Airlines Today: How to Manage COVID-19 Disruption
In a few short weeks, the prospects for the global airline sector have transformed from stabilized with growing profit margins to profound uncertainty, a likely long-lasting crisis and a potential reshaping of the industry beyond.
The airline sector is facing chronic uncertainty in terms of the length of domestic and international route closures and the shape and timing of the recovery. The International Air Transport Association (IATA) has estimated that the COVID-19 crisis is likely to result in a $314 billion drop in airline passenger revenues in 2020 – a 55% decline compared to 2019 – in a scenario where domestic markets open in Q3.
Airlines are also having a ripple effect on the global economy, as they are at the core of a value chain that supports some 65.5 million jobs worldwide.
At the time of writing, there is little consensus on how quickly the sector will recover. Previous nearly analogous events (9/11, SARS,GFC) may offer some indication, but this has been a steeper and deeper decline, and the factors impacting recovery are complex. Equity markets have reacted accordingly, with an almost 80% decline by early April, easily surpassing those events, in just a few short weeks.
As a result, management teams need to be both stabilizing and protecting their business as they simultaneously prepare for the post-pandemic environment. This requires both sufficient liquidity and the support of multiple stakeholders – customers, employees, labor unions, operating partners, suppliers and service providers, financing parties and government.
Governments across the globe are enacting support measures, with fiscal support made available to airlines in Europe and Australia to date. In the United States, the announcement of $58 billion allocated to the sector from the CARES Act stimulus was well received initially. The recent move from a $25 billion payroll grant to a part-grant/part-loan structure, however, and the ongoing discussions regarding the financial conditions and operating limitations associated with the $25 billion loan facilities, mean that careful balancing between immediate liquidity, ongoing governmental oversight and the potential for frustrating otherwise longer-term value engineering will be required.
Senior Managing Director