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  1. Analysis
April 15, 2020

Q&A: the financial impacts of Covid-19 on the aviation industry

Airlines are showing laudable solidarity in helping the UK Government to repatriate thousands of Britons stranded abroad. Yet as the coronavirus crisis continues, their cash supplies are drying out and many companies are now on the brink of bankruptcy.

By Adele Berti

At the end of March, the UK Government launched an airlift operation to repatriate thousands of Britons stranded away from their homeland amid the coronavirus pandemic. 

The “unprecedented” £75m move relies on airlines including British Airways , Virgin, easyJet , Jet2 and TITAN to help fly people back to the UK through charter flights and providing seats on commercial airlines. 

A welcome announcement for the many who had been unable to return due to flight costs and cancellations, the plan could however have negative implications for the country’s already heavily suffering aviation sector. 

University of Surrey reader in air transport management Dr Frankie O’Connell explains why the operation could further affect the industry and rounds up how aviation stakeholders around the world are being impacted by the ongoing Covid-19 crisis. 

Adele Berti: In a recent press release, you said that “the financial impact of the partnership is financially negligible for the airline industry”. What’s the reason behind this statement?

Frankie O’Connell: Just to give you an example, the global aviation industry currently registers revenues every year of between $750bn-$800bn. Up until now, the calculation has been that revenues for 2020 will be down by $250bn, so that £75m is very small money and absolutely negligible.

Airlines are now at a point where they are working as almost contracted to the government to help out in repatriation while a lot of passenger aircraft are now being converted to be used as freighters, so they’re bringing in protective clothing, mass food supplies and essential products instead of people.

AB: It has been a couple of weeks since the plan was announced. What’s the situation like now?

FO: This is still ongoing. The industry is working on a requirement basis and is still being almost contracted by the government to fly to particular countries on demand. 

But there is a more pressing issue here and that concerns all the passengers who have booked flights in the future, especially for the three months coming up – April, May and June – for which some $35bn worth of tickets have been sold. And if these tickets have to be given back to the passengers, that could very well bury the airlines because they’ve got no income coming in during their peak summer season. 

A lot of airlines only have about two to three months’ worth of cash left. Delta Air Lines is now burning through $60m per day. Meanwhile, JetBlue normally sells about $22m a day in tickets. It’s now selling $1m a day in tickets while spending $2m a day just in cash refunds. Plus all the airlines are now using 85%-90% of their fleet for cargo and the industry is in fast meltdown and will continue to be unless there is government intervention.

AB: Many governments are putting in place relief strategies for the sector. Which ones are standing out?

FO: Norway is providing a conditional state loan guarantee for the aviation industry and that’s totalling $570m. Half of that money is going to Norwegian Air, and a quarter of it is going to Scandinavian Airlines, while the other quarter is being divided between regional airlines. 

On the other hand in Italy, [flag carrier] Alitalia has now been nationalised. There is a rulebook under EU law that governments can’t inject money into airlines [as they would risk impacting competition], but everything has been abandoned now. So they’re more than likely going to start propping up their airlines again. But nationalisation means becoming government-owned which ultimately leads to inefficiencies and lower levels of productivity among the workforce; it also allows the government to interfere in the day-to-day commercial operations. 

AB: How is the UK Government pledging to help the industry?

FO: The UK Government said that it will intervene only as a last resort and when every other option has been exhausted. 

In my opinion, state support will take three forms. One will be taking equity in the airline, so the government will own [a] percentage of the airline. Another one is that they will defer taxes, fees and any loans to carriers to a much later period. So, the government will give airlines loans but they won’t have to pay back for many, many months or maybe even years in the future. The third one would be nationalisation, which would be the worst of the three options. 

AB: How are airports being impacted?

FO: Airports are having similar problems. One of the runways at Heathrow has now closed and that’s crazy – did we ever think that would actually happen? No. No one had ever envisioned a whole runway at Heathrow being furloughed like that. 

In the US, there is now a $2tn rescue bill, $50bn of which is going to passenger airlines, while $10bn or so is going to airports. 

Airports are like every other organisation now being cut off. There is absolutely no money coming in because a lot of revenues are non-aeronautical – from duty-free, car parking and concessions – and that’s all gone. 

And while the US has that $10bn for airports, that really hasn’t happened in Europe at all. So [European hubs] are in trouble and there’s a big knock-on effect as well. Aircraft leasing companies, ground handlers, catering – the value chain is enormous and they’re all being impacted. Boeing is in a lot of trouble as well and the industry is going to be severely damaged. 

AB: How do you expect the situation to evolve in the next few months?

FO: The thing is that this industry is very seasonal. [Airlines] make all their money in the summertime, and now that we’re heading into the summer season, there is no income coming in. And that’s where the coronavirus pandemic is going to do enormous damage. Cash is key now because a lot of these airlines only have two or three months of cash left. It’s a pure tsunami. 

A lot of carriers will probably have to be nationalised. Many airlines that are currently in stock markets will be delisted from it and they will be nationalised. But for those airlines that do not end up state-owned, they are in even more serious trouble. Because they’re not flag carriers, they’ll probably go under and there will probably be possibilities for mergers. That’s what normally happens in the global industry after something like this takes place – the industry contracts so you have a smaller number of players flying more passengers.

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