The coronavirus crisis will speed up airline-industry consolidation across Europe as less profitable carriers fail or are taken over by leaner competitors, according to an analysis by HSBC.

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

HSBC’s analysis covers Aegean Airlines, Air France-KLM, EasyJet, FinnairIAGLufthansaNorwegianRyanairSAS and Wizz Air. The bank finds that these carriers are doing a better job of cutting costs than it expected as part of its last sector analysis in March, but warns that this will not be enough to prevent “extraordinary losses” for the year.

Noting that government support for labour markets through furloughing schemes has been greater than anticipated, HSBC says it expects these airlines will manage to reduce their staff headcounts by around 50% for the June-December period. This compares with estimates of around 30% in its previous models, which ran to the end of June.

The bank also highlights more optimistic news on leasing. Back in March it expected airlines to negotiate only moderate lease reductions, placing carriers with owned fleets in a better financial position than those that rely on leased aircraft. Now it highlights comments made during IAG’s full-year 2019 results briefing, in which the group said that lessors were backing “winners” that they expected to survive the crisis, and offering them the opportunity to defer payments.

HSBC believes all of the airlines it covers bar Norwegian will survive, and estimates “70% lease holidays to June, 60% in the September quarter and 50% in the December quarter”. Norwegian’s weak financial position “will, we think, make lease companies reluctant to offer lease holidays”, adds the bank.

Europe’s airlines are also demonstrating stronger-than-expected working-capital performance. This is because they are withholding refunds from customers through the issuing of vouchers instead – a practice that does not, however, conform with EU rules. “If European regulations do not evolve to allow this behaviour, the cash outlook for airlines would deteriorate.”

On capex, HSBC notes: “Our understanding is that airlines are not taking delivery of aircraft at this time so final delivery payments are not happening.”

It observes that “government furlough support and constructive union engagement are reducing labour costs, working capital is being defended assertively, most airlines have negotiated relief on lease costs and capex is nearly suspended”.

Yet the bank warns against viewing the sector’s finances are healthy, noting that although it is seeing lower cash burn, performance relative to pre-Covid 19 estimates “remains very bad”. Previous forecasts of a meaningful recovery taking hold in April/May now look optimistic “and the idea that this crisis will be resolved by June looks equally hopeful”.

Fuel hedging is one area that is set to cause significant pain in the remainder of 2020, with European airlines typically hedging 25-90% of their needs, a far greater proportion than other areas of the world, says the bank.

It 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. “The build-up of debt that will arise from airlines surviving the grounding will weigh on the businesses and likely require the businesses to be recapitalised at some stage.