The Airline Industry under Severe Threat due to the COVID-19 Outbreak

    LightCastle Analytics Wing
    LightCastle Analytics Wing

    The International Air Transport Association (IATA) released an analysis on April 14, 2020 showing that airline passenger revenues will spiral down by USD 314 billion in 2020, a 55 percent decline from 2019, due to the outbreak of COVID-19.[1] Passenger demand is expected to decline by 48 percent from 2019 in 2020 due to two following factors:[2]

    1. Deterioration of the overall economy: The economic shock of the pandemic is expected to be at its worst in the second quarter with the GDP shrinking by 6 percent whereas, at the height of the global financial crisis in 2009, the GDP shrank by 2 percent. The passenger demand of airlines closely follows GDP progression.[1] The reduced economic activity in the second quarter of 2020 is expected to cause an 8 percent fall in passenger demand during the third quarter.[1]
    2. Travel restrictions: Travel restrictions are worsening the impact of the recession on passenger demand. As of early April, 80 percent of the flights were down globally compared to 2019.[1] 

    According to IATA, airlines will require around USD 200 billion in bailouts to overcome the crisis.[3] Due to the lack of cash financing, many airlines will run out of cash before recovery arrives.

    FIGURE: Cash and equivalents coverage of revenues across different regions / Source: IATA Economics using the Airline Analyst

    Recovering this loss in revenue passenger kilometers (RPKs) will be tough for an industry that took over five years to profit after the 2001 terror attacks, 2008 financial crisis, and past outbreaks.[4] 

    FIGURE: Impact of past disease outbreaks on airline industry / Source: IATA Economics

    Although some of the aforementioned outbreaks followed a V-curve, the recovery of global GDP this time will be much delayed due to the economic recession. This delayed growth will, in turn, affect consumer demand in the airlines industry.

    FIGURE: Economic recession delaying the recovery / Source: Oxford Economics, March 2020

    25 Million Jobs at Risk Globally

    According to IATA, an estimated 25 million jobs are at risk due to the adverse impacts of COVID-19 on the airline industry.[5] Globally, from sectors such as travel and tourism, around 65.5 million people are dependent on the industry. 2.7 million of them are directly engaged with airline jobs.[5] According to the analysis, the number of endangered jobs in the airline industry across several regions stands at:

    Asia-Pacific11.2 million jobsEurope5.6 million jobs
    Latin America2.9 million jobsNorth America2.0 million jobs
    Africa2.0 million jobsMiddle East0.9 million jobs
    TABLE: Number of endangered jobs in different regions of the world due to COVID-19 / Source: International Air Transport Authority (IATA)

    Airlines in Danger of Losing Brand Value

    Brand Finance, a UK-based strategy consultant, announced that the top 50 valuable international airline brands could lose up to 20 percent of their brand value which they valued at USD 22 billion.[4] An analysis of the ratio of cash and other short-term investments to revenue in 2019 shows that only 20 of the top 50 airlines in the world have enough cash to survive more than 60 days since the implementation of travel bans during mid-March . The brands that can survive more than this can do that due to factors such as strong position in the market, ability to tap into public and private markets to support the balance sheet.[4] For example, Qantas (ranked 15th in the world) has secured AUD 1.05 billion (USD .682 billion) in private debt funding. Other brands are trying to restore the consumers’ trust by easing the flight canceling experience amid the travel bans everywhere. Emirates, for example, is offering three options to customers affected by flight cancellations and travel restrictions viz; keeping tickets for 760 days; exchanging tickets with travel vouchers valid up to 2 years, and full refunds for vouchers and tickets that are unused.[6]

    Passenger Revenues of Bangladeshi Airlines at Risk

    Disruption in the aviation industry of Bangladesh has, in a chain reaction, affected other sectors like tourism, labor market, readymade garments, and the job market. According to the Bangladesh Civil Aviation Authority, most of the passenger flights on domestic and international routes, except the special cargo flights, have been suspended. Under these circumstances, the airlines are struggling with maintaining management costs, aviation charges, and payments of installments for the aircraft.[7]

    FIGURE: Effects of the COVID-19 pandemic on the aviation industry / Source: The Business Standard

