(Bloomberg Businessweek) -- Globalization has been a boon for the airline industry, which has flourished as nations opened up to one another over the past 40 years. Now businesspeople and tourists can crisscross borders as easily as they travel close to home. Unfortunately, as the cascade of infections around the globe can attest, so can the coronavirus.
That frictionless movement has expanded the reach of the crisis to an unprecedented level. The lethal outbreak had been a multibillion-dollar headache largely for airlines in China and the rest of Asia until late February. Since then, the fear of flying has followed the virus westward, striking some of the biggest U.S. and European carriers. From Qantas and Cathay Pacific in Asia, to Lufthansa and Air France-KLM in Europe, to United and American in the U.S., airlines all share the common problem of virus-sapped bookings.
Amid the sudden plunge in global demand, commercial air traffic is poised to fall 8.9% this year, according to Jefferies Financial Group Inc. That would be the biggest decline in the 42 years of available data stretching back to 1978, dwarfing the impact of the Sept. 11 terrorist attacks. “The industry is facing its biggest challenge in modern aviation history,” says Yu Zhanfu, a partner at consulting firm Roland Berger in Beijing.
As government advisories, travel bans, quarantines, and growing worries about being confined at 30,000 feet for many hours seated next to a possible virus carrier drain customer demand, airlines are responding by making massive cuts along their routes. Lufthansa is cutting its schedule by as much as 50%. United chopped its April domestic schedule 10% and reduced international flying 20%. Delta will cut domestic capacity as much as 15% and its international flights 25%; American will decrease foreign flights by 10% in the peak summer season.
The virus has already claimed its first casualties in the industry. Flybe, Britain’s biggest domestic carrier, was under financial stress before the infections began spreading, and it finally collapsed on March 5 as demand dwindled. In China, government officials began taking charge of the parent of Hainan Airlines this month after it fell victim to the mass travel bans there.
Other governments are likely to step in as well. Deutsche Lufthansa AG is looking for support to avoid layoffs. And, without offering details, President Trump said on March 10 his administration will provide assistance to U.S. airlines as a result of the outbreak. “We’ll be helping them through this patch,” he said.
A global revenue loss of $113 billion in 2020—the International Air Transport Association’s most pessimistic forecast—would represent a 19% drop from 2019. Even the trade group’s best-case scenario assumes an 11% decline in passenger revenue, or $63 billion. That may be why airlines are swinging the ax so brutally. Australia’s Qantas Airways Ltd. on March 10 slashed about a quarter of its international schedule for the next six months, while Air France canceled 3,600 flights scheduled for March, reducing its European network 25%.
Nowhere are the industry’s challenges more apparent than in China, whose airlines will shoulder more than one-third of IATA’s projected hit to industrywide income. China, fed by an exploding middle class happy to splurge on domestic and overseas trips, had long been on track to supplant the U.S. as the world’s largest air travel market in the middle of this decade. Now local airlines have found themselves on the front line of the crisis.
Chinese airlines by February had cut 10.4 million seats from their domestic schedules, according to OAG Aviation Worldwide. Ticket bookings in the country for April are down almost 80% from a year earlier, IATA says. With fears about the spread of Covid-19 weighing on demand for the rest of the year at least, it’s inevitable that other Chinese airlines will fail, says Joanna Lu, head of consulting for Asia at travel analytics company Cirium. “It’s more those smaller or private airlines, the low-cost carriers, that we should be worrying about,” she says.
State intervention may be the only way forward. The government in Beijing controls the country’s Big Three—China Southern Airlines, Air China, and China Eastern Airlines—and has signaled it’s prepared to step in. The Civil Aviation Administration of China said on Feb. 11 the government would support measures, including mergers, to help the beleaguered industry recover.
Then, on March 4, Chinese regulators announced state funding for domestic and foreign airlines operating international services to and from China during the crisis. On the table was as much as 0.0528 yuan per seat, per kilometer. For an 8,175-kilometer (5,080-mile) flight from London to Beijing, the subsidy would total 432 yuan ($62) per passenger.
Led by giants China Southern and China Eastern, the country’s airlines started adding back domestic flights the week of March 2, OAG’s analysis shows. Some were extraordinary bargains: A 3½-hour flight from Shanghai to Chengdu, for instance, was going for just 90 yuan, plus 50 yuan in taxes, almost a tenth of the price last September. Overall capacity in China is still only about half the level of late January, before the outbreak erupted in earnest. With the coronavirus taking hold in Europe and the U.S., low prices may not be enough to win back international passengers in China, says Yu, of Roland Berger.
Still, the global airline industry has bounced back from every crisis it’s seen. After the SARS outbreak in 2003, which cost Asia-Pacific airlines about $6 billion in lost passenger revenue, international traffic returned to normal within nine months. And this time around, plunging oil prices resulting from the feud between OPEC and Russia will also favor carriers, because fuel is one of their biggest expenses.
“I’ve been in this industry for 35-plus years, seen wars, terrorism, disease, and accidents,” says Jared Harckham, a vice president and managing director of aviation at consulting firm ICF International Inc. “So far, nothing has changed the long-term growth trajectory of the industry. Problems get controlled, memories fade, and people cannot pass up a good deal.”
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