The Covid-19 Crisis

Airlines are experiencing their greatest demand shock in a decade.

Is the world falling apart? It feels that way for airlines.

Just a few short weeks ago, things were looking rather bright. As the new year began, prospects for travel demand appeared healthy in most parts of the world. Global economic growth, according to the IMF, was picking up. Fuel prices were subdued. For most airlines, the biggest concern was an aircraft supply shortage. Then came Covid-19.    

By mid-January, a mysterious new virus began spreading in Wuhan, home to China’s 16th busiest airport. In response, officials greatly restricted the movement of people, essentially freezing the economy. The outbreak, moreover, coincided with the Lunar New Year holiday, the busiest travel period of the year for Chinese airlines. Indeed, because of how busy New Year travel typically is, Q1 is usually the most profitable quarter of the year for Chinese carriers.

Not this year. The demand shock in China was sudden and devastating, no less so than the shock U.S. carriers experienced after the 9/11 attacks in 2001. Already in January, carriers began showing y/y declines in traffic. February figures aren’t yet published but make no mistake: They’ll show extreme declines. Domestic scheduled flight departures last month, according to Cirium data, were down nearly 50% from last year. The y/y drop this month currently stands at about 20%.

The declines are even more severe for China’s international market. This month’s scheduled departures to and from China are down close to 75%. Most of the world’s airlines with routes to China have temporarily suspended them, or at least greatly curtailed flight frequencies. These factors pose problems for carriers with heavy reliance on China demand — Korean Air, for example, or AirAsia. But others like Finnair and United, both with substantial China networks, initially delivered a reassuring message: The financial impact won’t be that meaningful, they and others said. They were already, after all, dealing with an unrelated Hong Kong demand shock present throughout much of 2019. Besides, it was offpeak season for Chinese international traffic, and other Asian markets like Japan were doing just fine. Well into February, the demand shock looked like it might be confined to just a Chinese airline problem.

But the virus spread, and so did people’s fears. Cases in Hong Kong. Cases in Singapore. Japan. Korea. Iran. Then, farther afield. Italy, one of Europe’s largest air travel markets, experienced an outbreak of Covid-19 cases in the country’s north that began two weeks ago. Now it wasn’t just business conferences in places like Hong Kong and Singapore getting cancelled. The outbreak was cancelling major tourist events like the Venice Carnival. Another high-profile cancellation: The Mobile World Congress in Barcelona. Saudi Arabia closed its borders to visitors with religious pilgrimage visas. And so on.  

On Feb. 20, IATA gave some estimates on what it thought the outbreak’s impact would be on airline traffic and revenues. Airlines in China, it said, would see something like $13b erased from just their domestic revenues. For all Asian carriers, including those in China, the revenue loss would exceed $28b. Global traffic, measured in RPKs, would drop 8% this year, IATA said, revising a pre-Covid prediction of 5% growth. These IATA forecasts came before things got bad in Italy, though, where carriers are now reporting steep demand declines to Milan in particular.

And then… last week. For the first time, the Covid-19 outbreak started feeling like a truly global demand shock. The fear was clear as stock markets tumbled, spooked by a succession of corporate profit warnings and cancelled events. Airlines, on the front lines of the health crisis, saw dramatic stock price declines. It was the worst week for the U.S. stock market, in fact, since the global financial crisis more than a decade earlier, perhaps heralding another global downturn. On Wednesday, JetBlue flashed the first warning light among U.S. carriers without any Asia exposure, when it waived all change and cancellation fees for customers booking tickets through March 11, for travel through June 1.

Two days earlier, United suspended its financial guidance amid a near-complete collapse of its Asian demand. By Friday, United felt spooked enough to cancel an investor event it was planning to hold this week. Delta on Wednesday said it was reducing service to Seoul in addition to its suspension of China routes. It’s also waiving change fees for any booked travel to China, Korea, or Italy. Sabre said quarter-to-date GDS industry bookings are down y/y in the mid-teens.

