COVID-19: Airlines Impact

GLG sat down with Richard Aboulafia to discuss his insight into how the COVID-19 might impact the airline industry. Richard is the Vice President of Analysis at Teal Group Corporation, where he manages a team of experts providing forecasting in aerospace including engines, electronic space systems, and missiles.

GLG: As you look at airlines’ response to the recent outbreak and the suspension of flights to Mainland China, how does it compare to other outbreaks, such as SARS, MERS, and H1N1?

Richard: First, I think the most important thing to remember is that even though traffic is an area of concern, airline profitability is not nearly that kind of issue. SARS is the most severe epidemic the aviation industry has seen in terms of its impact upon its business. SARS came at a time when there were much broader problems for the airlines. You had bankruptcies among the U.S. majors. The sort of massive restructuring that we saw in the mid-2000s simply hadn’t happened. The post-9/11 bankruptcies were still very much playing out. It was very different.

We don’t know about this virus yet. The current indications are that it might be more contagious than SARS, but possibly less fatal. During SARS, you had Asia Pacific travel declining by a little over a third. It took about nine months for traffic to recover. It also took place at a time where airlines were perhaps in less healthy shape and less able to absorb the damage. Back then, capacity management wasn’t quite as robust as it is today. During SARS, you might have seen greater exposure by the airlines, whereas today it’s more manageable.

GLG: As we know, many flights within Mainland China have been suspended. Can you give us an estimate of how long halted flights will last?

Richard: The problem is, we don’t how quickly this thing can be contained. For the first three months during SARS, it was bad, but things recovered within about eight or nine months. That’s probably a good baseline.

In this case, you have a couple of hundred deaths out of many thousands infected. When all the data came in from SARS, one out of 10 people who were infected died. We just don’t have enough data yet to describe the fatality for the Wuhan virus. If it’s not disastrously fatal, you might see an easing of things in a few months. In a worst-case scenario, you’re looking at about a nine-month recovery period from this.

GLG: What is the risk that a broader restriction is placed on flights by airlines? What about European or U.S. airlines?

Richard: It’s truly a wait-and-see game. I believe there are still just about five or six cases in the U.S. Will it spread? Will it be effectively contained? Hopefully, it can. From my standpoint, I’m heading to the Singapore Airshow in a couple of weeks and there’s been no talk at all about calling it off or restricting travel. It seems to be very much a China problem and not much of anything else.

GLG: The World Health Organization announced that the Wuhan outbreak is an international public health emergency. What are the implications of this announcement in terms of regulatory agencies and/or corporate policies on travel restrictions into Mainland China or the region?

Richard: I think the announcement codified events that were already underway. Whether it was Starbucks closing their stores or companies banning travel to China, I think this announcement just codified the existing reality.

It will hopefully allow for better prioritization of resources to assist the Chinese government and its effort to control the virus. It will certainly play a role as they decide to take flights offline. I don’t think it will have a practical impact on what is already in place.

GLG: Could this outbreak impact airline travel from the consumer level, even outside of travel to China, due to fears of contamination?

Richard: Some background is important here. We’d basically had a decade of above-average traffic trends. For the last decade or so, growth was a little over 5.5% on average. In 2017, we saw 7.6%, and in 2018 it was 6.5%. In March, something very mysterious happened. You had year-over-year growth drop from 6.5% in February to about 4%. Since then it really hasn’t recovered at all. As a matter of fact, you’ve had some numbers in the threes globally. This is astonishing because there doesn’t appear to have been any catalyst for this weakness.

Part of it is likely due to the seizing up of trade. This probably stems from the protectionist measures that have been put in places, such as Brexit or the U.S. tariffs on Chinese and European goods. It’s important to note that before the COVID-19 outbreak we were only at 4.1%.

Then you throw this virus into the mix. I think this could lead to a few grim months in travel. I’d be surprised if you didn’t see the International Air Transport Association (IATA) decide to downgrade its expectations for the year from 4.1% to something in the three zone. It could also be a bad year from a traffic growth standpoint, which is unfortunate because the industry was already in that weak place in terms of travel demand.

About Richard Aboulafia

Richard Aboulafia is Vice President of Analysis at Teal Group Corporation, a firm providing consulting services in the aerospace industry. Richard is responsible for managing a team of experts who forecast aerospace markets including engines, electronics, space systems, and missiles. He has more than 20 years of experience in the aerospace industry. He has advised numerous companies, including most aviation industry prime contractors and many subcontractors.

This article is adapted from the GLG Teleconference COVID-19: Impact on Airlines. If you would like access to this teleconference or would like to speak with Richard Aboulafia, or any of our more than 700,000 experts, contact us.

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