines, unprofitable airlines and the ones without any strong financial backbone. Regionally said we will see a consolidation mainly in Europe, Middle-East and Asia-Pacific. There will not be huge changes to happen in US and China. US is already consolidated and China just started its growth path due to high demand supported by the government. What else will happen is also that airlines will drive the formerly by consulting firms proposed companywide restructurings (incl. lean & agile work forces, cultural transformation) -which was not doable/pushed back due to existing silos and frozen cultures- and reduce their existing staff. Many of them will sell some of the aircrafts to get liquidity. Airlines who didn’t outsource their operations in non-home-markets will do so and will have to reduce also their existing management levels.
What will happen after the crisis?
Once the big players survive the crisis, there will be no speed re-start or fast recover. The relaunch of the flights need to be step-by-step as the companies will not have big liquidities after the crisis (the average profitability was only 5%). If you have a three months’ layoff / aircrafts parked, you need to restart the system. It might be that there is a huge demand for flights direct after the crisis or in the opposite that people might want to wait and see. That’s-why the crisis could hold longer than 6 months. There is a need for new demand indications to new flight destinations (O&Ds). It might be that the airlines travel schedules and destinations will have a major change. Maybe the effect of the virus will be in some countries different to other countries etc and the demand to fly to some countries will also differ from each other etc. The other reason will be that the remaining / surviving airlines will take the “passengers” / demand of the vanished former airlines in these destination (O&Ds). Looking at the customers many corporates will start virtual meetings (skype) even if they tended not to until today. The corporate traffic will reduce and therefore passenger/customer portfolio will change. The business model of the airlines especially legacy carriers will also change a lot.