By Avtar Jalif
With so much uncertainty on the horizon, how and when will the transportation industry recover?
The aviation industry has been reeling from the impact of global travel bans in the wake of the coronavirus pandemic. As people are forced to stay home, either due to lockdown or self-imposed isolation, transportation and tourism have been among the hardest hit sectors.
Most airlines are either fully grounded, or operating at very limited capacity. Many are still paying leases or rentals, and some are operating ‘ghost flights’ to hold their flight slots. If travel restrictions continue, the International Air Traffic Association (IATA) estimates that industry passenger revenues could plummet $252 billion – 44% below 2019’s figure.
Some governments, like the UAE, have already stepped forward to ease the financial burden of their national carriers. Sheikh Hamdan bin Mohammed Al Maktoum, the Crown Prince of Dubai, said that the UAE Government plans to inject new equity into Emirates Airlines during this critical period.
Globally, the US Senate also voted to give the country’s aviation industry USD 58 billion in a coronavirus-rescue package, including grants to cover some 750,000 employees’ paychecks. Virgin Australia has sought a USD 862 million rescue package from the Australian government to enable it to survive the collapse in passenger demand.
Large carriers are expected to have better access to financing during the crisis, and those that support the e-commerce growth sector during these times may create additional cargo revenue. Airlines may also consider secured financing on their aircraft fleets.
However, fleets may become de-valued or, at a minimum, challenged by current and future lenders. The cycles (take-off and landing) and hours flown that drive regulatory maintenance compliance will determine the extent that maintenance costs can be deferred.
With so much uncertainty on the horizon, how and when will the transportation industry recover? Businesses will have no choice but to be more cautious about spending. The aviation sector especially could see reduced expansion and increased consolidation. It could be a fight for survival for some carriers, but the subsidies and support offered by governments will hopefully help reduce the impact.
While nobody can predict when people’s lives and businesses will return to normal, a reduction in leisure travel may be expected, as people choose to stay home for their own safety over the coming months. With constrained budgets, families will certainly re-evaluate their annual vacations – at least for the foreseeable future.
Exchange rates may also impact people and businesses in certain countries as the US dollar strengthens, making it less affordable for people to travel. Airlines could be forced to reduce ticket prices as a result, which might impact their overall business. As working from home becomes the norm, companies could re-evaluate business travel and curtail unnecessary spending involving travel for business meetings, events, corporate events and incentive trips.
Business will eventually return to a new normal – but not before a complete re-assessment of operations. In particular, Middle Eastern carriers have tended to have ambitious expansion strategies, seeking to attract people to fly via their hubs on routes between East and West. Furthermore, growing tourism in domestic markets (including Dubai and more recently, Saudi Arabia) meant that airlines were expecting a period of strong demand. This may be reviewed in light of the current risks.
Given that around 25% of costs for any airline are represented by fuel, the prediction that oil prices could plunge below $20 a barrel this quarter could bring some respite for carriers. But this is only a small part of the solution. According to IATA’s Director General and CEO, Alexandre de Juniac, airlines need $200 billion in liquidity support to simply make it through. On the other hand, a low oil price may impact the budget of Middle Eastern governments, causing a ripple effect in the local economics.
Government support through short-term loans, grants and tax relief is no doubt a welcome intervention. However, should the disruption be prolonged, there will be significant knock-on effects throughout the broader aviation industry, including airport operators, airframe and engine manufacturers and the entire aerospace supply chain. Governments may also have to manage their resources – the billions they are offering in subsidies could result in fiscal tightening or higher tax rates in the future.
More coordinated support could be required in the coming months to aid strained economies. The aviation industry will play a strategic role in the global recovery, with consolidation through mergers and acquisitions (or equity positions in publicly traded airlines).
At the moment, however, airlines will have to focus on managing costs, whether through voluntary leaves of absence, reassigning staff wherever possible, deferring aircraft maintenance and deliveries, ceasing capital expenditure, grounding high operating cost aircraft, returning leased aircraft early, or cancelling materials purchase orders to reduce operating costs as quickly as possible to preserve liquidity. Some of these measures could help the industry tide over challenges in the coming months.
Avtar Jalif, Head of Transport & Logistics, KPMG Lower Gulf