By Kevin Rozario (London, United Kingdom)
As COVID-19 coronavirus disease continues its rampage across Europe and the US, there are early indicators that the beleaguered aviation business – hit much harder than most (see chart below) – will see modest recovery in Asian markets first, and in domestic travel in particular.
Unlike previous crises such as the early 1990s recession, Asia’s financial crisis, the 9/11 attacks on the World Trade Center, or the widespread ash cloud disruption of Iceland’s Eyjafjallajökull eruption in 2010, the coronavirus pandemic has become global and is expected to linger. Second and third wave infections are a distinct possibility without a widely available vaccine.
Yet there are positive signs in the market. China has cautiously lifted lockdown restrictions on its citizens and reopened Wuhan’s international airport. Hard-hit countries in Europe such as Spain and Italy are also looking to relax their measures while Germany, Austria and Denmark have already begun.
Most air gateways remain open in Europe – more than 80% according to airports association ACI Europe – but many have shuttered infrastructure and are operating little more than essential cargo flights. London Heathrow, for example, has moved to a single runway and is about to consolidate operations into just two terminals (down from four). The busiest hub in Europe saw traffic halved in March (down -52% year-on-year) and is forecasting April passenger demand will plunge by -90%.
Singapore Changi is also shutting Terminal 2 for 18 months from 1 May while Terminal 4 may also close. The action, says operator Changi Airport Group, “is due to the steep decline in passenger traffic and the likelihood that air travel demand will not return to pre-Covid-19 levels in the near term”.
However, CAG says T2’s suspension will “allow for current T2 expansion works to be accelerated”. Completion is scheduled for 2024, brought forward by up to one year. This suggests faith in an eventual normalization of business. CAG’s Executive Vice President of Airport Management Tan Lye Teck comments: “We stand ready to ramp up operations quickly once recovery takes place.”
But is there a recovery visible on the horizon? And if there is, where is it and what shape will it take?
Regional Changes: China Acts as a Capacity Driver
Travel lockdowns started in January, but there have been good signs of recovery in China this week. According to aviation analyst OAG – whose data we are using throughout this Global Update series for consistency – there are hopeful signs in North East Asia. The revival there is being driven by capacity increases in China with 600,000 additional domestic seats added in the week to 19 April. “Increasing demand and the seasonal May holidays are expected to see further recovery,” says OAG’s Chief Analyst John Grant. South East Asia may have longer to wait.
China’s ‘big three’ carriers: China Southern, China Eastern and Air China have reported week-on-week capacity increases to OAG. China Southern added +19.4% this week, though its capacity remains down by more than 50% compared to 20 January – the time when travel restrictions first started.
Meanwhile in the US – the current epicenter of the Covid-19 crisis (alongside Europe) – capacity fell by -26.5% this week, and seats are off by -60% versus 20 January. India too has seen 60% of seats wiped out over the same period. OAG expects this decline to be greater once delayed data from local airlines are factored in.
In Europe, which accounts for 46% of global coronavirus cases, passenger traffic fell by -59.5% in March, dragging the first quarter down by -21% (source: ACI Europe). For perspective, the continent’s airports handled 5.1 million passengers on 1 March (-11.7% compared to the same day in 2019). By 31 March that number had plummeted to just 174,000 (-97.1% compared to the same day in 2019). This is unheard of.
Olivier Jankovec, Director General of ACI Europe, says: “During the global financial crisis it took Europe’s airports 12 months to lose 100 million passengers. With Covid-19 it took just 31 days for that same volume and more to vanish.”
On 9 April the trade association launched ‘Off the Ground’ a project that will map the issues that airports and their business partners will face when restarting full operations. The objective is to make governments and policymakers aware of the industry’s needs and ensure it gets an appropriate response. “Restoring air connectivity will be a cornerstone of economic recovery,” emphasizes Jankovec.
