Corona crisis – The impact of Covid-19 on the aviation sector

On January 24, IATA (International Air Transport Association), released the IATA Economics’ Chart of the Week, focusing on the impact of the Corona crisis. Expectations (hopes) were the international airline industry would be resilient: the 2003 SARS crisis had a major impact on Asian traffic volumes, but traffic volumes recovered quite soon. “At the peak of the outbreak, monthly revenue passenger kilometers were 35% lower than pre-crisis levels” (IATA, 2020). However, after about 3 months, traffic flows started to increase again, and the yearly loss in revenue passenger kilometers was about 8%, amounting to US$ 6 billion in revenue losses (IATA, 2020). The MERS crisis from 2015 had much smaller impact on global transport flows.

Giant impact

The Corona crisis will have a much bigger impact than the SARS crisis. Now that the number of infected seems to be decreasing in China, other countries are hit hard, with various cities, countries and even continents referred to as the epicentres: it is a true global crisis. And this is why this crisis will hit the aviation industry so hard. After the SARS virus, passenger numbers for East Asian airlines were on the rise again after about three months. In the current crisis, passenger numbers for global airlines will remain low for much longer for two reasons. First and foremost, countries keep their borders closed for flights from infected countries out of fear for (new) infections. And to contain the virus, this is necessary as long as there are “epicentres”. Second, in regions where the virus did not or will not spread (if these exist) or where the crisis seems to be over, passenger numbers will be low. The reason is that many destinations are served by airlines that are part of an international alliance: e.g. flights within China are filled with passengers from all over the world, transferring to their final destination at e.g. Beijing Capital International Airport. Even if China is recovering, its internal flights will see lower load factors. On a global scale: many airlines, big and small, will face very low load factors for months to come, and this causes an immediate cash flow problem. Aircraft ownership cost and staff cost are, to a large extent, fixed, while revenues are extremely low. As a result, all airlines are in troubles, and proposed national rescue packages (nationalization, cash transfers, delays in tax payments or governments paying salaries) will help some of airlines to survive, but other (smaller) airlines will disappear. And because these failed airlines may alliance partner to other airlines, the surviving airlines loose passengers and value.

Which airlines will disappear? I left my crystal ball at VU, but like in every crisis, some airlines will go bankrupt. Flybe was the first, it was in financial trouble already (like other airlines), and the Corona virus was the final push.

What good this crisis can bring

Is there something positive to this crisis? Aircraft burning the most fuel per passenger kilometer were the first to be grounded, and it is likely they will remain grounded. Surviving airlines most likely cannot start flying again with the schedule from early January: it first needs to sell tickets. And most likely they start flying to the destinations that bring in most revenues, adding destinations to the network if revenues from these destinations allow this. This can be an indication for airlines, alliances, airports and (local) governments which destinations matter the most to the airport-airline combination and local economy. For researchers (and airlines as well) interesting questions are: should we go back to the networks we had before the crisis, or can we make the network more resilient to the effects of local or global crises, including the environmental crisis we are heading to/in?

Reference: IATA (2020) What we can learn from past pandemic episodes.

Eric Pels
April 2020

 

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