Coronavirus Spread Becomes a Global Crisis for Airlines

 - March 6, 2020, 12:07 PM
Lufthansa Group plans to cut capacity by up to 50 percent in reaction to traffic declines stemming from the coronavirus crisis. (Lufthansa Group)

This story is part of AIN's continuing coverage of the impact of the coronavirus on aviation.

Recently released IATA statistics show just a 2.4-percent year-over-year increase in January airline traffic, certainly reflecting the emerging effects of the coronavirus outbreak. But those figures undoubtedly will mark just the starting point of a precipitous capacity and revenue passenger mile (RPM) decline in February and beyond. Airlines around the world have slashed capacity and suspended routes to several countries hit by the Covid-19 virus, starting with the epicenter of the outbreak, China. Now, as the virus spreads around the world, it has affected airlines in every region, including some of the industry’s busiest transit points.

In fact, on Thursday the United Arab Emirates—where Dubai’s Emirates Airline and Abu Dhabi’s Etihad Airways connect passengers from as far afield as North America to Asia—warned its own citizens and expatriate residents not to travel abroad until the outbreak subsides. Both airlines have encouraged staff to take time off in an effort to mitigate the need for layoffs while they reduce flying.

The Middle East, however, hasn’t seen the worst of the crisis. Of all the regions shaken by the virus, China and Asia-Pacific felt the first and still the most profound effects. For the month of February, Chinese airlines canceled about two-thirds of all their scheduled flights, and year-over-year traffic declined by 70 percent during the period of the Lunar New Year celebrations. Despite the cancelations, continued overcapacity resulted in the grounding of some two-thirds of the entire Chinese fleet. Meanwhile, efforts to encourage flying with fares equaling less than $20 in some cases did little to spur travel by a wary public.

Nevertheless, state-owned airlines have begun to add capacity again as part of a government effort to return its citizens to work. According to OAG Aviation Worldwide, Chinese carriers placed nearly 3 million seats back into scheduled service during the first week of March, primarily for domestic routes. State-owned China Southern Airlines, the country's largest air carrier, added 684,000 seats while also laying plans Wednesday to restore more than 460 domestic and international flights departing from Shenzhen. As of March 4, China Southern has resumed more than 5,100 flights, including 60 percent of its domestic routes and plans to operate 1,000 daily flights in March. More suspended flights will resume at an accelerated pace, the airline said.

China Eastern, which increased capacity by 566,000 seats this week, and Air China also signaled an intent to restore international and domestic service over March and April. As of March 5, Air China resumed more than 1,600 flights, with an average of nearly 150 flights per day.  

Whether or not the situation in mainland China warrants such capacity increases, airlines throughout the rest of Asia appear unready to follow suit, as carriers lay off staff, cut pay, and slash flights and capacity across international and domestic networks.

In the latest round of capacity cuts, Singapore Airlines Group (SIA) recently announced a further 10.3 percent reduction in scheduled capacity through the end of May. The latest cancelations, which add to existing cuts across SIA’s network announced late February, affect flights bound to South Asia, South Africa, Australia, and New Zealand. Meanwhile, SIA’s regional arm, Silkair, announced Tuesday that it will indefinitely suspend operations to Hiroshima, Japan, beginning March 27, due to weaker demand. Additional cost-cutting plans include a hiring freeze for ground positions, an employee voluntary-unpaid-leave scheme, and a senior management salary cut by 10 to 15 percent beginning March 1.

Indonesian-based airlines are also bracing for more capacity cuts across their networks after the government announced plans on Thursday to ban the entry and transit of foreign visitors coming from coronavirus-hit areas in Iran, Italy, and South Korea beginning March 8. The announcement comes after Saudi Arabia announced in late February that it would prohibit hajj pilgrims from 16 nations—including Indonesia, the world’s largest Muslim majority nation, from entering the country. Travelers departing from non-affected areas in Iran, Italy, and South Korea and holding a health certificate from their respective country may still gain entry to Indonesia. Late February saw the government roll out a $744 million financial relief package that includes subsidies and tax cuts in a bid to encourage consumption and boost domestic travel.

As part of a government directive, flag carrier Vietnam Airlines and budget carrier Vietjet Air have moved to temporarily suspend all South Korea-bound flights from March 5 and March 7 respectively. Travelers from other coronavirus-hit areas in Japan, Italy, and Iran may not enter Vietnam, and the southeast Asian country will no longer grant Italian and South Korean travelers visa-free entry.

The Philippine government has also rolled out travel restrictions to South Korea, prompting its flagship carrier to scrap several flights through the end of March. A total of 17 weekly flights to South Korea, including Seoul and Busan, have been canceled on top of 69 weekly flights to China, including Hong Kong and Macao. Last Friday saw Philippine Airlines lay off 300 ground-based and management staff as part of a restructuring scheme to rein in costs.

Meanwhile, the Covid-19 outbreak has sent shockwaves across AirAsia X, the long-haul budget arm of AirAsia, prompting the airline to aggressively cut several routes and reduce its fleet size, including deferring the delivery of 78 Airbus A330neos. The budget carrier did not elaborate on the duration of the A330-900 delivery deferrals but did add that it plans to sell two A330-300s and return a further five aircraft to lessors early.

Outside of Southeast Asia, members of the Hong Kong Board of Airlines Representatives, which represents a coalition of more than 70 airlines, have called for greater financial relief measures beyond a government-initiated $205 million assistance package rolled out late in February. Airlines flying into Hong Kong International are entitled to a 50 percent reduction on landing, parking, and other airport-operation-related fees as well as a 20 percent discount on airside vehicle permits, airline lounges, offices, and storage space.

