Since the start of 2020, coronavirus has been sweeping the globe and has had a major impact on the global economy. Over the past several months, global markets began to price in the effects of coronavirus. Besides, more and more countries across the globe shut down borders and widening travel restrictions as a response to the Covid-19 outbreak. Therefore, canceling almost all flights to control the spread of the virus and the plunge in demand for air travel have affected the entire airline industry globally.
Airlines around the world are confronting the challenge of a sharp decline in demand, many flights are canceled either by the airlines themselves or as a result of governments closing airports or routes. However, the most severe impact is expected to be in the second quarter since the travel restrictions will cause a worse demand for the airline industry or travel in general. According to IATA, in the early of April, the number of flights globally was down 80% compared to last year because of severe travel restrictions imposed by governments to prevent the spread of the virus (IATA. org, 2020).
The collapse in demand has led major airlines worldwide to the response being considered to include laying off significant numbers of staff, deferring aircraft engine maintenance, and grounding of high operating cost aircraft fleets to preserve liquidity. Delta Airline has refunded more than $1.2 billion to customers, including $160 million so far for this month and indicates that it would retire 18 Boeing 777 aircraft from its fleet by the end of the year to cut costs amid the travel restrictions by the Covid-19 pandemic (Dave, 2020). Meanwhile, Delta is accelerating its retirement plan for other aircraft and expects $1.4 billion to $1.7 billion impairment charges related to aircraft retirement for the second quarter and will rely on two more fuel-efficient aircraft for long-distance flying when international demand returns (Dave, 2020).
In addition, since the travel restrictions and the expected global economic recession, we expect such a lower demand situation and reduced global revenue passenger to continue into 2021. The IATA expects (Table 1) that more than half of passenger revenue reduction and estimates that industry passenger revenues could drop $314 billion or 55% below 2019’s figure because of the Covid-19 pandemic on airline industry (IATA. org, 2020). This is a scenario in which travel restrictions last for up to several months, followed by economic recovery later this year. Under the current circumstance, there is more likely a U-shaped recovery rather than a sharp V-shaped recovery with domestic travel coming back faster than the international demand (IATA. org, 2020).
Due to the damage by the Covid-19 pandemic, some governments have stepped up with financial relief actions to support the airline industry. In early March, Chinese authorities took a range of actions to support the sector in China from short-term support and relief to restart services and increased infrastructure expenditure. In the U.S, the Federal Aviation Administration award $10 billion funds to commercial and general aviation airports under CARES Act, which provides financial support to be exclusively used for employee wages, salaries, and benefits (Homeland Security Today, 2020). It is essential to provide financial relief for airlines today since supporting airlines will keep vital supply chains working through the crisis.
Since it is more realistic to make a U-shaped rather than a sharp V-shaped post-pandemic economic recovery, this scenario would cause a global recession that would last for months. The government would unlikely to provide airlines with financial support after the pandemic. Therefore, airlines that were having financial difficulties prior to the Covid-19 would still have issues to survive under such circumstances or would be merged by other airlines. The worst scenario could be the global economy into a recession that lasts for years and the government would have to bail out certain large airlines that are too big to fail. The supply and demand of airlines would continue to be low for years and many airlines would go out of business and surviving airlines would significantly reduce budgets and operation costs.
As the air travel demand has dropped over the past several months, the airline stocks have plunged in response. Aviation companies often adjust by taking measures to preserve their liquidity, manage debt covenants, and restructure operations. However, companies need to come up with solutions along with these conventional adjustments to survive through the crisis. The current market offers opportunities for risk-taking investors to add more aviation stocks to their portfolio at lower costs while providing much more liquidity to aviation companies through sale-leaseback transactions (Todd, 2020). Investors with available capital to invest could offer liquidity to operators by leasing them back purchased aircraft assets through the short-term and the investors have to take highly default risk in the future.