Airlines, aviation financing and plane makers – inherently vulnerable to the economic side-effects of a potential pandemic - faced challenges as the year began, ensuring they are now at growing risk of severe coronavirus-related disruption, says Scope.
Slowing passenger and cargo growth, the mismatch between elevated aircraft values and cheap finance, production challenges at Airbus Group and safety issues at Boeing Co. were among the factors weighing down on the aviation sector even before the extent of the Covid-19 outbreak became clear.
Scope says while it is still too early to assess the long-term impact of the outbreak of the disease, the virus is continuing to spread to new countries after its initial appearance in China.
Scope analysts Azza Chammem, Frank Netscher, and Helene Spro look at the individual aviation segments more closely:
“The credit outlook for European airlines was already negative as downward pressure on air fares, rising costs and slowing growth in traffic has piled pressure on carriers, particularly smaller, more indebted operators in Europe,” says Chammem, corporate-credit analyst at Scope Ratings. Air Italy, a small Italian carrier, went out of business earlier this month.
European long-haul carriers such as Deutsche Lufthansa (BBB/Stable) and Finnair have curtailed flights to China. Turkish Airlines has done the same with flights to Iran. As the virus spreads to more countries, voluntary or mandatory restrictions on air travel will increase among measures to contain the disease, such as the cancelling of international events from business conferences to sporting encounters, with knock-on effects for industry, business and tourism.
“Look at what happened to the airline industry during the SARS epidemic in 2003,” says Helene Spro, aircraft-finance analyst at Scope Ratings. Annual traffic decreased by 8% for the Asia Pacific airlines, which translated to a USD 6bn revenue loss. North American airlines lost 3.7% of international traffic due to SARS. “We expect that the Covid-19 outbreak will have a bigger impact than SARS,” she says.
“IATA has already warned that global air travel demand will decline for the first time since 2009, and it is worth remembering that air travel in China and the rest of Asia has grown hugely since the time of the SARS outbreak,” says Chammem.
“Even though lower jet fuel prices, as oil prices have dropped in recent weeks, provide some relief to airlines, ultimately it is falling load factors – for passengers and cargo – which will eat away at profit margins until the outbreak of the disease is contained,” says Chammem. “Particularly important for airlines will be whether they can resume normal operations in time for the busy northern-hemisphere spring and summer travel periods,” she says. In the meantime, airlines are looking for ways to reduce costs. Lufthansa is considering a hiring freeze.
“High aircraft values and low lease-rate factors do not properly reflect the commercial and operating risks facing airlines leaving the aviation finance industry in a vulnerable state in 2020 even before the extent of the coronavirus outbreak became clear,” says Spro.
It is not only airlines that are affected. Airbus decided to extend the Chinese New Year’s holiday at its Tianjin plant which produces around six A320 aircraft a month, equivalent 10% out of the 60 A320 aircraft Airbus plans to produce monthly.
“Airbus has a huge order backlog and Boeing is under pressure to find ways to make up for the multibillion-dollar cost of the grounding of its 737 MAX passenger jet even before virus-containment measures disrupted China-based supply chains on which the plane makers are dependent,” says Frank Netscher at Scope Analysis.
“Considering that they already have had delays in the A320 deliveries, this is not a good sign for Airbus which had hoped to restore a reliable delivery schedule by 2021,” says Netscher.
“The dislocation to supply chains has also come at a poor time for Boeing, which relies on Chinese suppliers for its civilian aircraft production, as it tries to offset the impact of the grounding of the 737 MAX passenger plane for safety reasons,” he says. Boeing has warned it might miss its first-quarter aircraft delivery targets.
For more of Scope’s aviation sector analysis, please follow the links below:
Scopecast Flight 006: How has the coronavirus affected the aviation industry? (podcast)
Aviation finance outlook 2020: sector looks vulnerable
European airlines outlook 2020: negative outlook as cost squeeze, slowing traffic pile pressure on carriers