With airlines in “survival mode”, they face a USD 61bn cash burn in Q2 because of COVID-19, according to the International Air Transport Association (IATA). And the outlook for the rest of 2020 is just as gloomy: the IATA predicts that global passenger revenues will drop by USD 314bn, a 55% decline compared with 2019.1https://www.iata.org/en/pressroom/pr/2020-04-24-01/
This isn’t the first pandemic that airlines have battled against; the severe acute respiratory syndrome (SARS) and H1N1 (Swine flu) outbreaks were also testing times. However, the magnitude of, and pace of change triggered by, COVID-19 has been unprecedented. Some European carriers have grounded 95%-100% of their fleet. American Airlines cut its international capacity by 75% YoY from 16 March to 6 May, while United Airlines cut 85% of its international flights for April.
While having fewer aeroplanes in the air automatically reduces costs that are directly related to flying, such as fuel and en-route charges, other costs are fixed or more difficult to manage. With swathes of fleets now sitting on the ground, parking is a significant cost line; depending on the type of aircraft and location, in the UK it could range from GBP 3,000 to GBP 120,000 a month. And how easy it is to take aircraft out of storage depends on whether they are held on a short- or long-term basis. For short-term scenarios — up to 60 days — aeroplanes are typically kept nearby and maintained so they can return to service within a week or so. Beyond that, an intermediate or long-term programme is required, involving larger maintenance and release costs. This also feeds into decisions about whether airlines defer or cancel orders, which have ripple effects across supply chains.

As was the case during previous airline shocks, such as 9/11, manufacturers “do earnestly try to work with the airlines to terminate orders on an equitable basis, or on a friendly basis”. However, the sheer volume of stored aircraft means this is unlikely to be feasible in a COVID-19 context. In terms of aircraft delivery deferrals, one expert believes Boeing is “clearly in a much worse position, because of the Max situation, than Airbus, which has a long order book behind them”.
As noted during another Interview, reducing the cost of fuel and emissions are among the main motivations for replacing aircraft. With airlines flying much less and the price of oil having reached all-time lows this year, keeping older airframes is “not as onerous as it used to be”. However, as another expert noted, retiring older aeroplanes typically results in a fuel burn advantage: “The MD-88s will burn more fuel per ASM than a new A320 and A320neo.” Thus, airlines may have to decide whether to stick with their older fleets or accept the financial burden associated with new aeroplanes. One expert doubts there is a need for many new aeroplanes “at least until next year”, adding that the picture is going to be “fuzzy” during this time. “To a degree, the orders going forward are going to have to match how the industry is reconfigured and that’s going to be country dependent, airline dependent and alliance dependent,” he said.
This turbulent period is also prompting some airlines to reassess their fleet size and structure in a bid to gain efficiencies and emerge from the crisis in a relatively stronger position. American Airlines said it will retire its remaining 767s in May 2020 and its 757s earlier than planned, circa mid-2021. Similarly, Delta Air Lines is considering whether it should retire some of its older aeroplanes faster than it otherwise would have. “Those are MD-88s and MD-90s, and some portion of their 767 fleet,” the expert said.
In other observations, Forum Interviews suggest airline consolidation could be on the cards in Europe, where the top five carriers account for just 51% of the market. In the US, which has already been through a significant period of consolidation, heightened activity in the alliance space is anticipated. For example, Alaska Airlines said it would join the airline alliance Oneworld next year despite having “always been more of an independent airline”. Although Europe is a very different market compared with the US, “that generally gives a view of the scope for consolidation.” Indeed, even before the outbreak, many European airlines had been struggling to remain profitable amid intensifying competition from low-cost carriers — one of the factors that led to the demise of Thomas Cook and, more recently, Flybe.
Meanwhile, the pandemic has thrown a spanner in the works regarding the ongoing Boeing 737 Max crisis, with one expert saying he would be surprised if the 737 Max “flies at all in 2020”. Firstly, given the widespread groundings, the industry is not lacking in capacity. Secondly, there remains much work to be done to get the 737 Max recertified. The Federal Aviation Administration (FAA) intends to assess each individual aeroplane — a lengthy and complex process involving various personnel. As aviation regulators around the world have also said they will not rely solely on the FAA’s approval, “we may see in different regions of the world the 737 Max coming back into the skies in a delayed fashion”.
It is difficult to predict how the global airline industry will emerge from the throes of COVID-19, particularly as its impact will vary across regions. As one expert put it, the situation is dynamic and “things are changing almost by the day”. While we can make comparisons with previous events such as 9/11 and the 2008-2009 financial crash — where there was “a degree of resilience” and “a relatively quick bounce back” — the global impact of COVID-19 has been unprecedented. “To see fleets of aeroplanes almost entirely grounded for such a long period of time is totally unheard of,” one expert said. “I think it’ll be a much more gradual recovery than we’ve seen from some of the other events like this in the last 20 years or so.”
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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