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Are airlines strong enough to survive coronavirus epidemic crisis? - By Ahmed Haouaria

Are airlines strong enough to survive coronavirus epidemic crisis? - By Ahmed Haouaria

29 Mars 2020

Dubai, Sydney, Paris or Casablanca. The situation is identical: the airports flight screens show the same flight cancellation. Though invisible, the Covid-19 is heavily present. Covid-19  is extremely impacting the world economy especially the airline industry.

Air transport has not faced such a serious economic threat since the 2008 financial crisis. In just over two months, the Covid-19 coronavirus epidemic has reduced bookings worldwide, and further weakened companies with already precarious status. Alongside events organization and hospitality sectors, air travel is one of the sectors hardest hit by the Covid-19 crisis.

113 billion $ losses if the new coronavirus continues to spread for a long time

Take the case of France, which welcomed more than 90 million foreign visitors in 2019 and which remains the world's leading tourist destination. The country whose tourist economic activity represents more than 8% of the GDP, and more than 56.2 billion euros in revenueand 2 million direct and indirect jobs already suffers from the negative effects of Covid-19 From an estimated $ 29 billion in losses, which affected only Asia, IATA, the International Air Transport Association, now believes that this crisis could cost the sector up to $ 113 billion. However, the companies hope for a scenario similar to that of SARS in 2003, which saw traffic fall very quickly before rebounding, and return to normal after six months. In just over two months, the outlook for the sector in most parts of the world has radically dimmed, said Alexandre de Juniac, Director General and CEO  of IATA. On the other hand, if the crisis continues, it could lead to the disappearance of the most fragile airlines. On the verge of bankruptcy before the arrival of the coronavirus, the British Flybe did not resist it. IATA, which groups 290 airlines, has estimated airline passenger losses between $ 63 billion if the spread of the virus is contained - and $ 113 billion if the new coronavirus continues to spread for a long time. This estimation does not take into account the losses of freight transport which is less affected by the crisis.

An hypotheses of a 19% drop in world passenger air transport revenues

The most critical scenario represents a 19% drop in global revenues from passenger air transport, a sector that generated $ 838 billion in sales last in 2019. The African, Latin American and Caribbean regions are currently excluded from this market study, due to the low number of contamination cases compared to Asia, Europe, and America. "From a financial point of view, this would be equivalent to what the sector suffered during the last global financial crisis of 2008.Willie Walsh, the chief executive of the British Airways and Iberia owner, International Airlines Group, noted a "very significant drop in demand" last week in Italy, the first source of contamination in Europe. However, he believes that demand will stabilize in the coming weeks in light of what has happened in Asia. In light of the current situation in Italy, this does seem to a realistic forecast.To avoid further routings, IATA calls on States to ensure that slots not used by airlines during this crisis are not redistributed. They also call for  mitigation of chargeswhich weighs more heavily on air transport.The global airlines which, according to some experts, are experiencing the worst crisis since the Second World War are increasing calls for help to governments to be supported economically.Since March 17,  2020, Europeans cannot leave the European Union for a month. Results, in the coming days, between 70% and 90% of planes will remain grounded for several weeks. A few days of respite, the time to bring back the thousands of travelers stranded in dozens of countries because of traffic restrictions, before an almost complete blockage.The announcement by the United States of America of the 30-day suspension from the entry of any foreigner who has stayed in Europe to stem the coronavirus pandemic has added another severe storm to the markets.The United States has also issued an unprecedented travel warning, urging Americans to avoid travel abroad due to the new coronavirus. "The State Department recommends that American nationals avoid traveling abroad due to the global impact of the Covid-19", extending the level of warning already adopted for Italy or South Korea to all countries in the world. 

The airline industry: a sector strongly  influenced by adverse exogenous factors

The airline business model one of the most complex and strongly influenced by adverse exogenous factors has shown its limits and states will have to come to the rescue of the companies. There will certainly be a before and after COVID-19. Even if the sector is used to the vagaries, its margins are too low to withstand these crises.

We recall the consequences of the attacks of September 11, 2001, on the International air transport. The airlines suffered a significant loss following the complete closure of the American skies just for four days. Many companies had reduced their capacities to cover their fixed operating costs, using short-time working when necessary. And worse, many companies, the most financially fragile, did not resist the shock, in the United States as in Europe. 

Sabena, the Belgian company created in 1923, Swissair, the company founded in 1931 bearing the Swiss cross as a distinctive mark, TWA, the time, second flag carrier company in the United States and TWA bought in 2001 by American Airlines are the most concrete example of the fragility of the business model. American companies that have posted very good financial results in recent years are today in a state of economic distress. Delta, American Airlines, United and other American companies are claiming the equivalent of 46 billion US dollars in aid from the federal government. While Boeing, which was already crossing a zone of turbulence reinforced with the setbacks of its Boeing 737 Max, requests 55 billion dollars.

Unusual times: Partial unemployment, closed airports…

In any case, around the world, the time has come to save the airlines. Air France, which represents 95% of the French fleet, will be able to benefit, like other companies, from the deferral and spreading of social and tax charges. Above all, the government said it was ready, if necessary, to recapitalize, or even nationalize the company. Proof, for those who doubt it, of the doldrums crossed by the air sector. In total, “100% of the 45,000 employees of the company will be affected by activity measures. There will be a loss of wages since for each hour worked, the employee will receive only about 84% of his net salary.

95% of the African air fleet is on the ground

African aviation is no exception. This is what concluded the Association of African Airlines (Afraa) which has 45 member airlines on the continent. A large part of African countries has closed their airports and borders because of the pandemic, forcing companies to cancel both inter-African flights and those to other continents. "If African airlines do not receive support, they will find themselves in insolvency by the end of June," according to Abderrahmane Berthé, secretary-general of Afraa. He estimates that 2.5 to 3 billion dollars (between 2.3 and 2.8 billion euros) are necessary, through financial aid or relief from taxes and charges. “African companies, long before the Covid-19 pandemic, were already in a difficult situation. They had been losing money for ten years while other companies in the rest of the world were making money. This crisis has added to the difficulties, ”he explains. For the past two weeks, it has been a great disaster for African companies whose planes no longer take off. They no longer have income, at the same time they incur incompressible costs (aircraft rental, maintenance, insurance, parking costs). The 45 member companies of Afraa represent 85% of inter-African traffic with 93 million passengers per year.







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