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IATA Request Spells Further Doom for Coronavirus-Hit Airlines

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The rapid spread of the dreaded coronavirus (COVID-19) rattled the airline industry significantly by crippling air-travel demand. This is evident from the International Air Transport Association’s (IATA) last-month projection, which suggested that airline revenues for 2020 might be hurt in excess of $29 billion due to this adversity. Per this research firm’s latest commentary, it requested an immediate suspension of rules governing the usage of airport slots. This statement further adds to the gloomy scenario.

Alarmingly, the coronavirus outbreak is now no longer restricted to its country of origin, China. The health scare spread it tentacles fast to every continent barring Antarctica ever since it was first detected late last year. The contagious disease already registered a death toll of above  3,000 people apart from infecting more than 88,000, globally.

As a result of this health peril, the Zacks Airline industry has declined 21.9% in the past month as it grapples with dwindling demand for international travel. The S&P 500 Index has also shed 10.3% of value in the same time frame.

Against this backdrop, the IATA’s request to aviation regulators worldwide for suspension of slot-use rules for the entire season (through Oct 2020) is fully understandable.

Delving Deeper

Currently, around 43% passengers depart from more than 200 slot-coordinated airports, globally. Per the existing rules for slot allocation, the concerned carrier under normal circumstances needs to operate at least 80% of the slots allocated to it. In the event of non-compliance, the airline has to give up its right to the slot in the next equivalent season. The concerned regulator can relax the above rule under special circumstances.

Why the Request?

Various airlines across the globe are trimming their capacity as the coronavirus outbreak is speedily becoming a full-blown pandemic from an epidemic. Reportedly, the European low-cost carrier Ryanair Holdings (RYAAY - Free Report) decided to reduce flights to/from Italy by 25% for three weeks. The decision to cut capacity in its largest market followed a significant decline in bookings due to this health hazard.

According to a Reuters report, Latin American carrier LATAM Airlines also planned to cancel its daily flight from Sao Paulo to the Italian destination, Milan, through Apr 16 due to coronavirus-induced tepid demand.  LATAM’s U.S. counterparts, namely United Airlines (UAL - Free Report) , Delta Air Lines (DAL - Free Report) and American Airlines (AAL - Free Report) also decided to slash flight frequency in a bid to combat the sharp drop in air traffic.

For instance, Delta and American Airlines recently chose to suspend some flights connecting the United States with Milan. Moreover, United Airlines cut back flights to Japan, South Korea and Singapore due to substantially weak demand on these routes. Additionally, this Chicago-based airline, which carries a Zacks Rank #3 (Hold), is offering travel waivers to Italy. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. JetBlue Airways (JBLU - Free Report) also announced a waiver in its change and cancel fees for all new flight bookings. Going by IATA, many carriers are ‘reporting 50% no-shows across several markets’.

With airlines across the world swinging into action to tackle this tepid demand caused by the health threat as highlighted by the above evidences, the current scenario certainly qualifies as an exceptional circumstance.  Therefore, it is widely perceived that the existing slot-allocation rule that requires the concerned carrier to operate minimum 80% of its allocated slots should be made flexible. This, in turn, will allow airlines to adjust their schedules to suit the current situation of low air-traffic. 

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