Airlines struggle to handle coronavirus issues

Several major airlines’ finance departments are struggling to handle a lack of cash flow as coronavirus (COVID-19) continues to evade containment around the world.

Fuelled by rising oil prices and hysteria, airlines are feeling the brunt of the outbreak, reminiscent of 2009’s H1N1 ‘swine flu’ pandemic, which lost airlines billions of pounds.

“The coronavirus has now spread to 84 countries/regions around the world,” said Bjarne Schieldrop, chief commodities analyst at SEB, via email. “The real impact on the global economy and the global oil market is huge.”

In just three months, coronavirus has taken a massive toll on the economy. The Asian Development Bank estimated the coronavirus will have an estimated impact of between $77bn (£59.3bn) to $347bn (£265.6bn) on the global economy, causing an economic slump – if not triggering a recession.

Regional airline Flybe was hit particularly hard by these economic fluctuations, collapsing into administration on March 3 despite assistance from the UK government.

While coronavirus was not the only cause for Flybe’s fall, flights have been disrupted across the globe as the virus quickly spread.

Numerous other airlines have been impacted, with the International Air Transport Association (IATA) estimating that passenger airlines, in particular, could see a fall in revenue to the tune of £87bn ($113bn). That revenue loss is nearly four times the IATA’s estimate just 13 days prior.

According to John Strickland, director at JLS Consultancy, major airline groups like the parent group of British Airways and Aer Lingus, IAG, may have the cash resources to cope with difficult economic times.

However, IAG has announced that its earnings forecast would be impacted by the spread of coronavirus, implicating that smaller airlines will face additional financial hardship.

“The airline industry is fragile, generally—in terms of financial status, it’s a high capital and a high labour cost industry,” Strickland says. “Many external volatilities can affect it day-to-day.”

Sign of the times

It’s been speculated that the virus’ impact on the economy will be worse than either H1N1 or SARS was. However, several airlines have been cutting their losses from the start, curbing some of the effect.

Several international airlines have offered their staff unpaid leave to help mitigate losses, and Lufthansa and KLM have grounded hundreds of planes for the foreseeable future, leaving a hole in their potential earnings.

Lufthansa has said in a press release that, “It is not yet possible to estimate the financial impact of the current developments,” said Lufthansa, in a press release. The German airline said it will continue to reduce its project volume and budget.

According to CNN, SARS cost $7bn (£5.4bn) to airlines in 2003. When H1N1 spread in 2009, airlines reacted similarly to how they have so far, but the economy still took a $55bn (£42.3bn) hit, according to the Wall Street Journal.

“Airlines have gone through recessions before, and often in these extreme conditions, airlines fall by the wayside because of its challenge with financial conditions,” Strickland explains. “It’s only the airlines that have really strong cash reserves who get through.

“Right now, this is a very bizarre situation—we don’t know exactly how long it’s going to go on, or to what scale.”

Strickland explained that the nature of the airline industry means that when times are difficult, they will often bleed cash—a major challenge for any finance department.

Given the current spread of the virus, European airlines may be hit harder than those operating in the North Atlantic market but that market may have an easier time rebounding from the virus, says Strickland.

“Times are tough for airlines, but a recession would make it harder,” he says. “The other side of that coin is that when conditions are hard, the tough airlines can often benefit at someone else’s expense—an airline failing or putting pressure to get another airline to the point of failure so that they can profit and consolidate the marketplace, which is an important point in aviation.”