    Biman Bangladesh Airlines

    International travel bans have directly impacted the airline business in Bangladesh, causing extreme financial pressure for the companies. Biman Bangladesh Airlines reported losses of more than BDT 4 billion (USD 47.02 million) as of March.[8] The company had to cut 698 of its international and domestic flights in March.[8] Various operations and ventures of the company have been impacted by the outbreak in the following ways:

    • Although the company was planning on a country-wide route expansion, the current scenario has compelled them to retreat from that and focus on cutting costs down by limiting business and investments. So far they have implemented a 10-percent salary cut and slashed nine other benefits and allowances to minimize operational costs.[8]
    • Their decisions to start flights to Guangzhou, Chennai, Sharjah, and Bahrain have been postponed indefinitely.[1][7] 
    • The carrier saw a capacity loss of 46 percent on its international routes. Currently, it is running charter flights on demand from several countries to evacuate their citizens from Bangladesh.[8]

    Biman took loans from multiple banks that currently amounts to BDT 100 billion crore (USD 1.18 billion) in order to include 10 new aircraft in its fleet.[8] The newly purchased aircraft were supposed to help the company reduce its operational costs. Instead of saving, the company has been incurring BDT 6.28 billion in various cost components every month despite no income.[8]

    The company has recently sought BDT 15 billion (USD 176.34 million) as working capital from Sonali Bank under the stimulus package for affected industries announced by the government. Under the guidelines by Bangladesh Bank, Biman can avail a maximum of BDT 4.5 billion from a single bank under the stimulus package.[8]

    US-Bangla Airlines

    The country’s largest private local airline has cut more than 60 percent of its international flights.[7] Due to this, they had to suffer a loss of BDT 250-300 million (USD 29.40-35.27 million) on average in January and February of 2020.[7] 

    • Besides canceling its route expansion plan to Delhi and Chennai, the carrier decided to limit its international routes to four from its existing eight.    
    • The business has decreased in domestic flights too. The total number of passengers of US-Bangla went down by 25-30 percent due to the outbreak of the coronavirus.[7] The company is now taking measures to limit its other expenses and stop capital investment. If the situation does not improve with time, the carrier will have to start laying off its employees.[7] 

    Foreign Workers in Bangladesh Face Uncertainty

    Flight cancellations have posed a serious threat to the inflow of remittance which went through a downward spiral in the first 2 months of 2020. The outbreak has worsened the manpower export of Bangladesh, which was already suffering from the global financial crisis and falling oil price. Biman Bangladesh, carrier of about 40 percent of total passengers to Middle Eastern countries, grounded its flights to Kuwait and Qatar.[7] These Middle Eastern countries contribute to more than 65 percent of remittance inflow to Bangladesh.[7] The number of flights has also decreased in the Gulf region, which happens to be the hub of the labor market for Bangladesh.[1] Several workers, currently in Bangladesh on vacation, are uncertain about their work and future due to the travel bans.    

    Re-booting the Industry

    • While the industry recovers, the trade body representing airlines like Lufthansa and British Airways is expecting the domestic markets to reopen first, as has been the case in China, followed by international routes. This means that a properly planned return of international flights will be tough for the airline finances because a lion’s share of their revenue depends on international routes.
    • The unilaterally implemented bans have to be lifted by the nations jointly. Hence, IATA is planning on arranging regional meetings to formulate ‘restart plans’ for the industry globally.[2] The international body is pursuing a plan in 3 stages to boost consumer confidence, restore the trust of the governments, and gain approval from health authorities.
    • With most governments stretching their resources to the limit, they have to consider sector-wise losses before providing necessary support to an industry.[5] The companies currently need support from the government to reduce charges on the operations and lower interest rates of running capital along with loan rescheduling facilities. 
    • Bangladesh bank has already issued a guideline for loan distribution under the stimulus package of BDT 300 billion (USD 3.53 billion). The guideline will let industries, already having loans with banks, get a maximum 30 percent of the existing approved loan limit. The lending rate, in this case, will be 9 percent and 4.5 percent of it will be subsidized by the government.[8]  

    Ultimately, recovery after the pandemic depends on how long it lasts. As more parts of the world are getting affected by the virus every day, it seems that the airlines industry, both local and international, is in it for the long haul.

    Saim Ahmed Shifat, Content Writer at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected]

    The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series.

    References

    LightCastle Analytics Wing

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.