In just a few weeks, the coronavirus has caused a collapse in air traffic, and undermine the future of several major airlines. The industry not only faces a drop in demand, but must also adapt to the many travel restrictions imposed by countries around the world, in the wake of the coronavirus pandemic. The decision by President Donald Trump to ban access to most foreigners from Europe for 30 days, was the last blow. Industry experts expect that the impact of the Covid-19 will be worse than that of the subprime crisis in 2008 and the 9/11. As a result many airlines have started to announce hiring freezes and job cuts, while the industry has already faced its first casualty with the collapse of British airline Flybe.

A cyclical industry

The airline industry is also one of the most cyclical and volatile industries. It exhibits high correlation with political, economic and social unrest.

During the last recession of 2008/2009, the global airline industry faced a significant drop in demand, due to an overall reduction in travellers purchasing power, and forced some airlines to shrink.

Since then and up until the coronavirus outbreak, the industry had enjoyed healthy and stable performance. Back in December 2019, the International Air Transport Association (IATA) had expected total spend on air transport to increase by 4% in 2020 to $908 billions from $873 billions in 2019.

 

airline industry projections 2019
source: IATA

Now IATA estimates that the the pandemic could cost the airline industry up to $113 billion in 2020,. This represents about 20% of the industry’s expected revenue.

Airline industry outlook for 2020: negative

Global rating agency Moody’s has downgraded its outlook for the global passenger airline industry from stable to negative.

“The negative outlook reflects the increasing risk to demand passenger air travel as the coronavirus expands globally,” said Moody’s senior analyst Jonathan Root.

In an interview with Bloomberg, Moody’s Jonathan Root explained that the airline industry’s outlook had been stable for “quite some time”, and that the coronavirus pandemic was “too great to maintain that position”. Last time Moody’s downgraded the airline industry was in 2008, when the agency was concerned with the significant liquidity risks faced by airlines.
“The uncertainty and the speed of the outbreak will pressure airlines’ operating profits and cash generation for at least the first half of 2020. We expect further capacity reductions as the number of infected people and affected countries grow,” said Jonathan Root in the report. 

Prior to the coronavirus outbreak, Moody’s anticipated the operating margin for the airlines it rates to be at at 9%. It now sees it below 5% for year 2020.

At this time, it is difficult to predict how long the coronavirus pandemic will last, what the scale of the infection rate will be and how much demand will be affected throughout the rest of the year. However, Moody’s expects the impact of the coronavirus crisis to be felt mostly in the first-half of 2020.

 

 

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