The Covid 19 outbreak has strained global
airlines to the brink, and in the
United States, major carriers are scrambling
to react to the unfolding
pandemic. We've seen a dramatic drop
in demand that really the industry
hasn't seen since 9/11.
The next few months will be ugly for
the travel industry in terms of both
demand and their
financial performance.
The initial coronavirus outbreak caused a
massive drop in air travel inside
of China between
January and February.
As the virus has spread, both
vacationers and business travelers have curb
ed their plans. And on March
11th, 2020, President Trump announced that
travel from parts of
Europe to the U.S.
would be halted for 30 days, which
later expanded to include Ireland and
the UK. Airlines around the world scrambled
to find a way to survive
without passengers.
There have been discussions about whether
to tell people not to fly.
It's the worst crisis to hit the
air travel industry since the 9/11 terror
attacks. Delta Airlines has cut
its capacity by 70 percent.
United Airlines has cut 65 percent
of its capacity and American Airlines
has cut 50 percent of its capacity.
When an airline says they're going
to cut capacity, that means they're
going to cancel some flights.
And that could be canceling frequencies in
a route that has lots of
frequencies in it. Or it could
mean stopping flying between two cities
they've been flying before.
Airlines talk about capacity as the number
of seats they have in the air
at any time or really the number of
seats they have out for sale at any
time. Internationally Norwegian, SAS and
Lufthansa have suspended most of
their operations and more cutbacks
are expected from other airlines.
That demand picture is
worse than after 9/11.
And we have no visibility as to
when things are going to recover.
On the range of possibility, sure, there
is a scenario where a couple of
months from now, maybe coronavirus isn't
eradicated, but things are more
stable and health authorities are changing
their advice that people are
willing to get back on airplanes.
But you know that at this point
is the most optimistic estimate scenario,
months of disruption.
The U.S. Senate just reached a deal
on a massive two trillion dollar relief
package to help with industries and
individuals hit by the coronavirus
pandemic. The airlines wanted $50 billion
from the package, and the exact
details on what ended up
in the deal remained vague.
What we do know now, is that airlines
won't be able to buy back stock or
handout bonuses to CEOs as part of the
deal, and they won't need to pay
back the direct cash
grants they receive.
Though the government will
take an equity share.
The airlines must also agree to refrain
from layoffs until later in 2020.
Airlines run on tough margins in regional
start ups go under every year.
It is easy to see why
the Covid 19 outbreak concerns airlines.
In 2019 alone, twenty three airlines
closed shop, including WoW Airlines
and Thomas Cook. And that's
before the coronavirus pandemic.
And in 2020, Alaska Airlines said it
has seen two hundred sixty five
thousand fewer bookings for
March than in 2019.
The impact airline travel in
China was rapid and vast.
Flights dropped by more than 80
percent, according to the Civil Aviation
Administration of China. The onset
of quarantines inside China starting
and move on grounded
hundreds of airliners.
In 2016, 20 million travelers
use the Wuhan International Airport.
And Beijing, where an eleven point four
billion dollar state of the art
airport was just opened, ranks as the
second busiest city for air travel
in the world. Even in areas
not quarantined by the Chinese government.
Citizens were reluctant to travel.
Disease spreads when people are stuck
in close proximity to each other,
something airlines are infamous for.
As the Covid 19 outbreak spread
in the United States, planes began
traveling with near empty cabins
as passengers canceled their flights.
People were told to limit their
activities and embrace social distancing.
That's not so easy at 30000 feet.
Administration officials even recommended that
those at the highest risk,
such as the elderly or those with
underlying health problems, not fly at
all. All those flights being grounded has
a ripple effect on the industry.
The challenge for everybody is nobody knows
when this virus is going to be
addressed, when it will start to
abate, when people will feel more
confident about flying, and importantly,
when business travelers will
return to the skies.
This isn't the first major disruption
the airline industry has faced after
the 9/11 terrorist attacks.
Aircraft were grounded throughout the United
States and no flights were
allowed in or out of the country.
Besides the immediate concern over
stranded passengers, airlines took a
massive financial hit.
It took a $15 billion bailout from
Congress to keep major airlines afloat.
Another recent disaster for the airline
industry was the eruption of the
Island Mountain Glacier volcano in
Iceland when the volcano erupted.
A massive plume of ash was released
into the atmosphere, making the most
efficient air routes between
Europe and America unusable.
The incident cascaded and slowed down
global routes as aircraft and
passengers were stranded or redirected
to much longer routes.
The 2008 recession also caused a slowdown
in air travel, one of the
industry's most lucrative clientele, business
travelers dropped to all
time lows. During 2008, the U.S.
airline industry lost just more
than five billion dollars.
