The aviation industry has been significantly affected by the global outbreak. Can the airlines survive this crisis? According to IATA’s “Updated Impact Assessment,” published on its website on March 24, several conclusions can be reached:

1. The outbreak is expected to be more severe than IATA predicted in its previous report, and airlines may not be able to survive the outbreak on their own.
2. Attributed to effective anti-Coronavirus measures, China’s domestic market has recovered rapidly, showing year-on-year growth for the first time this year.

  1. The outbreak is worse than predicted, Airlines can’t survive on their own

In response to the outbreak, IATA issued three reports on 2.20, 3.5 and 3.24. On February 20th, IATA ran a simulation based on 2003 SARS’s situation. According to that, the model assumes that RPK (revenue per km) stops falling in the second month after the outbreak, and increase significantly in the upcoming month, and returns to its pre-outbreak level in the seventh month. Asia-pacific airlines will suffer a 13% loss in RPK in 2020. Globally, the airline industry will suffer a 4.7 percent year-on-year loss in passenger revenue of $29 billion. 

Source: IATA Economics using data from IATA Statistics 2020.2.20 

Source: IATA Economics

In a March 5 report, IATA revised its forecasts, claiming that because of China’s rapid economic growth, using previous SARS model would underestimate the impact of the outbreak. Hence, IATA presents two models for different situation: “limited spread” and “extensive spread”. In the “limited spread” model, IATA analyzed only countries with 100 or more confirmed cases will be affected. Countries deal with the same pattern as China or Singapore, and market expectations are set. For revenue estimates, the model assumes no change in profit rate. In that case, a $63 billion in lost passenger revenue worldwide is expected, an 11% drop then previous year and 2.3 times as severe as Feb.20th’s estimation.

“limited spread” model Source: IATA Economics

In the “extensive spread” model, IATA included countries with 10 or more confirmed cases in its analysis and assumed that countries would be affected by the outbreak in nearby countries, resulting in lower confidence, which has a positive correlation with the outbreak size. “Extensive spread” model predicts that the global airline industry will lose $113 billion, a 19% year-on-year drop, more than four times the original estimate. Although the fall in oil prices has reduced the variable costs of airline operations, in the investment market the impact of the outbreak was 25% greater than that of SARS in 2003.

 “Extensively distributed” model Source: IATA Economics

Although IATA’s forecast for the airline industry this year was already low on March 5th, in a report on March 24th it noted that “the impact has now exceeded the predictions of the ‘extensive spread’ model”. The rapid spread of the disease in Europe and North America has had more serious consequences than the March 5 model predicted — the number of confirmed cases in the United States and the United Kingdom was between 10 and 100 on March 5, but has since increased drastically, thus reverting back to Asia, causing more loss of market confidence.

In financial markets, USA has announced the use of “quantitative easing” (QE) for an indefinite period, while other countries have adopted monetary and fiscal policies to stimulate their economies, but the effect is lower than expectation. The world economy is likely to enter a “recession”, which will also slow the recovery of the industry. In the March 24’s model, IATA took into account the measures now being taken by countries to restrict entry: enhanced screening, the need for health certificates, the quarantine of some passengers with suspected symptoms, restrictions on entry for some nationalities and border blockages for others. The IATA simulation, based on the current airline’s stated plan, predicts a 38% drop in RPK and a $252 billion loss in passenger revenue.

Overall, IATA forecasts that the Capacity of regional airlines was significantly affected in the second quarter, with each losing more than half of its Capacity compared with the same period a year earlier. By region, Europe lost 90% of its capacity in the second quarter compared with the same period last year, due to restrictions such as border blockades. The policy leaves no way for airlines to maintain their cash flow.

Source: IATA Economics

4According to IATA’s estimates, the impact of the outbreak on the airline industry will recover roughly seven months after the outbreak (starting with 2020.1), or optimistically in July. But based on the balance sheets provided by the airlines, we find that airlines on each continent hold on average only two months ‘worth of earnings. On its own, it will be difficult for airlines to generate cash flow due to the massive passive reduction in current capacity.

Source: IATA Economics using the Airline Analyst

2. China’s domestic market is recovering rapidly

According to the IATA report, the turning point in China’s domestic market has been reached, for the first time, the year-to-year revenue has increased. Today, the routes leaving Hubei province is fully open, Xiangyang, Enshi, Shennongjia three airports officially resume flights. With effective management and rigorous practice, the epidemic has been controlled to a certain extent in China, and its impact on the domestic market is gradually decreasing.

According to the IATA report, the turning point in China’s domestic market has been reached, for the first time, the year-to-year revenue has increased. Today, the routes leaving Hubei province is fully open, Xiangyang, Enshi, Shennongjia three airports officially resume flights. With effective management and rigorous practice, the epidemic has been controlled to a certain extent in China, and its impact on the domestic market is gradually decreasing.

Source: IATA Economics using DDS

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