Global airline capacity in 2020 has declined by nearly 3% as of 2 March compared to the same period in 2019, Rob Morris, global head of Ascend by Cirium, disclosed at an ISTAT event today.
Through the week ended 1 March, global capacity had declined by 2% year-over-year, Cirium schedules data shows. By the time Morris took the stage in Austin the morning of 2 March, this slipped to 2.8%.
IATA had forecast on 19 December 4.7% growth in global airline capacity for full-year 2020. That was before the coronavirus spread in China and, ultimately, across the globe.
“The black swan has flown in,” Morris said.
Airlines facing the biggest threats are those that are exposed to the Chinese market and have large portions of their fleet leased and, consequently, have greater difficulty raising capital, he said.
“The word, I think, for the scenario today is chaos. Airlines are hunkering down and are moving into disaster recovery. They’re getting ready to just survive a disaster and hopefully come out on the other side. There are no significant airline failures as of today but who knows what tomorrow will bring.”
The overarching questions for the global aviation industry are: how much further will demand and capacity drop, and which airlines might not survive the crisis?
“How bad can it get? It’s very hard to put specific numbers on it,” said Peter Negline, head of strategy and market research for BOC Aviation, at the same event. “We know now that there are problems with the spread of the virus here in the United States. Until we know the extent of all of that we might not know how active the airlines need to be. It might make sense for them to err on the side of caution if need be and shut down a bit more capacity than maybe is justified. [The capacity] will come back fairly quickly as the demand is restored and the virus is hopefully controlled.”
“In the current market, it is all about the coronavirus,” said another panelist, Mark Streeter, credit analyst at JP Morgan, emphasising that other issues threatening aviation’s growth, such as the grounding of Boeing’s 737 Max and expanding trade barriers between nations were now of secondary concern, if that.
Streeter said he was “feeling still pretty good” about the ability of major US airlines to manage their way through the crisis.
“If we look at the IATA figures for global profitability, US airlines make up about 20% of global capacity, yet 65% of global profits have been in North America. The extreme profitability in North America relative to the rest of the world gives the US airlines a much stronger ability to weather the storm.”
US majors will also most likely benefit from their practice of not hedging fuel prices, he added. “In Asia and Europe hedging is still the more common practice. So you have, right now, this massive hit to revenue. And the offset in the US from [low] fuel costs is very significant.”
Streeter’s concerns about survivability rests more with some low-cost European and US airlines.
Negline, putting the human cost aside, suggested that a shakeout of some airlines as demand continues to drop globally would not necessarily be a bad thing for aviation’s appeal to investors.
“Let’s face it, every year for the last 10 years we’ve had at least five airlines [fail],” he said. “The industry would be doing a lot better if you cut out the 20 largest loss-making airlines.”
Streeter said: “Last year in 2019, we had a record number of airlines globally fail, and a record number of aircraft subject to the bankruptcy process.
“And that’s when economy was still pretty good. Fast-forward to 2020, and we’re dealing with the coronavirus. Obviously, this is causing some sort of near-term global recession.”
As for last year’s “black swan” event – the grounding of the global Max fleet – the absence of expected aircraft from airlines’ fleets has eased some of the pain from the sudden drop in customer demand.
“Max unavailability for airlines at the moment is a positive,” Cirium’s Morris said.
“Those aircraft not being there has allowed airlines to reduce capacity and manage their capacity. The scenario of how it returns to service depends on how the coronavirus and demand play out.”