You've put all of your savings into a no-expenses-spared trip-of-a-lifetime to Dubai. You've hit the gym every day for months to build the perfect summer beach body, ingesting more protein powder, BCAAs, and creatine than is either necessary or healthy. You've promised your kids that this summer, you're going to meet Mickey Mouse and his crew in Disneyland. And then, Covid-19 hits. Holidays are cancelled, airlines stop flying, and hotels, Airbnb's, and the hostel that you were going to be staying at on your lads' trip to Magaluf, are all forced to shut. In an unprecedented situation that has had global repercussions, what has been the true impact on the aviation industry, and what can we expect to happen next?
Sometimes as consumers, we're quick to forget that we're not the only party in a transaction. There are always two sides (or more) to a story, and while all of our summer plans have been ruined, or, at best, postponed, it's often easy to overlook how the coronavirus has affected the other side - the travel industry. Firstly, let's talk about lockdown. In the UK, the word lockdown immediately brings to mind a couple of images - the closure of all pubs and most shops; the headline that Dominic Cummings defied his own government-imposed lockdown rules and the ensuing chaos that followed; Captain Tom's heroism, and Matt Lucas' viral impersonation of Boris Johnson's inability to take a clear and consistent stance on the deadly epidemic. But, for airlines, it has meant filing for bankruptcy. Flybe, Avianca, Compass Airlines, and Virgin Australia are just some of the airlines that have already entered administration or filed for bankruptcy. In the case of Flybe, the airline already faced financial uncertainty, but the outbreak of the pandemic was the death knell for it. While there have been attempts to revive some of these dying companies in recent weeks, it is only a matter of time before many more airlines follow them on the path to extinction. CAPA, the aviation consultancy, claimed that "most airlines in the world will be bankrupt" as a result of Covid-19, unless immediate action is taken.
With less than 1/3 of the global fleet of planes currently in the air, it will take some time to rebuild this industry. Revenues for airlines have fallen dramatically due to a lack of demand from passengers, as well as travel restrictions that are in place. Airlines are burning through cash at a rapid rate, and are forming large mountains of debt that will be difficult to pay off. They are also being forced into cutting thousands of jobs in a bid to preserve cash. According to IATA (International Air Transport Association), air travel will lag pre-COVID forecasts for more than 5 years. Whether this is bullish (optimistic) or bearish (less optimistic), it is clear that Covid-19 will have a long-lasting effect on this industry. Even when travel restrictions are eased and people can jet set, attend business meetings across the globe, or move freely between countries, there are some lingering questions that must be answered - will airlines be running? Will they be operating to full capacity or as frequently as they used to? Will people feel safe travelling by plane?
Let's take a look at General Electric as a case study. While not an airline, General Electric is a global industrial company that relies heavily on airlines and aviation companies for sales. General Electric (GE) sells aircraft engines and other plane parts to companies such as Boeing. As a result of Covid-19, the group’s revenue (24.8% down from a year ago), profits, and free cash flow fell in Q1 2020. GE’s dependency on the aviation industry cannot be underestimated. In April, the company was forced into furloughing over 50% of its engine manufacturing staff, had to terminate 69 Boeing 737 Max airplane contracts, cut 13,000 aviation jobs completely (5x more than originally planned), and saw Q1 earnings drop massively (new engine installations were down 45% and spare engine sales were down 60%). Prior to the new year, there were already underlying issues with GE’s energy business and other units. Debt reduction was a priority, and aviation was supposed to counteract these problems. But, since the turn of the year, there has been none of this hoped-for stability in earnings or cash flow. In fact, GE estimates that there will be upwards of a $700m operating profit impact (likely to rise even further) from Covid-19.
Since 20th February, EasyJet's shares have fallen by 47%, as have Delta Airlines and American Airlines. The aviation industry will suffer more than a $315bn revenue loss, with Asia Pacific, Europe, and North America being the most adversely affected. Some airlines are back up and running, but to a limited capacity. For example, EasyJet returned to the skies last week, with their flights about 30% full. Depending on the destination, passengers may have to quarantine upon arrival for a varying length of time. To see the most up-to-date data on lockdown's travel impact across the globe, you should visit LockdownIndex.com.
A major factor in share price performance of a company is public sentiment. Within the investment world, since the outbreak of Covid-19 earlier this year, major players have been quick to disassociate themselves and their portfolios with the airline industry. GE is extremely reliant upon this industry for clients to buy its jet engines, plane parts, and other aerospace-related products and services. However, with Warren Buffett selling all his airline stocks recently, and Boeing CEO David Calhoun claiming that the aviation industry will take a minimum of five years to recover to pre-coronavirus levels, negative sentiment has consequently pushed the share price of GE further down to a 29-year low. Furthermore, (not for the first time in the last few years) rumours are circulating with increasing potency and velocity that it is only a matter of time before GE files for bankruptcy. Thus, it is evident that coronavirus has devastated the industry - even non-airlines that rely on the aviation industry have been crushed.
So, what happens next?
As lockdown eases, people's once-abandoned travel plans may fall back into place, albeit in a limited and very different manner. The hospitality industry in the UK is expected to open its doors once again to the public from July 4th, and in many countries, tourists are already being welcomed, without the need to quarantine. Flights will increase in capacity and frequency, but this change won't be immediate. Airlines will continue to be hurt, revenues will continue to fall, aircraft (and plane parts) orders will be cut back, and companies will go bust. Let's hope for our sake as consumers, and for theirs, that we'll be back in the sky jet setting across the world as soon as possible!