The Chinese Version of this article is published on carnoc.com, check out the URL or more information!The Darkest Moment Has Come
The aviation industry is strongly influenced as the Pandemic spreads worldwide. Can airlines walk through this situation? According to International Air Transport Association (IATA)’s “Updated Impacted Assessment” published Mar.24th on its website, some trends are clearly shown:
1. The Pandemic is far more severe than IATA once speculate. Airlines can’t survive solely, without governments’ help.
2. Attributed to effective measures on controlling, Chinese domestic market increases YoY, for the first time of the year.
Much more severe than once speculate
IATA has published 3 reports on this topic on Feb.20, Mar.5, and Mar.23. In Feb.20 report, IATA runs a simulation based on 2003 SARS’s situation. According to that, RPK falls only for two months, and a high increment, and fully recover in the seventh month. According to that model, there will be a 13% RPK loss YoY in Asian Pacific. Globally speaking, the loss would be 4.7% YoY with a 29 billion revenue loss.
In Mar.5 report, due to the increasing importance of Chinese Market, IATA amends its model and admit the previous one is too optimistic. The new speculation based on two models “Limited Spread” and “Wide Spread.” In the “Limited Spread” model, IATA considers the impact only on countries that have 100+ confirmed cases. How countries deal with the pandemic is similar to China or Singapore, and the market confidence is adjusted. There will be no change in yields in the model, which means the profitability maintains. In this situation, IATA estimates a 63 Billion and 11% loss YoY, 2.3 times severe than its Feb.20th speculation.
In “Wide Spread” model, IATA considers countries that have 10 or more confirmed cases will be influenced, and a loss in confidence in nearby countries. According to that, there will be 113 Billion and 19% YoY loss, 4 times more severe than initial speculation. Although the variable cost is lowered due to a steep decline in oil price, but in investment market, the Pandemic brings more negative thoughts than 2003 SARS, for a-25%-more decline.
Although the estimation in Mar.5 is already very low, in Mar.24 report, IATA claims “The situation is more severe than ‘Wide Spread’ model.” The Pandemic causes more impact in Europe and America. In Mar.5th, there’s only 10-100 confirmed cases in Britain and America, but after that, the number skyrocketed and import cases back to Asia, causing a higher-than-ever confidence loss. In financial market, America embarks its QC in unlimited time scale. Other countries use fiscal and monetary policies to stimulate economy, but with little result. The world economics is forecasted to get into recession, which further lower the demand.
In Mar.24report, travelling restrictions are taken into consideration, as the graph below shown. Running a simulation based on current airlines’ policy, IATA adjusts the loss to 38%, 252 Billion YoY. Viewing from the grand picture, the capacity will decrease sharply in the second quarter, The Pandemic will over in the fourth quarter with only 10% decrease then. Viewing from region, European carriers burdens a 90% capacity decline YoY, which cut the cash flow directly
Same pattern is observed in other regions. The
positive estimation of recovery is 7 months after outbreak, which means July,
2020. But according to airline’s balance sheet, they can overcome with own cash
flow for only two months. If on their own, due to the cut of flights, airlines can’t
get much cash. Except a very small number of them, most airline will face cash
flow shortage four month after the outbreak, which is mortal in the industry.
Fast Recovery of Chinese Domestic Market
According to IATA’s report, the turning point for Chinese domestic market has come. For the first two weeks in March, passenger yields in Chinese domestic shows increment YoY. This is the first time of this year, which definitely shows some positive sides. In Mar.26th, Hubei province ended its blockage, and three airports in province re-opened. Attributed to the effective management and strict implement, the Pandemic in China is under preliminary control, whose impact is on steady decline.
1. Pearce, Brain. (2020. Feb.20th). Initial impact assessment of the novel Coronavirus. IATA Economics.
2. Pearce, Brain. (2020. Mar.5th). Updated impact assessment of the novel Coronavirus. IATA Economics.
3. Pearce, Brain. (2020. Mar. 24th). Updated Impact Assessment. IATA Economics.