The International Air Transport Association (IATA) has recently published a new analysis regarding the impact of the coronavirus disease (Covid-19) crisis on the aviation industry. The analysis shows that airlines may lose $61 billion of their cash reserves during the second quarter, ending June 30, 2020, while posting a quarterly net loss of $39 billion.
This analysis is based on the impact assessment that the IATA carried out last week, based on the assumption that the severe travel restrictions may last for the next three months. In this scenario, full-year demand will fall by 38% and full-year passenger revenues will drop by $252 billion compared to 2019. The fall in demand would be the deepest in the second quarter, with a 71% drop.
The impact will be severe, driven by the following factors:
- Revenues are expected to fall by 68%. This is less than the expected 71% fall in the demand due to the continuation of cargo operations
- Variable costs are expected to drop sharply —by some 70% in the second quarter—largely in line with the reduction of an expected 65% cut in second quarter capacity. The price of jet fuel has also fallen sharply, although we estimate that fuel hedging will limit the benefit to a 31% decline.
- Fixed and semi-fixed costs amount to nearly half an airline’s cost. We expect semi-fixed costs (including crew costs) to be reduced by a third. Airlines are cutting what they can, while trying to preserve their workforce and businesses for the future recovery.
These changes to revenues and costs result in an estimated net loss of $39 billion in the second quarter.
In addition to these unavoidable costs, airlines will be faced with refunding sold but unused tickets as a result of massive cancellations resulting from government-imposed restrictions on travel. The second quarter liability for these is a colossal $35 billion. Cash burn will be severe.
“Airlines cannot cut costs fast enough to stay ahead of the impact of this crisis. We are looking at a devastating net loss of $39 billion in the second quarter. The impact of that on cash burn will be amplified by a $35 billion liability for potential ticket refunds. Without relief, the industry’s cash position could deteriorate by $61 billion in the second quarter,” said Alexandre de Juniac, IATA’s Director General and CEO.
Response of the government:
Governments across the world are responding positively to the industry’s need for relief measures. Among countries providing specific financial or regulatory aid packages to the industry are Colombia, the United States, Singapore, Australia, China, New Zealand and Norway. Most recently, Brazil, Canada, Colombia, and the Netherlands have relaxed regulations to allow airlines to offer passengers travel vouchers in place of refunds.