What Does A Fall In Passengers From Coronavirus Mean For Airlines?

As passenger traffic falls due to the Coronavirus outbreak, what is the short and long-term impact on the airline industry?

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Coronavirus
Coronavirus (Image Credit: Alissa Eckert, MS; Dan Higgins, MAM / Centers for Disease Control and Prevention)

There remains considerable uncertainty as to the human cost of the outbreak of Coronavirus (COVID-19).

However, it has already had a significant impact on the aviation industry. Airlines have cut capacity to affected areas and implemented flexible rebooking policies.

A number of trade and sporting events have been either cancelled or postponed. Many organisations are restricting their employees from international travel.

A number of companies in other industries are themselves experiencing disruption to supply chains and adverse financial impacts due to the effective closure of certain geographical markets. This, in turn, leads them to cut discretionary spending. The travel budget is the easiest to cut first.

The industry does not yet appear to facing a crisis of the scale of 11 September 2001 or the 2008 financial crash. However, airlines are now facing a period of significantly reduced demand for air travel and are unable to ascertain what the financial impact will be.

For some airlines there will be a short-term impact. For others, there will be significant long term changes. Based on history, here’s what we can expect.

Weak Airlines Are Vulnerable

We’re not in the business of speculating on the health of individual airlines.

However, it is well known that some airlines in Europe and beyond are struggling. A number of airlines such as eos, Flyglobespan, MaxJet, Silverjet, XL Airways UK and Zoom failed around the time of the 2008 financial crisis and a rising oil price.

It is inevitable that some airlines will not be able to survive a prolonged period of depressed demand. This is particularly so if this coincides with other pressures such as a rise in the oil price, or if this prompts nervousness from creditors and suppliers.

Cash Is King

With airlines having very high fixed costs, they ultimately survive on the cash flow from forward bookings and suppliers offering credit terms.

If depressed forward bookings continue, preservation of cash will be a priority. This does mean that capital intensive expenditure such as new aircraft deliveries and aircraft refurbishment projects will be postponed.

In terms of passenger revenues, it also means more focus on generating maximum revenues from flights. Anecdotally, after the 2008 financial crisis, BA adopted an extremely aggressive approach to overselling long-haul economy and premium economy cabins.

Everything Is Up For Review

During a crisis, no stone will be left unturned and nothing can be ruled out.

Marginal routes will be cut, aircraft will be grounded, projects put on hold and everything will be looked at to save costs. Again, after the 2008 financial crisis BA removed foot rests from long-haul economy seats to save £1m from its annual fuel bill.

Airlines Will Look To Ancillary Revenues

On that note, airlines will look again at generating more ancillary revenues from passengers.

The “sweet spot” for airlines is charging for ancillary services that cost little to provide, but have a value to customers. And in was after the 2008 financial crisis that BA started charging for seat reservations at the time of booking, which were previously restricted to Silver & Gold members of the Executive Club.

Short-haul Business Class Will Take A Hit

In both of the past two major aviation crises, there was a structural decline in what’s left of short-haul business class in Europe.

Whilst it’s unlikely that the major network carriers will do away with short-haul business class altogether (which BA considered at Gatwick many years ago) some the few large corporates that still allow short-haul business class travel will stop doing so.

There Will Be Bargains For Premium Leisure Travellers

Airlines love business travellers. They buy expensive flexible fares at relatively notice, and generate high yields. Except when they don’t.

History has shown that whilst corporate customers severely restrict business travel in a downturn, leisure travel remains relatively resilient. There will be few Britons prepared to give up their annual summer holiday because of Coronavirus.

With First Class and business class seats unoccupied by business travellers, there will be significant bargains for premium leisure travellers and members of frequent flyer programmes in particular. We’ve already seen BA do this by adding 100,000 Club World reward seats.

“Never Waste A Crisis”

There’s a phrase in politics “Never waste a crisis”. And airlines know this.

During the 2008 financial crisis, BA pushed through reform of its Heathrow cabin crew fleets. Whilst BA is now largely past such big structural changes, some airlines may use this time to push through potentially unpopular change.

“Rational” Airlines Will Want To Prove Themselves

For years, advocates of rational, disciplined, investment such as IAG have preached that airlines must be able to generate sustainable financial returns over the economic cycle.

It is not enough for airlines to make easy profits during the good times, only to burn through cash during a crisis.

Whilst they will not want to be seen to take advantage during a crisis with a substantial human cost, it’s no secret that some airlines looked with envy at Ryanair’s blockbuster Boeing 737 aircraft order post 11 September 2001.

Groups such as IAG will be looking to pull off a similarly “transformational” deal.

Airlines Will Work Hard To Recover Demand

When the time is right, airlines will work hard to get passengers travelling again.

Whether it be a bold move such as BA giving away every seat for one day in “The World’s Biggest Offer” from 1991, a more softly spoken campaign like “Opportunities” from 2009, or BA’s first post 9/11 TV ad below, expect a big effort to encourage travellers to start flying again.

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