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Coronavirus Outbreak Might Dampen APAC Airlines’ Growth

 - January 27, 2020, 2:09 PM

Will 2020 and the outbreak of the novel coronavirus (2019-nCoV) bring a repeat of 2003 when the SARS pandemic resulted in Asia-Pacific airlines losing $6 billion of revenue? At the height of that outbreak, in May 2003, revenue passenger kilometres (RPKs) of Asia-Pacific operators were a staggering 35 percent lower than their pre-crisis levels because the loss of confidence and fears of global spread impacted both business and leisure travel to, from and within the region, data of the International Air Transport Association (IATA) show. On an annual basis, passenger traffic fell 8 percent. 

“The recent health scare reminds us of SARS,” Association of Asia Pacific Airlines (AAPA) director general Andrew Herdman told AIN. “It can have an impact on demand even without travel restrictions imposed by governments,” he said, though he cautioned against drawing early conclusions on the size of the impact. “We learned a lot from SARS,” he noted, “a lot of procedures to handle a pandemic are now well established through the World Health Organization, IATA, and other institutions.”

He also pointed to the response of China, where both the recent novel coronavirus and SARS originated. In contrast to the SARS outbreak when Chinese officials were slow to release information “they now very quickly did take draconian actions and shared information with health authorities across the world,” Herdman said.

There are risks this outbreak could cause a “sizeable” disruption, IATA acknowledged in its January 24 Economics’ Chart of the Week. The timing of this novel coronavirus outbreak coincided with the Lunar New Year celebrations, China’s busiest travel season, and the very strong growth of the Chinese air transport market over recent years means that an additional 450 million passengers fly to, from and within China per year compared with a decade ago. Nevertheless, “history indicates that any effect on air transport would be temporary,” the global airline trade body asserted. In the outbreak of SARS, which was the most serious epidemic impacting traffic volumes in the last two decades, monthly international passenger traffic returned to its pre-crisis level within nine months. The initial impact of MERS Flu in 2015, which was focused more on a single country, was a sharp slowdown—a 12 percent decline in monthly RPKs to, from and within South Korea in the first month of the outbreak. However, air travel volumes began to recover after two months and had returned to pre-outbreak levels within six months, IATA observed.

While the airline industry has proven resilient to pandemics in the past, the novel coronavirus will bring an additional challenge to Asia-Pacific airlines in a year they had hoped would be marked by an uptick in financial performance, following a trying 2019. In its latest update of the Economic Performance of the Airline Industry, released in December and thus before the outbreak, IATA projected Asia-Pacific operators collectively would increase net profit from $4.9 billion in 2019 to $6 billion this year. The outlook lift in profitability, the trade body noted, “comes with the help of a modest recovery in world trade, based on our assumption that a trade war ‘truce’ is able to be maintained; the so-called ‘phase 1’ agreement between China and the U.S. is consistent with that view.”

The dismal performance in 2019—Asia Pacific airlines’ lowest aggregate net profit in five years and less than half of the $10.5 billion net profit they reported in 2017—is due to the region being the most exposed to weaknesses in world trade and cargo, according to IATA. It added that the “highly competitive” nature of many markets in Asia-Pacific and unexpected currency fluctuations also weighed on airlines’ financials, further depressing their historically low return on invested capital (ROIC). Asia-Pacific operators’ ROIC fell from 4.3 percent in 2018 to 3.2 percent in 2019—compared with a worldwide airline industry level of 5.7 percent, 9.9 percent for North American carriers and 6.8 percent for European airlines.

If the 2020 forecast holds, airlines in the Asia-Pacific region will earn $3.34 per passenger. This is up from a $2.92 net profit per passenger in 2019, but less than a quarter of what their counterparts in North America are expected to earn per passenger this year—$16. The divergence in financial performance between the regions becomes even more apparent when considering their respective share of global traffic versus their share of industry profits. Asia-Pacific carriers fly about 35 percent of global RPKs and freight tonne kilometers (FTKs) and are forecast to account for just 20 percent of the collective $29.3 billion net profits operators are expected to report this year. Airlines in North America are projected to account for around 56 percent of aggregate earnings in 2020 though they hold only a 22 percent share of industry-wide RPKs and 23 percent of global FTKs.