Part of that expected response will no doubt be financial aid to soften the €23 billion in lost revenue for European gateways in 2020, a decrease of -41% compared to a business-as-usual scenario. An estimated 873 million passengers will not travel through Europe’s airport this year.
Domestic Traffic Showing Resilience
A steeper decline in European passenger traffic came after US travel restrictions and the EU’s own travel ban were announced. (Source: ACI Europe)OAG data indicate that domestic air traffic has fared much better than international. Following US travel restrictions to/from Europe and the EU’s own non-essential travel ban – both in mid-March – international capacity nosedived. Compared to mid-January, domestic capacity has fallen by -57% and international by -88%. “Domestic capacity now accounts for 85% of all seats being supplied compared to 61% at the beginning of Covid-19,” says Grant.
Domestic traffic will bounce back first. This is happening in China and will also eventually be apparent in large geographical markets such as the US, India and Russia – once the virus threat recedes. A key driver is that individual governments have better control of post-lockdown population movement (and likely infection) when it is within their borders. Meanwhile for consumers, perceptions that foreign destinations pose a greater, or unknown, risk of infection might encourage home travel for some time.
Grant tells AirportIR: “The domestic market is absolutely stronger now, especially in countries with huge land masses and under-developed alternate modes of transport such as the US, Russia, and to a degree China and Turkey.”
There is general consensus that this will be an initial way out. Former Director General at ADP International, Jacques Follain, says: “It is likely a recovery will be driven by local internal economies and that major countries will first look for a rebound within their borders. This favours the progressive reopening of domestic routes within a period of four to six months from now.” Follain adds that domestic recovery will start in Asia first and notes that “China, Japan, South Korea, Vietnam and Indonesia never fully closed their domestic traffic”.
Daniel Bircher CEO of Zurich Airport International Asia tells AirportIR: “Certainly countries with robust domestic passenger demand such as China, India, Indonesia, Vietnam and Thailand will see quicker recoveries.” But how this plays out will vary. He adds: “Whereas Indonesia and Philippines rely heavily on domestic flights, Japan, China and Malaysia also have good road and train infrastructures that would support travel demand as economic activities increase.”
Recovery is anticipated to happen in order of Covid-19 outbreaks. Fernando Carrandi, Investments and Airport Operations at Chilean multinational Agunsa, says: “I expect a first wave of rebounds in Asia, then Europe and finally North America. Possibly business travel will happen first, then leisure.” Rogerio Prado, Head of Airport Development at Brazil’s Companhia de Concessões Rodoviárias (CCR) agrees, adding: “The Latin America and Caribbean region will be the last to rebound because it is hugely dependent on the US market.”
An eventual international bounce will likely starting regionally too. Bircher says: “Intra-Asian flights would see a quicker recover than long-haul intercontinental flight connections.” Follain adds: “If European countries can agree to open borders in a way that minimises the risk of a pandemic rebound, we may see the reopening of regional flights. International routes will take longer because of the persistence of travel bans in the absence of a solution to fight the virus.”
Alexandre de Juniac CEO of airline association IATA underlines that point: “Governments re-opening their economies must have confidence that the disease is also under control in the countries they do business with. Otherwise they are not going to make travel easy or convenient.”
The Outlook Beyond 2020
Confidence in the ability to suppress Covid-19 is key to aviation’s future outlook. Beyond a dismal 2020 – during which IATA forecasts full-year passenger revenues collapsing by 55% versus 2019, and traffic falling 48% – the picture is far from clear.
Several airports expect losses of traffic and/or revenue for 2021 as well, but at the 10-20% level. In Latin America Agunsa’s Carrandi says: “It is possible that nearer the end of the year we will see a slight recovery but 2021 is difficult to predict. It will certainly be better than 2020. Much depends on how hard industrialized economies are hurt by the economic crisis.”
