A requirement to refund an estimated $35 billion in airline tickets during the second quarter will deepen the impact of the coronavirus crisis on carriers’ cash reserves, according to IATA, which also projects an overall industry net loss of $39 billion for the period.
In an update today, the airline association says its fresh analysis shows airlines could burn through $61 billion of their cash reserves during the second quarter amid the virtual grounding of scheduled passenger services.
On 24 March, IATA had already stated that the coronavirus outbreak could wipe around $250 billion off total airline passenger revenues in 2020 – which equates to roughly 44% of passenger revenues in 2019.
Today it has detailed the scale of potential losses during the second quarter – a period in which the industry is dealing with a global lockdown.
While airlines have reacted by grounding fleets and furloughing staff, IATA chief economist Brian Pearce notes during a media briefing that this does not tackle the full cost burden.
”The trouble is airlines also have costs which are either fixed or semi-fixed – so it’s difficult to cut all of these costs,” he says. ”So airlines are doing their best to take out as much cost as possible, but there will be some unavoidable costs that airlines have to pay even if their fleet is grounded. And that is really part of the cash-burn challenge.”
While IATA sees airlines reducing their variable costs, including fuel, by around 70% in the second quarter, it expects fixed costs to only be cut by around 30%.
Set against an anticipated 68% fall in airline revenues for the second quarter, it sees the industry posting a collective net loss of $39 billion for the period. That compares with a net profit of $7 billion for the same quarter in 2019.
Pearce notes that the challenge for airline cash reserves is compounded by the requirement to refund sold tickets.
“Airlines have accumulated quite a large amount of tickets that have been sold but not flown. We estimate that for the second quarter of this year, there is around $35 billion of tickets that are due for refunds – so that would be on top of the unavoidable costs, another very big drain on airlines’ cash flow.”
Combined with the expected losses – even with deprecation added back in as it is a non-cash cost – this points to an overall cash drain across the industry of $61 billion during the quarter.
Reiterating his call for prompt government support, IATA director general Alexandre de Juniac says: “Airlines cannot cut costs fast enough to stay ahead of the impact of this crisis. Without relief, the industry’s cash position could deteriorate by $61 billion in the second quarter.”