COVID-19: The Aviation Industry Is Staring At A $120 Billion Hole, Worsening Demand


As the impact from the Coronavirus continues, the global airline industry is grappling with the largest demand shock in history. While the industry is no stranger to “black swan” events, the sheer magnitude of the corona impact has left the industry with very few options. For purposes of comparison, one must note that the 1991 Gulf War resulted in a 7- 9 per cent reduction in passenger demand. The 9/11 attacks of 2001 and the US Recession led to a 12 per cent reduction in some markets and resulted in some airline bankruptcies.

In 2003, the SARS outbreak resulted in a 20 per cent decline in demand in Hong Kong, thus hurting the aviation sector. The 2004 Indian ocean earthquake/tsunami led to upto 35 per cent reduction in demand. The 2010 Eyjafjallajokull volcanic eruption resulted in a 20-30 per cent decline in demand.

The 2020 Coronavirus outbreak, however, shall result in more than 50 per cent decline in demand and is likely to go higher.

Traditionally, airline leaders have held that airline failures can be traced to mismanagement of costs. Accordingly, successful management teams always looked to ensure that costs did not have a linear graph and that revenues, when they fell, were matched by cutting costs. But this time the issue is inverted. It’s a revenue issue first and foremost. As far as revenues are concerned, they are just not coming. It is not a decline in demand rather it is a decimation of demand. 

For airlines, this means adjusting capacity and costs accordingly. And they have done just that. Whether it is FinnAir or SAS, or AirFrance-KLM with capacity cuts of upto 90 per cent; or RyanAir that is cutting capacity by 80 per cent and may ground entire fleet; or Cathay Pacific with capacity cuts of 75 per cent+; or Lufthansa with capacity cut of 50 per cent; or Delta Airlines and the decision to park 300 aircraft and cut capacity by 40 per cent; or United Airlines with capacity cuts north of 50 per cent. The list is endless and more cuts are on the way. Massive layoffs, bankruptcies and airline shutdowns are likely. 

Ironically, this time the airline industry as a whole was better prepared with stronger balance-sheets, credit facilities and healthier cash-flows (compared to a decade earlier). Yet, the speed at which the virus spread and consequently the speed at which demand (booking volumes) fell has been unseen in the industry. Put simply, the coronavirus has come as a “black swan” event where the size and scale of the impact were beyond imagination.

A 120 nano-meter particle is now likely to lead to USD 120 billion in airline losses and counting. As the virus spreads, extreme travel restrictions have been imposed by thirty countries. More countries are likely to impose restrictions. And even when these are lifted, air-travel as we know it is likely to be altered forever. 

That said, eventually, folks will take to the skies again. Even if there are a global shift and de-risking of supply chains and an uptick in remote-work and the use of technology, in the medium-term labour, capital and people flow will resume. This effectively will constitute recovery. But key questions are what shape the recovery of demand will take and how long the recovery will take. 

The past may give some ideas but it is worth repeating that the sheer magnitude and speed of the decline have not been seen previously in global aviation. 

Industry watchers and insiders, at least those who are thinking ahead, are looking to what shape the recovery will take. That is, how soon global traffic will revert to pre-crisis levels (on a country-level this will be significantly different than when looked at as a whole). As highlighted here, a V-shaped recovery is actually the best case. This was seen in the Oil Crisis of 1979 where global air travel demand started to rise post the crisis. But this nature of recovery has all but been ruled out.

Chances are of a “U” shaped recovery. This was seen after the terrorist attacks of Sept 11, 2001. A situation where demand will continue to fall, flatten out and then start to rise. When it comes to how long the recovery will take, this is anybody’s guess. There are simply too many variables at this time to forecast a timeline. And thus the decision of airlines to ground aircraft and drastically cut capacity. Because even when demand picks up, the only way to entice travelers will be via price. Effectively airlines will be buying their sales for a while before they return to a profitability zone. 

Even when traffic levels start to stabilize, aviation as we know it will likely be altered forever. The tectonic shift will force a revision of business models and aircraft manufacturers and airlines may have to rethink “high-density” configurations that pack in as many seats as possible into aircraft.

The most stressful and unpleasant element of travel, namely “airport security” may get an additional element of “health security.” This because the likely narrative post the corona crisis will be that that aviation was the cause of the pandemic. Other impacts that will spill out include medium-term “market-access” impacts, a revival of domestic tourism and likely aviation policy changes by countries. Not to mention the fluctuation in asset values (mainly aircraft), the revision of technology cycles for aircraft and engine manufacturers, the mitigation measures by airports (likely by the ways of added levies on passengers) and the restructuring of airlines.  

Aviation as we know it has been altered forever. A 120-nanometer particle and is likely to have a 120 billion impact. For airlines, both large and small and global and local, permanent structural changes are on the horizon. 

Satyendra Pandey is an India market expert and has held a variety of roles within the aviation business. His positions include working as the Head of Strategy & Planning at Go Airlines (India) and with CAPA (Centre for Aviation) where he led the Advisory and Research teams. He is also a certified pilot with an instrument rating.