To put it into context, after 9/11, in
2002, the industry had a big, lost
one and a half percent.
In other words, air travel was
down one and a half percent.
That was pretty tough.
The Great Recession. We
lost about 1 percent.
This year, we could lose 10.
Airlines are more than just a way to get
from point A to point B, they are
a point of national pride.
In previous economic slowdowns, governments
around the world have stepped
in to prevent national
carriers from going under.
The last time the government
rescued airlines following 9/11, the
government actually made
money on that.
It basically got to get a stake in
these airlines and sold its stake years
later at about a 300 million dollar
profit similar to the auto maker
bailout. Besides getting bailouts and
economic stimulus, airlines also
take their own actions
to survive sudden downturns.
They cut routes such as daily shuttle
flights between cities and also long
haul flights with
high overhead costs.
When you're in trouble, the first order
of business is fly the airplane.
Make sure you know how much fuel you
have, where you are, where are you
going, that your wings
are straight and level.
And that's kind of where
the industry is right now.
Okay. Where are we?
What do we need to do? And what
that means is they need to preserve cash,
as much cash as they can, which
means they're canceling flights that would
likely lose cash, but continuing to
fly flights that are generating cash.
Some airlines have already grounded large
portions of their aircraft and
laid off staff in hopes of
resuming operations after the pandemic has
subsided. Airports and all the workers who
make the day to day operations
runs will also be
affected by the slowdown.
And aircraft manufacturers like Boeing
are looking for federal help.
Boeing was fortunate to be able to
get through one major crisis that might
have killed a lot of other customers.
That, of course, the grounding
of the Boeing max.
Who's too big to fail?
The candidates for that, a wider swath
of the economy than it would have
previously been. But the arguments Boeing
would make is, look, Boeing is
America's biggest exporter.
There's no other company that exports more
to the world than Boeing does.
It employs, of course,
a lot of people.
And yeah, it's a producer of goods
that are key to national security.
No question about that.
Again, a lot of other
people certainly be in line.
A lot of other people,
Companies, for government aid.
The potential bailout is already facing
some serious push back from
lawmakers. United Airlines just announcing that
they will lose money in
the first quarter, not make money.
And Boeing is suspending its operations,
production operations up in the
Puget Sound area. In normal pre-pandemic
times, Boeing might have been a
sure thing for a government bailout,
but there are several other
industries and sectors lining up for
government assistance because of the
coronavirus. The financial outlook for
airlines just took a nosedive.
And while the pandemic ranks as
the biggest disruption in aviation
history, it perhaps hit at
an advantageous time for carriers.
9/11 happened on a Tuesday.
By that Saturday.
U.S. airlines were laying off tens
of thousands employees of employees
over continental labor.
Part of United, what, first, 12000
layoffs, 20 percent of its workforce.
And within a few weeks, 75000 U.S.
airline jobs were gone this time.
Weeks into the crisis, U.S.
airlines, the major ones, anyway, still
hadn't laid off their their first
person. Even though the capacity cuts this
time have been far greater, the
golden age of air travel has
left airlines with full coffers, especially
American based companies.
The liquid assets of the major airlines
and most of the regional players
are in good shape. And unlike
after the 9/11 terrorist attacks, there
probably won't be a need for
massive reorganizations of the major
airlines. I don't think of it
exactly like 9/11, however, because after
9/11, the industry was forced to
restructure in some really dramatic ways.
Several airlines went
into bankruptcy protection.
Airlines closed hubs that didn't
make much sense after 9/11.
There were big changes for
customers in terms of security.
And on the airplane, the door to
the cockpit and the procedures on the
airplane. I don't see those kinds of
changes coming with this, at least
not yet. Mechanics, suppliers and pilots
for the most part aren't getting
laid off in mass as of yet.
And those that are hopefully
only being laid off temporarily.
It is expected that there will be
a need for them shortly after the
pandemic subsides.
The problem with the pandemic is that
no one really knows how long this
could go on.
For U.S. airlines, look if you could assure
them that this is going to be a
two or a three month issue, I don't
even know that they would be wanting
government aid and taking some of
the strings attached to that.
Most of these U.S. airlines would be
positioned to get through a months
long disruption. The problem is they just
don't know how long it's going
to go on and to keep employing
people, paying people basically to stay
home indefinitely.
They would quickly run out of money.
That's a key difference between
this crisis and 9/11.
Airlines are well positioned in the
short term compared to previous
downturns. However, the requests for
stimulus from the government
indicates the industry is worried about
how long this will last.
Airlines thought they were
prepared for anything.
And it turns out they were
prepared for anything except this.
