In economic terms, the effects of COVID-19 are becoming the most serious crisis for several decades.
The Chinese industrial production shrank by 13.5% year-on-year for January and February combined, whilst retail sales fell by 20.5% and investment by 24.5% according to the Chinese National Bureau of Statistics. It is probable that most parts of the world will experience something similar.
However, this shrinkage will not be uniform in its effects. In particular, the transport sector has become exceptionally vulnerable and parts of it are facing imminent collapse.
In particular, the sweeping restrictions on air travel announced since Friday threaten the airline business with widespread bankruptcy. It is now difficult to fly across the Atlantic as well as to many destinations in Asia. The list on de facto travel bans increases daily.
The market intelligence organisation CAPA has suggested that “by the end of May 2020, most airlines in the world will be bankrupt”. This may be true. Already the Italian state has had to “stand behind” Alitalia, although admittedly this was not the healthiest airline anyway. Other large global groups have tacitly said that they too will face acute financial problems.
The position of airlines in various European states is febrile. The French finance minister met with the CEO of Airfrance-KLM on Friday after which an official was quoted as saying “as of today there is no recapitalisation” and Airfrance-KLM quickly asserted that it has €6bn on its balance sheet. Carsten Spohr, CEO of Lufthansa said that he would “speak to the governments of our home countries not only about easing burdens as before but also about active support when this becomes necessary” and the Chairman of Virgin Group says he has written to the British government suggesting the provision of a £7.5bn credit facility for the sector. In the US the CEO of Delta said that he was talking to the government about “potential assistance” whilst the airlines’ lobby group ‘Airlines For America’ has suggested a credit facility of US$50bn. CAPA observed that the Chinese airlines are largely state-owned and thus have an implicit guarantee.
In these circumstances cash is king, although it could be a while before there is much acquisition or investment activity in the sector.
All of the large airlines have reduced their schedules enormously both in response to travel bans and to reduce costs. Agility quotes the airfreight market intelligence company, Seabury, as suggesting global widebody belly-freight capacity is now down 14% although this will surely vary very greatly from route to route. Consequently, there is now a severe shortage of belly-freight. Anecdotal evidence suggests that it is even hard to get price quotes for air freight services.
In the long-term, there is a question over what the airline sector will look like after this. The crisis may well lead to a creeping re-nationalisation of the sector, with governments taking the opportunity to assert greater control of the sector. The effects of this for airfreight would be unclear as, on the one hand, it might lead to less competition on the other it might result in the sustainment of weaker providers with an excess of capacity. Either way, it suggests a less globalised and commercially orientated sector.
Source: Transport Intelligence, March 17, 2020
Author: Thomas Cullen
