Airline Industry Stemming for Revival after COVID-19 Disruptions

  • May 25, 2020 AEST
  • Team Kalkine
Airline Industry Stemming for Revival after COVID-19 Disruptions
  • Travel and tourism contributed more than 10% to the Australian economy in 2019, as per WTTC; however, lockdowns and travel restrictions arising from the virus spread severely impacted the industry in first half of 2020.
  • Revival of the travel and tourism industry depends on consumer behaviour, especially when international travel restrictions continue to be in place, keeping in mind that key to expected growth is domestic travel
  • Domestic air passenger demand revival expected, as states and territories lift restrictions on interstate movements.

 

Airline industry is one of the worst-hit industries due to COVID-19. Investors in the airline space are stuck between a rock and a hard place. Most of the travel bloggers and alike have placed their travel plans in abeyance.

Some may still have concerns in taking a flight, should there be more health-conscious people. At the same time, Virgin Australia Holdings Limited (ASX:VAH) has entered administration and working on rejuvenation plans.

As per the World Travel & Tourism Corporation (WTTC), travel and tourism contributed 10.8% to the total economy in 2019, which grew by 0.8%. It also supported 12.8% of the total employment in the country.

Also, incoming international travellers to Australia spent $31.6 billion in 2019. Majority of international arrivals were from New Zealand, China, United States, United Kingdom and Singapore.

But airline industry has been facing massive contraction…

In its March Air Passenger Market Analysis, the International Air Transport Association (IATA) noted a fall of 52.9% in industry wide revenue passenger kilometres. Global passenger volumes returned to levels seen in 2006, on a seasonally adjusted basis.

 

Source: IATA

 

Except for the resumption of China’s domestic market, the global airline markets were impacted by the virus spread in March with lockdowns and travel restrictions. IATA believes that even after lockdowns and travel restrictions are lifted, customers would be unwilling to travel initially.

April survey conducted by the body suggested that approximately 30% of the respondents would wait for six months before travelling by air, and around 10% answered that they would delay air travel by a year.

Industry-wide available seat kilometres, which is a proxy for capacity, were down by 36.2% over the previous year in March. All regions recorded falls in the capacity with the largest being Asia at 44.4%.

April Business Confidence reflects softness…

In the latest survey of airline CFOs and Heads of Cargo, most of the respondents (above 80%) have experienced profit declines in Q1, reflecting the largest share of respondents reckoning falling profits since October 2009.

Around 7% of the survey-takers saw their profits improve in Q1, which is the lowest since the survey was started. Almost all of the respondents (97%) acknowledged deteriorating conditions and no upside in profits over the next twelve months.

 

Source: IATA

 

During April, it was noted that 84% of the businesses experienced fall in passenger volumes, and around the same proportion of respondents believed that demand will continue to deteriorate over the next twelve months. Also, some respondents were sceptical of the recovery in passenger volumes over the 12 months even if there is earlier-than-expected recovery.

Close to 13% of survey-takers acknowledged an improving cargo demand in Q1 – being the lowest proportion since October 2009. Moreover, approximately two-third of respondents expect air cargo demand to fall over the coming year. But around one-third of respondents believed that cargo demand will likely increase, meaning that cargo would recover faster than passenger traffic.

Around 80% of the respondents are expecting to lower staff over the next twelve months, which is the largest proportion in the history of the survey. They commented that there is a greater need to reduce cost levels in an effort to successfully make to the other side of the crisis.

Also, 50% of the survey-takers reported lower input costs over the past three months, and very lower numbers of respondents noted an increase in costs. These lower costs were majorly due to lower fuel, cost reductions, etc. But some said fixed costs remained same translating to higher unit costs.

Around 73% of the respondents acknowledged that passenger yields will move down in the next twelve months. They also said recovery in passenger demand will be slow and price discounts would be used to attract more passengers. However, some also say that social distancing measures may induce them increase the prices.

Of the total respondents, 42% said there will be increase in cargo yields and 13% expected a fall, primarily due to strong demand and no belly-hold cargo. However, around half of the survey-takers pointed to weak outlook for the next twelve months. 

 

Source: IATA

 

Respondents also said that they have been significantly impacted by disruptions cause by the COVID-19 outbreak, but there has been a lesser impact on the cargo side. Around 20% of the survey takers said that fall in the bookings was between 40% and 80%, while 20% highlighted that they experienced significant contraction.

Only 10% of the airlines unveiled to have reduced workforce size permanently. Management teams have quickly adopted cost reductions and lowered capacity. 57% of the respondents expect recovery in the next six to twelve months, but around 25% believe that it may take a few years.

Related: Coronavirus outbreak: Can the Airline Industry regain the vigour?

Is social distancing viable for Australian airlines…

Tourism will play a critical part in the recovery of the Australian economy. Since the international travel market is likely to remain muted over the near term, domestic travel could provide breather for the travel and leisure industry.

Tourism is bread and butter for many Australians and stakes are high. If international tourism can’t be back to normal early, it is important that domestic tourism should pick-up for a better recovery.

Across the Tasman Sea, New Zealanders come to Australia in large number and there should be clarity when the trans-Tasman travel could return back to life even if not with normal traffic.

International travel restrictions will continue to hurt the economy – starting with depleted air traffic impacting airlines – to the ripple effects of a lower number of incoming international passengers, who could be arriving for business, travel, etc.

At the same time, it is important that Australians who want to holiday shall look for domestic options amid this pandemic. A revival of the travel and tourism industry also depends on consumer behaviour, especially when international travel restrictions still apply.

However, domestic travel could not return close to normal levels when interstate travel restrictions still apply.

Media reports note that Qantas Airways Limited (ASX: QAN) would use staged boarding of passengers and provide masks as well. But the airline could not leave the seats empty as would be impractical for the business.

Qantas intends to maintain high levels of hygiene to ensure that virus transmission is minimised. It is looking to restart domestic passenger flights as inter-state travel restrictions come to an end.

As airlines are already under immense pressure due to COVID-19, social distancing measures in airlines will leave more dents to the cashflows for domestic flights. It may force airlines to increase prices to recoup the losses suffered by keeping seats empty.

With the airline industry already in recession, empty seats may not be constructive. However, as states and territories lift restrictions on interstate movements, there is likely to be a revival in air passenger demand. Interstate people movement will also allow Australians to have a vacation/business trips within the country, as international travel restrictions continue to be in place.

(All currencies in AUD unless or otherwise stated)

 


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