Airlines and travel distributors, indeed, are sounding more and more pessimistic with each passing day. Finnair, which downplayed the impact on its finances on Feb. 7, during its Q4 earnings call, gave a much gloomier assessment last week. IAG, presenting its own Q4 results on Friday, noted a “very strong falloff in demand” to Italy just since last Monday and a broader weakness in business bookings as events are cancelled and companies impose more stringent travel policies. Lufthansa and easyJet were two other European airlines that reacted to deteriorating conditions last week, cutting shorthaul capacity and imposing moratoriums on non-critical hiring and investment.

As things stand now, airlines in most parts of the world will feel some degree of pain from the Covid-19 health emergency. The pain is still most acute among Chinese airlines, followed by non-Chinese airlines with heavy China exposure. Clearly, the toll is building for Europe’s shorthaul airlines. The virus is just now infecting U.S. air travel markets, it seems, and perhaps the whole U.S. economy.

Will the demand shock persist? For how long? Will it worsen? Airlines will be watching the world’s efforts to resist the outbreak’s spread, which seems — encouragingly — to be slowing in China itself. In a best-case scenario, the outbreak subsides quickly, perhaps with the help of a vaccine or antiviral drugs. For most airlines, prior virus scares with names like Ebola, Zika, H1N1, avian flu, and MERS were in some markets damaging but only briefly. SARS in 2003 had a greater impact but mostly in Asia, where China at the time had a much smaller and less globally-systemic economy. Coinciding with the current Covid crisis, meanwhile, is a development that airlines are relishing: Plummeting fuel prices.  

A worst-case scenario? Widespread infection across the world, leading to large numbers of fatalities, lost days of work due to illness, and the mass closure of offices, schools, shopping malls, and other places of gathering. One of the last places a person would want to be when trying to avoid infection is an enclosed tube crammed with other flyers. Even those willing to fly might not have reason to, if businesses are reeling, events cancelled, and tourist sites closed.

Already, the demand shock has been large enough to put at least one major airline in dire straits. Hainan Airlines, though it discloses very little, reportedly can’t survive on its own anymore and requires a takeover by the government of its namesake province. There’s even talk its planes and other assets might be sold off to China’s Big Three. Hainan is no minnow, with more than 200 planes, to speak nothing of the planes held by sister carriers like Hong Kong Airlines, plus a major leasing firm also owned by its parent company HNA. 

Will this be a first instance of post-Covid consolidation? China and Asia more generally, with its airlines already suffering cargo distress, overcapacity, over-fragmentation, and slowing economies, could use some airline mergers. The longer the shock lasts, the more pressure will grow on carriers already weak before the crisis. The current gravity of the shock in Asia, meanwhile, is prompting carriers to shift capacity to other regions, creating risk of overcapacity in the transatlantic market for example. That’s precisely what happened, incidentally, after the late 1990s Asian financial crisis. What happens in Asia doesn’t stay in Asia.  

The current shock could also have profound implications for aircraft markets. This will be the center of attention at this week’s ISTAT Americas conference in Austin, Texas, which was not cancelled. Lessors have already said they’re working closely with Chinese and other Asian customers, in some cases moving planes to markets with MAX- or NEO-related aircraft shortages.

Bottom line? Time is running out for the Covid crisis to pass without having caused a major crisis for the global airline industry as a whole. If it ends soon, and there’s a V-shaped demand recovery, 2020 might yet be a decent year for many airlines, minus those based in China, anyway. If planes are still empty by the peak summer, however, or if the virus subsides but comes back with a vengeance in the fall, 2020 could be the worst year for airlines since at least 2009. Might it get as bad as 2001? Might 2020 (gulp) be the worst year ever? It might not be long before it starts to feel that way.

• Airlines are constantly adjusting their capacity as the Covid-19 virus crisis unfolds, but here’s a snapshot of y/y changes, taken on Feb. 26.
• Ranked by growth in January