The US government’s decision to initiate a travel ban covering the Schengen Area of Europe and subsequently also the United Kingdom and Ireland is essentially rubbing salt into the wounds the country’s airlines are suffering as the COVID-19 coronavirus has reached pandemic status, and that decision significantly raises the levels of uncertainty about when a recovery in demand will occur.
As the country’s largest airlines American Airlines, Delta Air Lines and United Airlines navigate the effects of the ban, they are also likely being forced to examine their long term view of how they plan to rebound once the pandemic is over.
As the US and world markets continue to get pummelled, those airlines may need to change their judgement that COVID-19 is a “fear event” rather than an “economic event”. The public health emergency caused by COVID-19 has now turned into an economic crisis, whose duration is tough to predict.
Indeed, Delta has now been forced to cut its capacity by 40% over the next few months, with CEO Ed Bastian telling employees: “The speed of the demand fall-off is unlike anything we’ve seen – and we’ve seen a lot in our business.”
At this point, any comparisons to past Black Swan events such as 911 or SARS are rendered useless. Life in the US has come to a standstill Disney theme parks have closed, all sporting events and concerts have been cancelled, schools have closed and grocery store shelves are increasingly becoming bare.
The fluidity of COVID-19’s spread makes any long term effects on the airline industry tough to predict. In a recent research report, Cowen & Co managing director Helane Becker remarked that US airlines are in cash preservation mode, “and we fully expect to see credit facilities extended and increased in the next week. We previously stated US airline bankruptcies were unlikely and in the near-term that still remains the case, but if bookings do not improve in the next three months things could deteriorate quickly”.
Ms Becker also remarked that “oil is still a tailwind, but that doesn’t help if a large percent of the fleet is grounded”. After the US initiated a travel ban on Europeans visiting the US for 30 days, Delta also stated it was parking 300 aircraft, and it seems as if the sharp drop off in demand is quickly wiping out any benefits airlines will enjoy from lower fuel prices.
CHART – The reduction in air capacity between the US and Europe is clearly evident and this will be further exaggerated as UK and Irish flights are reduced in light of the expanded restrictionsSource: CAPA – Centre for Aviation and OAG
In the case of United, its worst case scenario modelling for COVID-19 could prove to be a shrewd move. As the spread of the virus continues to reshape hammer the global airline industry, United’s decision to model aggressive drops in demand may prove to be the most prudent move by an airline working to navigate the crisis.
Prior to the US government’s decision to ban travellers from Europe (US citizens and legal residents excluded) entering the country, United executives stated that the airline’s gross bookings to Europe (gross bookings are new bookings before netting out cancellations) were down 50%, and US domestic gross bookings had fallen 25%. Domestic net bookings (new bookings minus cancellations) were down 70%. Unsurprisingly, net bookings to Asia were down 100% while gross bookings have fallen by 70%.
Going forward, United has decided to model more aggressive worst case scenarios than its competitors. Noting the company in no way was offering a specific forecast, Untied president and rising CEO Scott Kirby explained the airline’s worst case scenario planning assumptions include a revenue decline of 70% in Apr-2020 and May-2020, 60% in Jun-2020, 40% in Jul-2020 and Aug-2020, 30% in Sep-2020 and Oct-2020 and 20% in Nov-2020 and Dec-2020.
Mr Kirby remarked that “I suspect that sounds shocking…and for what it is worth, we don’t actually think it will be that bad. But again, we’re biased to be too aggressive in taking action, as opposed to taking the risk and looking back at some point and wishing we’d been more aggressive sooner.”
United’s president made those comments prior to the latest travel bans to the US taking effect, and before Delta made the unprecedented mover of slashing capacity by 40% over the course of the next few months.
The US Travel Association recently joined roughly 150 other travel related organisations in urging the public to make rational, fact based decisions regarding the coronavirus and COVID-19. “Though the headlines may be worrisome, experts continue to say the overall coronavirus risk in the U.S. remains low. At-risk groups are older individuals and those with underlying health conditions, who should take extra precautions,” US Travel Association said in a statement.
The association remarked that the decision to cancel travel and events has a trickle-down effect and threatens to harm the US economy, from locally owned hotels restaurants, travel advisors and tour operators to the service and frontline employees who make up the backbone of the travel industry and the American economy.
There are also repercussions from the recently instituted travel ban on citizens from Europe (now including the UK and Ireland) the association warned. “Temporarily shutting off travel from Europe is going to exacerbate the already-heavy impact of coronavirus on the travel industry and the 15.8 million Americans whose jobs depend on travel,” the association stated.
“We have and will continue to engage Congress and the administration on policy steps that are necessary to ensure that travel employers – 83% of which are small businesses – can keep the lights on for their employees,” it added.
According to association economists, 850,000 international visitors flying from Europe (excluding the UK) entered the United States in Mar-2019, accounting for about 29% of total overseas arrivals to the US. These visitors spent approximately USD3.4 billion in the US.
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The impact on airlines of the recent COVID-19 coronavirus outbreak, which began in China but has spread around the world, continues to have a devastating effect on the aviation and supporting industries. In a new essential daily update, CAPA – Centre for Aviation is curating intelligence from the World Health Organisation (WHO) and myriad industry sources available via its CAPA Membership news and data service. Its mission is to help cut through the noise and provide a useful daily snapshot of the COVID-19 outbreak evolution, together with key industry developments.