Economic strength will also determine aviation’s fate. More than 22 million Americans filed for unemployment benefit since President Trump declared a national emergency a month ago, indicating just how hard consumers are being impacted. Fitch Ratings is now using what it calls “a deep global recession” on the scale of the 2008/9 global financial crisis as its base case.
Zurich Airport International’s Bircher notes: “The industry will feel the after effects of this crisis for some time – be it through debt repayments, suppressed travel demand, immigration and quarantine procedures and/or new hygiene requirements.” But he believes there can be some regional pick-up: “Underlying demand in Asia has been very robust and purchasing power from a growing middle class has boosted air travel (in the past). I do not see this changing substantially. A fast recovery in 2021, especially in markets with strong domestic demand, is very likely.” This assumes there are no strong second or third waves of the pandemic.
In France, Follain says the currently opaque picture of governmental measures to support aviation makes it hard to assess the future. “Although most major economies intend to accelerate their economic rebounds after the Covid-19 crisis, air travel will remain in chaos leading undoubtedly to airline failures,” he says.
“In view of the financial stress for airlines, before the end of 2020 the sector might see bankruptcies, re-nationalizations, and certainly consolidation. Progressive opening of international routes will be accompanied by reduced load factors. The second half of 2021 should be more stable.”
On the airport side Follain believes that operators will continue to axe non-essential capex and opex to safeguard P&Ls and cash reserves. “Some governments and private owners might decide to sell their assets leading to accelerated consolidation in the business,” he says. On the other hand some privatizations are temporarily being put on ice, for example in Japan.
In adversity there is always opportunity – as well as risk – for buyers in the market and a who-dares-wins approach may reap rewards. Financing may not be readily available but Follain says that groups “may have to fund airport asset acquisitions with their own equity and envisage a possible refinancing in 3-4 years when the industry has stabilized”.
[For previous Global Updates please click here for last month’s and here for February’s. For our weekly update of a basket of airport and airline shares, and the stock exchanges they trade on, please click here and save the link.]
Redefining the Airport-Airline Relationship
In AirportIR’s second Global Update a month ago we suggested that the financial impact was so profound that the key stakeholders in the aviation business – airlines and airports – would have to fundamentally review their often fraught relationship. We asked four leading aviation leaders for their insights.
Fernando Carrandi, Director of Investments & Airport Operations, Agunsa “This episode is probably going to make airports, airlines, governments and other actors in air travel work more closely together. I foresee better understanding and relationships between all participants.”
Daniel Bircher, CEO Zurich Airport International Asia “This crisis highlights the interdependency between partners and it is paramount that we support each other now. But there are challenges. Different actors have different cost structures. Airports typically have a large share of fixed operating costs while airlines have flexibility to reduce those costs quickly. Other providers may have very thin margins. However, all partners will strive to postpone capital costs, reduce operating costs and renegotiate financing terms. All aviation partners need to focus on creating healthy finances for their business, reducing leverage and ensure sufficient financial reserves.”
Jacques Follain Former Director General ADP International “Airlines and airports will have to fight to recover their financial health, but their respective models mean the recovery process will be different. Airports will be less affected by Covid-19 than airlines. Airports are a long-term strategic asset for countries and/or regions and the vast majority have taken measures to enable them to weather a difficult crisis. Unlike airlines, it is difficult to imagine – with a few exceptions – airport bankruptcies without either a buyout, a recapitalization or national, regional or private financial support. The way out of this crisis will be in a spirit of support between airports and airlines. It is an opportunity to finally solve the issue of economic regulation of airports and the arguments for and against dual till mechanisms, advocated by airports, and single till which is favored by airlines and in particular by IATA.”
Rogerio Prado, Head of Airport Development, CCR “It is too soon to understand whether this crisis will lead to an improved relationship between airlines and airports, particularly privatized entities. We are implementing measures to cut costs and negotiate mitigation plans for tenants as well as special conditions during recovery (such as eliminating minimum guarantees in the first months and applying discounts on variable fees). Governmental aid and support will be key.”