If the relative financial success of the European airline industry had always seemed paradoxical given the glut of carrier failures over the past three winters, the coronavirus outbreak has to some extent been a leveller.

No market has been untouched by the swathe of travel restrictions implemented as the coronavirus impact spread across the continent in March. Without domestic markets of the scale of the USA and China, Europe’s scheduled passenger airline industry has been all but grounded.

“Not every airline is in the same boat – because there are differences [in business model],” observed IATA chief economist Brian Pearce during a media briefing at the end of the March. “But even the solvent ones with good business models and strong balance sheets are in trouble in this kind of environment, so it is a leveller.”

Europe is perhaps the clearest example of “the long tail” in the airline industry that Pearce has flagged in observing that much of the industry’s record profits in recent years has been in the hands of relatively few carriers.

Five airline groups – IAG, Lufthansa, Turkish Airlines, Air France-KLM and Ryanair – all posted operating profits in excess of $1 billion in 2018. By contrast, the failures of Air Italy, Flybe and Thomas Cook provide further reminders of the fragility for most European carriers.

IATA’s latest projections are for European carriers to take the second largest hit in passenger revenues from the crisis. The association’s updated forecast from 14 April was for European airline traffic as measured in RPKs to now be down 55% on the 2019 figure – the steepest drop of any region. That would result in the wiping out of $89 billion in passenger revenues from the 2019 performance.

Europe’s biggest airlines should be able to withstand 10 more weeks of coronavirus-related travel restrictions, after which government support could be their only option for survival, Bernstein analysts have suggested.

If the Covid-19 crisis continues into the second half of the year, “red indicators start flashing” and airlines will likely be reliant on state aid to boost their depleted liquidity reserves, writes Bernstein analyst Daniel Roeska in a 6 April research note.

European airline bodies have called for urgent action from governments and regulators to help airlines through the crisis.

“With air traffic down 90 per cent across Europe, there has been an urgent need to mitigate the devastating effects of this significant and unprecedented liquidity crisis,” says ERA director general Montserrat Barriga.

Access to funds varies depending on individual government approaches, but some have already shown themselves willing to step in as required. Measures introduced in France and Sweden have already been cleared by European regulators.

Regulators have also taken some steps to ease the way. The European Commission has relaxed rules during the crisis around state aid and slot regulations, while Eurocontrol’s member states have agreed to defer air traffic control fees – originally due in April – into November.

Much though may rest on whether European carriers are prevented from providing passengers with vouchers rather than refunds. While the European Commission ruled compensation rules would not apply to flights cancelled during the coronavirus crisis, passengers are still eligible to a cash refund under EU legislation. Euroactiv reports a group of 14 European governments are backing airlines providing vouchers instead of refunds.

HSBC analysts note that Europe’s airlines have been demonstrating stronger-than-expected working-capital performance, partly because they are withholding refunds from customers through the issuing of vouchers instead. “If European regulations do not evolve to allow this behaviour, the cash outlook for airlines would deteriorate,” it notes.

No quick return to air passenger numbers

Notably the HSBC analysis also warns of weak traffic growth stretching deep into the upcoming decade. “It will take until 2022 or maybe 2023 to recover the level of traffic seen in 2019, since aviation volumes are directly related to economic activity and the world economy will shrink through this outbreak,” HSBC predicts.

Lufthansa has been among the first to take permanent steps for this changed environment. The group says six of its 14 Airbus A380s – originally due to be returned in 2022 – will now be “permanently decommissioned” alongside seven A340-600s, five 747-400s and 11 Lufthansa-operated A320s because of the coronavirus crisis.

Explaining the moves, Lufthansa says: “It will take months until the global travel restrictions are completely lifted and years until the worldwide demand for air travel returns to pre-crisis levels.”

EasyJet meanwhile has agreed a deal with Airbus to push back an order for 24 aircraft due for delivery in 2020-2022. That came in the face of pressure from EasyJet’s founder and largest shareholder Stelios Haji-Ioannou to cancel or renegotiate an order for 107 Airbus jets, including through the threat of legal action and the removal of board members.

Challenges continue for troubled airlines

The future is even less clear for some of Europe’s carriers that were under financial pressure even before the crisis.

Scandinavian budget carrier Norwegian saw its share price nosedive when markets opened on 14 April, following its 8 April proposal to convert debt to equity in order to qualify for state aid.

This was the first indication of investor appetite for the airline since it announced plans for bondholders, lessors and other creditors to become equity holders in the company by converting “substantial” debt to equity. The carrier’s chief executive, Jacob Schram, said the proposed measures were necessary to secure “the next tranches of the Norwegian government state guarantee programme”.

A planned acquisition by LOT Polish Airlines’ parent PGL of German leisure carrier Condor has meanwhile hit the buffers. The deal was originally agreed in January before the coronavirus crisis hit. PGL had agreed to repay a €380 million ($418 million) bridging loan facilitated by the German federal government and state of Hesse.

That six-month loan was granted after the collapse of the airline’s former parent, Thomas Cook, in September 2019, to support Condor through the winter season. Condor says it is exploring alternative ownership options, such as a trustee structure. It is also in talks about state aid, as a result of the coronavirus halt of passenger flights.

Alitalia, meanwhile, which was already approaching a third year in administration with little clear sign of a buyer, is set to be renationalised under a broad set of emergency measures unveiled by the Italian government in March.

“We expect financially weak airlines that survive to be… significantly smaller as they exit the outbreak,” HSBC writes in its analysis. “Where these businesses have strategically relevant market positions, we would expect them to be absorbed by the stronger entities.”

This article includes original reporting from Cirium