The airline industry, already reeling under the effects of the prolonged Boeing 737 MAX groundings, is now bearing the brunt of massive international capacity reductions from China, following the novel Coronavirus outbreak. The deadly virus claimed the lives of more than 2,000 people and infected in excess of 75,000 across the globe. Due to this health crisis, international capacity from China has been reduced by 270,000 seats a week, reflecting an overall decline of 80% since Jan 20, per the latest report from air transport data consultancy OAG.
Among the Chinese airlines, China Eastern Airlines and China Southern Airlines are the most affected with the two airlines having slashed capacity by more than 200,000 seats a week. Earlier this month, Cathay Pacific Airways Ltd. (CPCAY - Free Report) , the flag carrier of Hong Kong, stated that it plans to cut capacity by approximately 30% across its network over the next two months. The airline’s traffic “continues to weaken significantly” after having slumped in late January as the crisis in China intensifies.
Major U.S. airlines, namely Delta Air Lines (DAL - Free Report) , United Airlines (UAL - Free Report) and American Airlines (AAL - Free Report) suspended all flights to and from China. Citing a persistent drop in demand, United Airlines suspended all flights to and from China through Mar 28. Beginning Feb 8, it also suspended flights to Hong Kong. Likewise, American Airlines suspended mainland China flights through March 27 and also halted Hong Kong flights to and from Dallas/Fort Worth as well as Los Angeles through Feb 20 due to decreased demand following the Coronavirus outbreak. Meanwhile, Delta suspended all flights to and from China through Apr 30.
While Delta holds a Zacks Rank #2 (Buy), United Airlines and American Airlines carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks (Strong Buy) here.
IATA Paints Gloomy Picture for Airlines in 2020
Based on preliminary analysis of the effects of the COVID-19 outbreak, the International Air Transport Association (IATA) anticipates a 13% drop in passenger demand for Asia-Pacific carriers. Given that these carriers were expected to witness a 4.8% growth, the net effect of the plunge in demand indicates an 8.2% year over year decrease in 2020 demand. This contraction in demand is equivalent to a loss of $27.8 billion in 2020 revenues for airlines in the Asia-Pacific region. Majority of this loss will be borne by the Chinese carriers.
Apart from the Asia-Pacific carriers, other airlines with exposure to the Chinese market are likely to face a revenue loss of $1.5 billion in the current year. With this, the total amount of revenue loss equals $29.3 billion for airlines globally, representing a 4.7% negative impact on global demand. Given the research firm’s earlier forecast (provided in December) of a 4.1% rise in global revenue passenger kilometer (RPK or passenger traffic), the net impact of the decline in global passenger demand implies a 0.6% fall in the same for 2020.
Airlines’ Recovery From Virus Outbreaks in the Past
The airline industry is one of the first to feel the heat of a major outbreak. Drawing a comparison between the impact of the 2003 SARS epidemic and the COVID-19 on airlines, the International Civil Aviation Organization (ICAO) expects the latter to deal a more severe blow to the industry in the wake of greater number of flight cancellations from the rapidly spreading virus outbreak. However, airlines have been quick to recover and “proven resilient to shocks including pandemics” in the past.
For example, during the 2003 SARS outbreak, there was a sharp decline in demand for six straight months with Asia-Pacific airlines witnessing a 5.1% decrease in RPKs. Airlines in the region lost $6 billion in revenues while globally, the industry was affected to the tune of $7 billion. That being said, the recovery was “equally quick”, per the IATA.
Additionally, within the first month of the MERS flu outbreak in 2015, which was restricted within one country, there was a steep fall of 12% in monthly RPKs to, from and within South Korea. However, traffic rebounded just after two months and normal pre-outbreak level of demand followed within six months.
Despite the airlines’ ability to overcome setbacks from epidemics easily, 2020 is likely to be a difficult year for the industry given that it is already facing numerous flight suspensions due to the MAX groundings. The capacity shrinkage in turn, is weighing on non-fuel unit costs. Low fuel prices should help airlines partly counterbalance the effect of the lost revenues from the COVID-19 outbreak.
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