Amongst the hardest hit by the epidemic as well as the ongoing government protests in Hong Kong, flagship carrier Cathay Pacific moved to slash 40 percent of its capacity across February and March. It expects to institute further cuts in April and a voluntary special-leave scheme from March 1 to June 30.

While Asian carriers look to governments to help mitigate the damage, so have some of their European counterparts. For example, Air France-KLM will ask the French government to delay the introduction of the new aviation tax in view of the virus outbreak, the group’s CEO, Ben Smith, told AIN at a March 3 aviation summit in Brussels. Meanwhile, EasyJet approached the UK government to ask for temporary relief or reduction of the air passenger duty, the LCC’s CEO, John Lundgren, told AIN, insisting the measure would need to apply to all airlines equally. “I do think it is absolutely the right thing to do to ask governments to consider what type of support they can give their airlines in terms of maintaining connectivity,” Lundgren said.

International Airlines Group CEO Willie Walsh disagreed. “We have seen these issues before,” he said. In response to a question by AIN about whether the situation warrants state aid, he said he personally did not believe “it is appropriate for governments to provide financial support to airlines that were not sustainable before the coronavirus.”

Based on IATA’s most recent assessment of the potential impact of the coronavirus outbreak on operators’ passenger businesses and taking into consideration a limited-spread scenario—markets with at least 100 confirmed cases of the virus as of March 2—Italy could suffer a 24 percent fall in passenger numbers this year. France and Germany could each witness a 10 percent fall in passenger numbers, and the rest of Europe a 7 percent fall. That contraction translates to a $5 billion loss in passenger revenue in Italy, and $2.9 billion and $2.5 billion in Germany and France, respectively.

Under the “extensive spread” scenario—countries that currently have reported 10 or more confirmed Covid-19 cases—10 major markets in Western Europe (Austria, France, Italy, Germany, Netherlands, Norway, Spain, Switzerland, Sweden, and the UK) could record a 24 percent passenger decline. That would equate to a $37.3 billion loss in passenger revenue in 2020 for all airlines serving routes to, from, and within each of the countries, according to IATA projections. The rest of Europe could see a 9 percent contraction of passengers and a $6.6 billion loss in revenues.

Airlines across the region, from TAP Air Portugal and Iberia in the south to Wizz Air and El Al in the east, SAS and Finnair in northern Europe, and Ryanair in the west, have reacted to the fall in demand or travel restrictions imposed by governments by trimming schedules, suspending non-critical investments, cutting non-essential expenses, and freezing hiring. TAP, for instance, announced Thursday it would cut capacity by 4 percent in March and 6 percent in April, amounting to a total of around 1,000 flights. Finnair will start negotiations on planned temporary layoffs for a 14- to 30-day period on March 12, while SAS withdrew its fiscal year 2020 guidance to deliver an EBIT margin of 3 to 5 percent. “At this stage, it is too early to assess the full impact on SAS operations and financial outcome and therefore not possible to give a more accurate guidance,” the airline said.

Lufthansa Group on Friday said that the Covid-19 crisis now has affected all areas of its network, prompting it to reduce capacity by up to 50 percent “in the coming weeks.” The new capacity cuts come in addition to earlier announced route suspensions and frequency adjustments, including to China, Northern Italy, and domestically in Germany. The German airline group, Europe’s largest in revenue, already trimmed capacity in the wake of the coronavirus outbreak by up to 25 percent across its network and subsidiaries. “This corresponds to a calculated capacity of 150 aircraft, of which 125 are narrowbodies and 25 long-haul,” a Lufthansa spokesperson told AIN. The Lufthansa Group fleet currently consists of about 770 aircraft, including some 180 long-haul aircraft.

Lufthansa Group also said it could not estimate the effect on earnings expected from the Covid-19 situation, though it plans to reveal details when it publishes its 2019 financial results on March 19.

Though North American airlines haven’t yet seen the level of coronavirus effect that forced Lufthansa into such drastic measures, big international carriers such as Delta, American, United, and Air Canada all significantly slashed transpacific service as the crisis spread outside China, and, more recently, to points in Europe and Latin America. United Airlines, for one, plans by April to cut international flying by 20 percent and domestic service by 10 percent. United has also frozen hiring until at least June 30.

Separately, American Airlines has suspended all flying to mainland China, Hong Kong, South Korea, and Italy until late April, while Delta Air Lines has suspended all flying to China through April 30 and instituted significant cuts to Italy, Japan, and South Korea.

While the U.S. has seen relatively few cases of coronavirus—authorities had reported some 200 cases as of March 5—health experts believe the situation will worsen considerably. The resulting anxiety among the public and moves by major corporations to curtail business travel have affected virtually all of the country’s airlines, even those primarily flying domestic service. New York-based JetBlue, for one, on Wednesday said it would cut service by 5 percent. Although the country’s biggest low-fare carrier, Southwest Airlines, has yet to announce any service cuts, CEO Gary Kelly told CNBC television Thursday that the airline saw “a precipitous” decline in bookings in the last week of February, and that losses likely totaled “several hundred million dollars.”

Kelly’s comments came a day after the CEOs of most of the country’s major airlines met with President Donald Trump in Washington, D.C., to discuss mitigation measures such as airplane disinfecting procedures. During the meeting, Trump opined that the virus could help U.S. businesses because it would encourage people to stay in the country. “And a lot of people are staying in our country, and they’re shopping and using our hotels in this country,” he said. “So, from that standpoint, I think, probably, there’s a positive impact.” 

With contributions and editing by Gregory Polek