Airline industry faces its worst-ever crisis as virus pummels share prices
Pandemic fallout is likely to spark consolidation in the sector, writes Dan White
CORONAVIRUS has turned what had been shaping up to be good year for airlines into one of the aviation sector’s worst-ever crises as nervous passengers put travelling plans on hold.
As the world finds itself in the throes of the worst pandemic in more than a century, the airlines are among the first businesses to feel the impact of Covid-19.
Lufthansa — Europe’s second-largest airline after Ryanair by passengers carried — has gone cap in hand to the German government.
In a message to the airline’s staff on March 6, CEO Carsten Spohr said Lufthansa would be applying for assistance under the Kurzarbeit (short-time work) programme, under which the German government picks up the tab for the wages shortfall of staff whose hours have been cut.
“The impact [of coronavirus] on our booking situation is immense. We must assume that it may take months before we will see the first signs of stability,” he told staff.
The German flag carrier followed this up with a series of brutal capacity cuts which will see the airline slash the number of flights by up to 50pc in the coming weeks and temporarily take its entire fleet of long-haul Airbus 380s out of service.
Analysts are bracing themselves for even more bad news when Lufthansa releases its full-year 2019 results on Thursday.
Lufthansa isn’t the only airline to have been knocked sideways by the coronavirus.
Closer to home, Ryanair has cancelled all flights to and from Italy, the European country worst affected by coronavirus, until April 8. This will reduce the number of passengers flown by the airline in the year to the end of this month from the previously projected 154 million to 151 million.
IAG, the owner of British Airways, Iberia and Aer Lingus, has warned that coronavirus will hit its 2020 profits, with chief executive Willie Walsh cautioning that it was still too early to quantify the full extent of the damage. On Friday the head of British Airways said coronavirus was causing an unprecedented crisis, warning that aircraft would be parked like never before and staff laid off, in a hardhitting staff message to address “the worsening situation”.
“It is a crisis of global proportions like no other we have known,” BA Chief Executive Alex Cruz told staff in a video message,
It is not just European airlines which have been hit by the virus. Australia’s Qantas has suspended deliveries of long-range A350 aircraft and scrapped its forecasts, while both its chairman and chief executive, Tallaght-born Alan Joyce, are waiving their salaries.
In the United States, both Delta and American have also scrapped their 2020 forecasts and unveiled deep capacity cuts while United announced a $2bn cash call.
The International Air Transport Association (IATA), which represents most of the world’s airlines, is predicting coronavirus could knock up to $113bn off global aviation revenues this year.
By early last week the global aviation industry had lost about a third of its total value, $70bn, as airline shares plunged on the deluge of coronavirus-related bad news.
And that was before The Donald had his say. Last Wednesday, President Trump announced a 30-day ban on flights from most European countries — but not yet from the UK and Ireland — to the United States. This follows the previous US ban on flights to and from China announced on February 1.
News of the US flights ban piled further pressure on airline shares. Shares in Ryanair — which doesn’t fly to the United States — which had already fallen by almost 30pc since the beginning of February, dropped by a further 5pc and are now down by a massive €5.14 or 33pc to just €10.63 over the past six weeks.
It’s a similar story with IAG, whose share price is down by 36pc over the same period.
Ryanair and IAG are both financially strong airlines which will ultimately successfully weather any turbulence coronavirus throws at them.
Other airlines might not be so lucky. Already British regional airline Flybe has gone bust. While it had long-standing financial problems, it was the coronavirus outbreak which finally tipped it over the edge into insolvency.
It almost certainly won’t be the last airline to bite the dust. Compared to the United States, the European aviation sector is very fragmented. Stateside, the top five airlines have a combined market share of almost 70pc while the top 10 control more than 90pc. Europe’s top 10 have a 50pc market share with more than 100 carriers sharing the rest of the market between them.
“Companies that were very strong coming into this will be even stronger coming out of it”, says Davy aviation analyst Stephen Furlong.
“We’re probably going to get more consolidation of the sector. We’re probably going to see more Flybes.”
One of the most vulnerable European airlines is Norwegian. Investors have signalled their concern by marking its share price down by 80pc since the beginning of February.
However, it is an ill wind that blows no good. At the same time as customers have been cancelling their bookings and airline share prices have been plunging, oil prices have also nosedived with a barrel of Brent crude that had been changing hands for $60 a recently as the beginning of February was down to just $33 late last week.
The collapse in crude oil prices has pulled aviation fuel prices down as well, with IATA estimating that globally jet fuel prices have fallen by 18pc over the past month. Jet fuel prices are down by 21pc in Europe and by almost one-third over the past year.
IATA reckons this will knock $19bn off airlines’ 2020 fuel bills, a reduction of 22pc. Goodbody aviation analyst Mark Simpson calculates that lower jet fuel prices could be worth as much as €900m to Ryanair in the 12 months to March 2022. “Anybody looking to buy the sector is now looking at next year. Next year is going to be great for some airlines,” he said.