Airlines face $61-B cash burn from COVID-19

IATA warns

If severe travel restrictions due to the Covid 19 pandemic lasts for three months, airlines will burn through US$61 billion of their cash reserves by end of June, even as they net $39 billion losses in the second quarter of the year, according to the newest analysis of the International Air Transport Association (IATA).

Already, many governments, including the Philippines', are considering extending their lockdowns to contain the pandemic.

However, in a scenario of extended lockdowns, full-year demand for international travel will plummet by 38 percent and full-year passenger revenues will dive by $252 billion versus 2019. The fall in demand would be the deepest in the second quarter, with a 71 percent drop, IATA warned.

The impact will be severe. Revenues will fall by 68 per cent although this less than the expected 71 percent fall in demand due to the continuation of cargo operations, albeit at reduced levels of activity.

Variable costs will likewise drop sharply—by some 70 percent in the second quarter— in line with a 65 percent cut in second quarter capacity.

The price of jet fuel has also fallen sharply, although IATA estimated that fuel hedging will limit the benefit to a 31 percent decline.

Fixed and semi-fixed costs amount to nearly half an airline’s cost. The association expects semi-fixed costs, including crew costs, to be reduced by a third.

Airlines are cutting what they can, while trying to preserve their workforce and businesses for the future recovery.

These changes to revenues and costs translate to a net loss of $39 billion in the second quarter.

On top of unavoidable costs, airlines are faced with refunding sold but unused tickets as a result of massive cancellations resulting from government-imposed restrictions on travel.

The second quarter liability for these amounts to $35 billion.

"Cash burn will be severe. We estimate airlines could be burning through $61 billion of their cash balances in the second quarter," stressed Alexandre de Juniac, IATA’s Director General and CEO.

“Airlines cannot cut costs fast enough to stay ahead of the impact of this crisis. We are looking at a devastating net loss of $39 billion in the second quarter. The impact of that on cash burn will be amplified by a $35 billion liability for potential ticket refunds."

"Without relief, the industry’s cash position could deteriorate by $61 billion in the second quarter,” he warned.

Several governments are responding positively to the industry’s need for relief measures.

Among countries providing specific financial or regulatory aid packages to the industry are Colombia, the United States, Singapore, Australia, China, New Zealand and Norway.

Most recently Canada, Colombia, and the Netherlands have relaxed regulations to allow airlines to offer passengers travel vouchers in place of refunds.

“Travel and tourism is essentially shut down in an extraordinary and unprecedented situation. Airlines need working capital to sustain their businesses through the extreme volatility," de Juniac pointed out.