Aviation doom deepens as investors embrace realistic facts

Airline Industry has been hit hard by the COVID-19 crisis, probably the hardest indeed. While human beings are staying at homes, birds are chirping outside, dolphins are returning to coasts, wildlife has best times, and the earth is healing.

China has reported the largest increase in new cases since March, triggering fears of a second wave. Its National Health Commission noted that new cases were imported from other countries, and Chinese cities near the border are tightening border controls as well as a quarantine for arrivals.

A possibility of the second wave might be raising concerns for additional travel restrictions, which doesn’t bode well for the travel industry, including the mobiliser – Airlines. With oil prices so low, it has been a breather for airlines, but when no one is flying that doesn’t do any good.

Meanwhile in the US, the Governors of some states have agreed to lift the measures as virus spread is contained to a sustainable extent. President Trump has been eager to reopen the economy as the extent of the shutdowns would impact the magnitude of economic damage to the US economy.

The ramifications of bankruptcy could be far reaching, including the loss of jobs, haircuts for bond holders and financiers, loss for creditors, less competition, and the potential second-order impacts.

In Australia, the airlines industry is standstill with domestic services operating weekly while some cities have closed doors. However, once travel restrictions lifted within the country, a pickup in domestic travel demand could be expected.

Policymakers are likely to lift travel restrictions on domestic movement first, and later on the international travel. Later when domestic travel is up again, the Government may remove travel restrictions on countries that have controlled the virus spread.

Arrivals in Australia are still subject to a quarantine period of 14 days at a Government facility with strict surveillance by the police. Post the quarantine period, the arrivals are sent home, but with low domestic operations, it could be a problem for travellers.

Operating in routes with very less traffic may not be profitable for the airlines industry, with this cash crunch, the number of profitable routes for the airlines could be much lower than before. Meanwhile, there have been talks that the Government may subsidise some routes.

Earlier in March, the Government announced $715 million package for the airline industry, which removed a range of Government charges on the industry and it was applicable since 1 February 2020. However, this might not be enough for the airlines industry, given that some are running in troubled waters.

IATA expects a large fall in Airline revenues

An analysis by the International Air Transport Authority shows that airline passenger revenues would fall by USD 314 billion in 2020 when compared to 2019, meaning a decline of 55%.

Earlier, the body estimated that number could be USD 252 billion when the travel restriction is assumed for three months. And, the updated numbers incorporate the disruption in the domestic travel industry, some international travel restrictions beyond three months, and additional impact from nations that had lower virus spread earlier.

It notes that the full-year passenger demand would be lower by 48% against the previous year. The rationale behind this estimate is that the world is heading for recession, which would shrink the GDP by 6% in Q2, consequently a fall in passenger demand.

Second reason is that travel restrictions are impacting the passenger demand, and along with the recession, the passenger demand downturn is likely to be intensified additionally. IATA said that at the start of this month, the global flight carriage was down 80% against the previous year.

Further, the body expects that domestic passenger demand would return to normal initially followed by the international passenger demand that depends upon the policymakers’ response on travel restrictions across jurisdictions.

IATA said that policymakers must include aviation in the response packages, and the industry supports around 65.5 million jobs worldwide. It has asked Governments to provide tax reliefs, loans and direct financial support to the industry.

Virgin Australia & Qantas; the two domestic names

S&P Ratings downgraded Virgin Australia Holdings Limited (ASX:VAH) in late February. Since then, major rating agencies have degraded the outlook for the business as travel restrictions continued to halt the capacity for the airline operator, thereby leaving dents on the incoming cash flows.

By 25 March 2020, Virgin Australia’s domestic capacity was reduced by 90% while international flying was banned earlier by the Government. Around 80% of its workforce temporarily stood down.

Media has been widely reporting on the efforts of the Company to get cash from the Government, which is believed to be denied. Around 90% of the business is owned by foreign investors that include Virgin Group, Etihad Airways, Nanshan Group, Singapore Airlines, HNA Group.

Almost all of the business is owned by a foreign investor, which gives some hint why the Government has been reluctant to extend support for the cash-starved business.

At the end of last month, news emerged that Virgin Australia is looking for a $1.4 billion, which was a part of a broader package that the industry’s lobbyists have been asking for from the Government.

On 15 April 2020, media reported that the Company was considering voluntary administration as it would enable the business to force creditors to take haircuts among other measures.

On ASX, VAH remains suspended for trading since 9 April 2020.

Qantas Airways Limited (ASX:QAN) has also suffered a similar dent to cashflows as flights have been stranded due to the containment measures introduced by the policymakers. It has also deferred the payment of the last announced dividend to September 2020.

In March, Qantas secured an additional round of debt funding of $1.05 billion to maintain additional liquidity amid the COVID-19 crisis. It has taken additional debt against a fleet was aircraft that were brought in cash.

The fresh debt has a tenure of 10 years with a rate of interest of 2.75%. Post securing the funding, the cash balance of the Company stood at $2.95 billion and a further $1 billion in undrawn facilities.

As the global crisis is deepening day by day, the recovery for a global airline company like Qantas would be consistent with pick up in global passenger demand. At this juncture, it is quite clear that international business is likely to take time to return to normal levels.

Meanwhile, the domestic business could be in a better shape to recover from the crisis earlier as the conditions in Australia are getting better lately, while the debate is ongoing that the country might have crossed the peak of the virus infections.

On 16 April 2020, QAN was trading at $3.475, down by 2.113% (at AEST 2:15 PM).

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