Virus risks emergency landing for airlines
Targeted intervention could help carriers weather the turbulence
Warren Buffett’s famous critique of airlines — that they make poor investments and are little more than “bottomless pits” in which to throw money — has never seemed more apposite. Carriers are facing one of their greatest challenges as the rapidly spreading coronavirus has caused a slump in passenger demand. The International Air Transport Association estimates airlines could lose a stunning $113bn in revenue this year alone if the virus continues to spread. That is about four times the previous estimate published last month.
Big US carriers have announced sharp cuts to capacity. Across Europe there are fears that passenger numbers could plunge by as much as 24 per cent this year. Lufthansa on Friday said it would slash capacity by half in coming weeks. Investors have voted with their feet, sending airline shares down nearly 25 per cent since the outbreak began — some 21 percentage points greater than the decline at a similar point during the 2003 Sars crisis.
Despite the turbulence, government bailouts are not the right answer to economic contraction or to help underwrite failing business models. In the UK, the government was right last week not to intervene to save regional airline Flybe. The carrier was already on a perilous financial footing. Nor is the industry alone in suffering the damaging consequences of the crisis. Italy’s decision to lock down the region of Lombardy will have significant repercussions, not just for travel industries but for the wider economy.
It also worth noting that the US industry in particular, whose carriers have in recent years been the world’s most profitable, is in a very different state thanks to a drastic consolidation. The restructuring even lured back long-term critics, including Mr Buffett, who now owns stakes in several carriers. The virus could lead to a similar clear-out in Europe where too many airlines are still chasing too few passengers. Some governments have been all too happy to support ailing flag carriers. Partial consolidation has already begun but the virus could give it wings.
All this does not mean there is no room for assistance. Insurance policies will vary for each airline but not all of them will be covered. Targeted intervention would not be unprecedented and can prove a useful tool during emergencies. The European Commission lent a helping hand to ailing airlines in 2002, after the 9/11 attacks in the US; in 2003 after the Sars epidemic and the Iraq war; and again in 2009 after the financial crisis. The help consisted of relaxing strict EU rules that govern the use of slots at airports. Airlines must use their allocated slots 80 per cent of the time or risk losing them. These rules have already been relaxed for flights to and from Hong Kong and mainland China. In Europe, some carriers are operating “ghost” flights to keep their slots. It would make sense to suspend these rules temporarily.
Other measures could include airports reducing aircraft landing and parking charges. Singapore has already done so. It would, however, be difficult to see private owners of airports in western nations agreeing to follow suit. The UK government is under pressure to suspend air passenger duty for the next six months in this week’s budget.
Yet the virus should not obscure what is by far the largest threat to the industry: climate change. Airline passenger growth typically increases faster than economic output. Accommodating this in a low-carbon world is a daunting challenge. Companies are investing in developing electric planes, but carbon-free long-haul flying is unlikely to become viable over the next few decades, if ever.