While capacity is expected to increase in coming months, airlines in and around the region warn of material losses in upcoming financial results. With the pandemic-induced downturn showing no sign of easing off anytime soon, they are finding it increasingly trickier to match expectation with reality.
When China Eastern Airlines released its traffic results for June, it began on a relatively positive note.
“As progressive and significant results have been achieved in the prevention and control of the novel coronavirus (Covid-19) epidemic in China…as well as the gradual recovery of the demand in the aviation market, the Company’s domestic passenger transportation capacity increased by 23.1% [month on month], and domestic passenger transportation volume increased by 25%,” it states.
A few paragraphs down in the same report, the airline takes a sombre turn, stressing that it is far from being out of the woods.
The pandemic has “caused a huge impact” in the industry, which is “facing an unprecedented severe situation”.
“It is expected that the operation results of the company for the first half of 2020 will be materially and adversely affected,” says the SkyTeam carrier, reiterating a point it made in previous months’ traffic results.
Among Chinese carriers, which were the first to report any indication of a plausible recovery from the outbreak, the sentiment is fairly similar: capacity and passenger numbers are rising, but 2020 is terrible financially.
Broadly across the Asia-Pacific region, it is a slightly different story. Recovery is expectedly slower, more so for carriers without a domestic market to rely on, and airlines are cautious about adding back capacity.
A review of past traffic and financial results has also revealed an increasingly strident tone in recent months. From carriers like Cathay Pacific and Singapore Airlines, the mood has gone from a cautiously optimistic wait-and-watch when the pandemic first broke, to blunt pronouncements of dire straits.
“As the pandemic lengthens in duration, I would expect some airline backers to throw in the towel and let them fail. There may come a point where the ability to raise additional finance becomes impossible for some.” - Richard Evans, senior consultant, Ascend by Cirium
Cathay for instance, began the year emphasising its “strong” financial position, despite the “difficult trading conditions” brought about by the coronavirus outbreak.
This was even as it detailed in February a planned 90% reduction in mainland China flights and an overall capacity cut of almost a third. It entered 2020 on the back of a challenging second half of 2019, brought about by anti-government unrest in Hong Kong.
Fast forward a few months later, and the carrier said it was “impossible to predict” when passenger demand will recover from the coronavirus crisis. In its traffic figures for April, where it announced a HK$4.5 billion ($581 million) unaudited loss for the first four months of the year, Cathay said the financial situation for the subsequent few months “continues to be very bleak”, and that it did not “anticipate… a meaningful recovery for an extended period”.
Later in June, the carrier was extended a bailout from the Hong Kong government, and will soon embark on a restructuring exercise.
With the pandemic-induced downturn showing no sign of easing off anytime soon, airlines in and around the region are finding it increasingly tricky to match hope with reality.
Industry watchers note that airlines’ key priority in the bleak economic environment will be to conserve cash, and to restore passenger confidence.
Ascend by Cirium head of consultancy Asia Joanna Lu says: “I think in the earlier stage of the pandemic there might be a desire for airlines to add back some capacity, but now it is more about how to carefully select the route network, and [to] operate them wisely.”
Lu notes that the continuous lack of confidence in the business travel sector — traditionally a stronghold of mainline carriers — would make it difficult to resume many high yield routes, and lead to an adjustment in route strategy.
“This would require the airlines to monitor the market changes more closely than ever before. For larger carriers, they might behave more like a smaller airline, being more flexible, leaner and perhaps also accepting some charter services where demand is available,” she adds.
Richard Evans, a senior consultant at Ascend by Cirium agrees, noting that “airlines need to be nimble”. He adds: “I’d say the overriding mentality at the moment is to minimise cash burn in order to survive.”
However, Evans warns that patience — and stamina — could soon run out.
“As the pandemic lengthens in duration, I would expect some airline backers to throw in the towel and let them fail. There may come a point where the ability to raise additional finance becomes impossible for some,” he adds.