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Major British Airline group companies -British Airways, Virgin Atlantic, Norwegian and Ryanair have now approached the British government for a rescue package to help them navigate through the current harrowing industry trading environment, induced by the coronavirus pandemic. This desperate move by the airline companies comes in the aftermath of the United States, putting a restriction on passengers coming from the United Kingdom and Ireland from entering its territory due to the threat of transmission of the virus. Earlier, in the previous week, the United States had barred entry of citizens of European Union countries from entry excepting for British citizens, which has now been withdrawn.
A fortnight earlier, the International Air Transport Association (IATA) had warned that the global airline industry could lose as much as $113 billion in passenger revenues, on account of the outbreak of the coronavirus epidemic. The association had estimated that the European markets of Austria, France, Italy, Germany, Netherlands, Norway, Spain, Switzerland, Sweden and the United Kingdom would be the hardest hit, losing as much as 24 per cent of the registered passenger base, resulting in a $37.3 billion loss in revenues. Since then, the situation has deteriorated dramatically in Europe. The continent has now been declared as the new epicentre of the pandemic. Italy is the most affected country in Europe reporting as much as 24,747 cases out of which 1,809 deaths have been reported; Spain has reported 9,191 cases out of which 309 have been reported dead; France has reported 5,423 positive cases out of which 127 have succumbed to the infection while in the United Kingdom 1,391 positive cases have been reported till now out of which 35 patients have now been confirmed dead. The very frequent movement of people from one country to another through air travel as a medium is being held responsible for such rapid spread of the virus in the European continent.
The airline industry in the United Kingdom and in other parts of Europe was not on a strong footing as it started the year 2020. The industry had been marred by overcapacity and slow down for more than a year and the crisis of the Boeing 737 MAX model being grounded for months together has severely brought down the capacity utilization factor in the industry. However, this was not the case in the last few weeks of 2019; improving economic conditions in Europe, China and the United States brought new hope for the industry, which was recovering from cyclical and non-cyclical factors related to the slowdown. Though some concerns still remained, green shoots of recovery were visible in all of these geographies in the first few days of 2020. This untimely outbreak of the pandemic, however, changed all that and pulled back the world economy towards a slowdown, which it was in a few months earlier. For the airline industry at least, the pandemic was a major blow.
Major airline companies in the United Kingdom, as well as other European countries, had issued profit warnings in the recent past on account of the outbreak, which has been declared as a pandemic by the WHO. London Stock Exchange-listed IAG Plc, the largest airline consortium in Europe and the owner of British Airways, Iberia and Aer Lingus did not provide any guidance for the year 2020, while for previous years it had generally issued earnings forecasts by this time of the year. Another Low-cost British airline operator EasyJet Plc reported a significant drop in demand from its European operations, especially those going in and coming out of northern Italy. Finland's national airlines Finnair, in a rare move, withdrew its 2020 capacity growth projections while warning of a significant drop in its operating profits for the year. The airline also warned that cost-cutting measures, including temporary laying off of staff, are also under consideration to fight the slowdown in demand. Irish Airline company Ryanair also issued revenue warning and highlighted that its first-quarter earnings could see a meaningful impact because of the pandemic and that the company is expecting a drop on 10 per cent in its bookings in the months of April and May 2020. The biggest causality of this epidemic, however, was in Europe. One of the largest British regional Airline companies, Flybe fell into administration on 4 March 2020, after it was unable to persuade the British government for a grant to sustain with its operations while its revenues continued to slide amidst the scare of the epidemic.
The global airline industry had been on a rough patch for the last couple of years with several airline companies shutting shop around the world due to financial distress. The Pre-Brexit headwinds across Europe and the US-China trade war situation had been having a significant impact on the world economic outlook leading to a drop in demand as well as an increase in aviation fuel prices. While the above two factors led to the squeezing of margins for the airline companies, what affected the most was the intense competition initiated by the low-cost airline companies the world over. These companies not only ate into the market share of large airline companies but would most often initiate mutually destructive aggressive marketing strategies. The effect: a number of airlines have shut shop in the United Kingdom and the rest of Europe in the last two years namely, Monarch Airlines in 2017, Flybmi in 2019, Thomas Cook airlines in 2019 with the latest one being Flybe, which fell into administration on 4 March 2020.
IATA in its forecasts in the first week of March 2020 had predicted that a marginally positive impact on the bottom-line of the airline industry would result due to the falling crude oil prices. It had projected that the industry would be able to save as much as $28 billion in fuel costs during the year without considering individual fuel-saving measures taken by the airline companies. Since then the crude oil prices have fallen by almost two-thirds of their value compared to where they were trading at the beginning of March 2020. Currently, the only hope the industry has is with the healthcare authorities who need to contain the spread of the virus as soon as possible. Losses are inevitable across the industry for the first quarter of 2020; gradual recovery can be expected from the second quarter onwards. The recovery in the rest of the world economy, however, will be the determining factor that will bring back airline passengers.
The government in its budget presented on 11th of this month had allocated as much as £30 billion in stimulus to fight the massive disruptions business disruptions taking place in the country due to the coronavirus pandemic. It is highly likely that some of these funds could find their way into the airline industry. Though time will tell if the situation will improve or deteriorate in the coming months; the industry could see a massive realignment during the next few years in the form of M&A deals and a significant number of smaller players going into bankruptcy.
