Coronavirus coverage: Travel industry on uncertain path

Travel took an immediate hit from the coronavirus outbreak. On top of movement restrictions within China, multiple airlines, including British Airways and KLM, have grounded flights. Consequently, the world’s deep interconnectedness is being laid bare – and although the situation is still unravelling, it’s clear that coronavirus poses a dire threat to the world’s travel industry. In late February, the International Air Transport Association (IATA) estimated that coronavirus could snatch close to USD 30bn¹ https://airlines.iata.org/news/coronavirus-outbreak-set-to-cost-airlines-30bn-in-revenue from airlines’ revenue this year. Just 11 days later, this figure was admitted to be obsolete²https://www.theguardian.com/business/2020/mar/02/airline-industry-braced-for-major-threat-from-coronavirus-turmoil?utm_term=Autofeed&CMP=twt_gu&utm_medium=&utm_source=Twitter#Echobox=1583165991. On 5 March, IATA updated its assessment: the losses are now thought to number from USD 63bn to USD 113bn³https://www.iata.org/en/pressroom/pr/2020-03-05-01/, depending on how the virus spreads. Third Bridge Forum has already explored fragments of what is a widespread and complicated situation.

As one of the largest aviation markets, shocks in China reverberate elsewhere. However, these effects are being felt particularly in Asia-Pacific. About 1.7 million⁴https://time.com/5785594/china-airlines-coronavirus/ fewer seats were recorded on China services as a result of coronavirus from 20 January to 17 February. Airlines within China are particularly at risk, and “obviously, all of them are bearing the brunt, so I would say, rule of thumb here, the domestic routes are operating at about 20-25% capacity.” Numerous airlines depend on flying into China, for instance Air Macau, Singapore Airlines and Cathay Pacific. Meanwhile, in February Qantas⁵https://www.reuters.com/article/us-qantas-results/qantas-shares-jump-after-it-unveils-coronavirus-strategy-share-buyback-idUSKBN20D2SC said it would ground the equivalent of 18 planes and is encouraging its staff to use their leave.

Although cutting flights might seem like the obvious solution for airlines to save money, the 80/20 rule obstructs this option. It means, “if I have a slot which I’ve purchased or I’ve negotiated at an airport, I have to use it 80% of the time”, otherwise it’s given up. Accordingly, airlines are faced with running loss-making flights to protect their routes. Developing new options is not viable either, as “that will take six, nine, 12, 18 months of planning, because you have to get overflight rights, you need to get the landing slots, you’ve got to get approvals, government approvals, international affairs approvals.” However, in early March it was reported that IATA⁶https://www.iata.org/en/pressroom/pr/2020-03-02-01/ is attempting to suspend this rule for the 2020 season, which extends to October this year.

Tourism within China is in disarray too. A specialist Third Bridge Forum interviewed outlined the market’s scope – in 2019, more than 6 billion domestic tourists, up 9% from the year before, created RMB 5.6tn in revenue. There were 145 million inbound and 168 million outbound tourists, contributing RMB 916.3bn and RMB 6.5tn in revenue, respectively. The collapse in visitors to China “is estimated to be 40-50 million fewer and revenue from the inbound travel sector USD 35bn-40bn less than previously expected.” In the Interview, a comparison with SARS was used to illustrate how long it might take China’s tourism to recover. As SARS affected a smaller region – and was not declared a Public Health Emergency of International Concern by the WHO, as COVID-19⁷https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-happen was on 30 January – it took the inbound sector six months to recover. “Given this, it will likely be a long time, probably not until 2021, before foreigners begin to travel to China again.”

All this spells bad news for China’s hotels. One specialist has a particularly gloomy outlook: “Before the outbreak ends and the tourism industry recovers, the average occupancy rate of China’s hotels will likely remain below 1% or 2%.” In another Interview, it is surmised that “the occupancy rate of hotels in operation now is less than 10%”. Homestays, which have skyrocketed in the past two years, could be particularly vulnerable. Often, this kind of accommodation is rented and converted properties, meaning that the business owners will have to absorb all costs such as rent. However, larger global hotel chains will be able to weather the storm better, owing to financial backing. Another issue is that the Chinese government banned online travel agencies from charging cancellation fees, affecting domestic companies, as some “foreign hotels wouldn’t agree to the requirement, so the platforms and suppliers have to undertake the loss.”  

Consumer sentiment is, understandably, abysmal – but, H1 is normally weaker than H2 for this sector. And travel demand won’t disappear; people simply delay their plans. What recovery depends on, though, is whether this outbreak can be largely contained in the forthcoming months. With new cases springing up across Europe, South America and the Middle East, it is uncertain what will unfold next.