Widespread cuts to scheduled airline service in China and multiple travel restrictions imposed by foreign governments have prompted concern that the effect of the novel coronavirus outbreak on the air transport sector could prove more severe than that resulting from the 2003 SARS epidemic. At the same time, government-imposed factory closures in China have already disrupted the aerospace supply chain, with Western OEMs, including Airbus, Boeing, and Safran all coping with restrictions on their operations in China.
On Monday, it remained unclear to what extent China’s aviation industry might be returning to work after a government-imposed delay in reopening facilities following the Lunar New Year holiday. Over the weekend, state-controlled Xinhua news agency reported that Chinese leaders had given clearance for businesses to “resume operation in an orderly manner” but provincial authorities appeared not to have lifted all closure orders on factories, and staggered working hours apply in some locations.
Independent financial analysts have warned that it could take many weeks for Chinese industry to return to anything like normal levels of operation. “I am quite sure that Monday is not realistic [for businesses to reopen], even if virus data are suddenly suggesting that might just be possible,” Michael Every, head of financial markets Asia-Pacific for Rabobank told reporters. “Many people are thinking April is more realistic for the virus peak.”
Airline Traffic Plummets
According to air transport data consultancy OAG, the scale of the rapid reduction in airline seat capacity is already the most significant ever recorded for one country in a relatively short period of time. On Monday, the company reported that the response to the outbreak has resulted in two-thirds of international capacity to and from China being canceled. Since January 20, around 1.4 million seats have been cut from scheduled airline capacity, which amounts to more than all of the scheduled international capacity planned for France this week.
The top airlines with service out of China saw cuts in international capacity of between 5.6 and 79.7 percent, with most suffering high double-digit declines. Air China, China Eastern and China Southern were the hardest hit, along with Asiana Airlines, Korean Air, Thai Lion Air, Thai AirAsia and All Nippon Airways.
The latest OAG data also revealed the extent to which cuts to airline capacity have impacted other countries, with Thailand seeing the biggest drop in traffic from China at 63 percent. Among the top 10 for connections to ChinaOther countries that have taken a hit include Japan (60.1 percent), Taiwan (62.7 percent), South Korea (54.4 percent), Russia (48.1 percent), Canada (46.4 percent) and France 42.1 percent). Hong Kong alone saw an 80.3 percent drop in traffic from mainland China, while capacity out of Indonesia fell by 92 percent, followed by Singapore (89 percent) and the U.S. (86 percent).
"Our expectation is that international capacity from China may again fall over the next few days but that we have seen the worst of the cuts with airlines having responded quickly to the virus," said OAG analyst John Grant. "Ultimately we know from previous events of this nature that capacity and demand will return quickly but the numbers are certainly some of the most dramatic we have seen in any market."
The Cirium consultancy has tried to generate a more complete snapshot of flight activity by tracking the number of services that were scheduled but never flew. Between January 23 and February 4, a total of 196,487 flights were scheduled within and in and out of China but 54,011 flights did not operate (28 percent). Taking into account domestic traffic alone, 48,962 flights out of 153,843 scheduled movements did not operate (32 percent).
Chinese carriers lost between around 20 and 45 percent of their scheduled flights during the early stages of travel restrictions. Xiamen Airlines canceled 44.59 percent of flights, followed by Shandong Airlines (40.12 percent), Lucky Air (39.83 percent), Hainan Airlines (38.25 percent), China Southern (35.87 percent), China Eastern (26.03 percent), and Air China (18.95 percent).
According to Cirium, the most significant decline in both planned flights, and the numbers of planned flights that did not operate, only began from around February 1 when the scale of the health crisis became more widely understood outside China and as travel restrictions began to take effect. As of the end of December, scheduled flights into and within China had been expected to be around 8 percent higher this year than in 2019.
Cirium reported that China accounts for around 16 percent of global airline capacity and that if the current trend continues this is likely to drop by 8 percent. "Coronavirus has the potential to fundamentally impair 2020's global airline capacity growth," concluded analyst Henk Ombelet.
On February 7, Hong Kong Airlines announced it will cut 400 jobs and reduce operations in direct response to reduced demand caused by the coronavirus outbreak. Daily operations are being cut from 82 to 30 sectors between February 11 and the end of March. The airline is asking staff to take a minimum of two weeks unpaid leave each month through the end of June or switch to a three-day workweek.
On January 28, Cathay Pacific Airlines and its Cathay Dragon subsidiary announced plans to reduce capacity by at least 50 percent through the end of March. It indicated the plans were part of a response to Hong Kong government restrictions on travel to and from mainland China, but also due to weakening demand caused by continuing political protests that have seen marked reductions in foreign visitors. On February 5, Cathay asked staff to take unpaid leave for three weeks and also offered a voluntary special leave program to run from March 1 to June 30.
The three leading U.S. carriers—Delta Air Lines, United Airlines, and American Airlines—have suspended all services to and from mainland China. Delta does not intend to resume flights until at least April 30, while American and United have said the suspension will run, respectively, through March 27 and 28.
The decisions were, in part, a response to new U.S. State Department restrictions on travelers from China and advice to U.S. citizens not to travel to the country. The Allied Pilots Association had previously filed a lawsuit against American to demand a suspension of flights.
Several leading European airlines had earlier announced a cancellation of flights to China, including British Airways, Lufthansa, Swiss, Austrian Airlines, Finnair, and Virgin Atlantic. British Airways and Virgin Atlantic yesterday confirmed that the suspension of operations will run at least through the end of March.
Health Scares Take a Toll
At the height of the SARS outbreak in May 2003, revenue passenger kilometers (RPKs) for Asia-Pacific airlines fell by 35 percent from pre-crisis levels. However, according to data from the International Air Transport Association (IATA), traffic did recover within nine months. Over the course of that year, airlines in the Asia-Pacific region lost 8 percent of passenger traffic and $6 billion in revenues.
The MERS flu in 2015, which was concentrated more in a single country, initially resulted in a sharp slowdown—a 12 percent drop 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. The 2005 and 2013 episodes of avian flu had a much milder and short-lived effect and air travel rebounded quickly as the fears of a global spread of the virus eased, IATA observed.
“In the past, the airline industry has proven resilient to shocks, including pandemics,” the airline trade group concluded in a late January statement, while acknowledging the adverse timing of the coronavirus outbreak as it coincided with the Lunar New Year celebrations and China’s busiest travel season. Moreover, owing to the very strong growth of the Chinese air transport market over recent years, an additional 450 million passengers fly to, from, and within China per year compared with a decade ago. Many neighboring Asian countries, such as Thailand, as well as parts of Europe and North America, have already seen a steep decline in Chinese visitors, which had accounted for some of the fastest tourism growth in recent years.
“The recent health scare reminds us of SARS,” Association of Asia Pacific Airlines (AAPA) director-general Andrew Herdman told AIN late last month. “It can have an impact on demand even without travel restrictions imposed by governments,” he said, while cautioning against drawing early conclusions on the size of the 2019 outbreak’s effect. “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.”
Asia-Pacific Demand Already Dipping
In year-end 2019 traffic figures announced by IATA on February 6, the Asia-Pacific region recorded 4.5 percent growth in available seat kilometers (ASKs). The numbers marked a significant decline on the 8.5 percent achieved in 2018, which the industry group said was due to factors such as the effect of the U.S.-China trade dispute and weakening business confidence and economic activity. Global ASK growth was 3.4 percent last year. Asia-Pacific RPKs increased by 4.8 percent, compared with the global growth figure of 4.2 percent, with the region falling behind growth for Africa.
Last year, domestic airline traffic within China accounted for 9.8 percent of the global total, growing by 8.2 percent in ASK terms and 7.8 percent for RPK. “Looking into early 2020, positive impact of the ‘phase one’ trade agreement between the U.S. and China on air travel demand will be likely countered by the coronavirus outbreak in Wuhan province,” said the IATA report.
Air freight figures released by IATA on February 5 recorded the industry’s worst year since 2009, with demand in terms of freight tonne-kilometers (FTKs) dropping by 3.3 percent compared with 2018 in response to weak global economic growth of just 0.8 percent. The Asia-Pacific region retained the largest share of FTKs, at 34.6 percent, even though its carriers posted a 3.5 percent decline in cargo volumes carried.
“Trade tensions are at the root of the worst year for air cargo since the end of the global financial crisis in 2009,” commented IATA director general and CEO Alexandre de Juniac. “While these are easing, there is little relief in that good news as we are in unknown territory with respect to the eventual impact of the coronavirus on the global economy. With all the restrictions being put in place, it will certainly be a drag on the economic growth.”
Supply Chain at a Standstill
On February 5, Airbus confirmed that its A320 final assembly line in Tianjin, China, remained closed following the New Year holiday as part of measures introduced to resolve the coronavirus outbreak. Airbus China said that it is “observing Chinese government requirements for staff to work from home and is facilitating with IT equipment so employees from all locations including Tianjin do not need to travel to work where possible.”
The Europe-based airframer’s statement did not specify how disruptive the closure of Chinese operations is proving to be for its supply chain. It did acknowledge that travel restrictions are posing “logistical challenges.” The Tianjin factory makes six A320 aircraft each month, accounting for almost 10 percent of global production for the single-aisle family.
Meanwhile, last week both Boeing and engine and aircraft systems group Safran also confirmed disruption to their activities in China.
Work at Boeing’s Zhoushan completion and delivery center had already stopped due to the ongoing suspension of 737 Max airliner production. The company, which has three subsidiaries, four joint ventures, and more than 35 direct suppliers in China, said that in response to government guidance it is “working through plans to delay office openings, provide masks, and offer informational briefings and facilitate work-from-home options when available.”
Safran said that it has extended the Chinese New Year break at its Chinese facilities until February 10. The France-based group has extensive manufacturing and maintenance operations in the country, employing around 2,500 people at 20 different entities.
Israel Aerospace Industries' maintenance, repair, and overhaul joint venture with Lingyun Science and Technology Group is another operation that has been suspended on government orders. It is located in China's Hubei province, which is where the outbreak started.
However, not all aerospace manufacturers are as exposed to supply chain disruption in China. Embraer Commercial Aircraft CEO John Slattery told AIN that the Brazilian airframer has no tier-one suppliers in China and that he does not expect much effect from disruptions at the small number of lower-tier vendors it uses in the country. Embraer does not plan to make any aircraft deliveries to Chinese airlines during 2020.
As they scramble to respond to the short-term fallout from the coronavirus outbreak, aviation leaders also must contemplate the longer-term consequences for a regional economy already dented by economic uncertainty. In recent years, the region has been a powerhouse for new aircraft orders but that surge in demand might now be waning for reasons that go beyond the current public health crisis.
On Friday, ratings agency S&P cut its forecast for Chinese economic growth in 2020 by 0.75 percent, to 5 percent. “The global impact will be felt through four real economy channels: sharply reduced tourism revenues, lower exports of consumer and capital goods, lower commodity prices, and industrial supply chain disruptions,” said a company statement.
This week’s Singapore Air Show, already diminished by multiple exhibitor withdrawals, will be keenly watched by analysts seeking to assess the toll the anticipated downturn takes on aviation.