Can the Airline Industry survive the Pandemic?
This article covers the impact on the airline industry due to the global pandemic and its importance to global economy.
The current crisis is supposed to have a bigger impact than 9/11 on the aviation sector. Owing to worldwide travel restrictions, it is one of the hardest-hit sectors due to the ongoing COVID-19 pandemic with reports suggest that it will continue to face turbulence in the near future.
According to Forbes, the aviation industry supports 65.5 million jobs around the world and $2.7 trillion (3.6%) of the world’s gross domestic product (GDP). If aviation were a country, it would rank 20th in size by GDP. That equates to the GDP of Switzerland or Argentina. This gives us the idea of the importance of the survival of the Aviation Industry and its value to the Global Economy.
Do they have the money to Survive?
COVID-19 pandemic has had a huge impact on the aviation industry due to travel restrictions around the globe and the plunging travel demand. All the major airlines have halted their operations and grounded their fleet. This has created financial stress among all the companies in the aviation sector. According to IATA’s report, the Airline industry is going to incur losses of over $113 billion worldwide in 2020.
As you can see from the above graph most of the Airlines around the Globe have only two to three months of Cash Reserves to run their operations. This is because even though the airline companies don’t incur any variable costs, it has to bare fixed costs like lease payments, employee salaries, maintenance and Depreciation costs. These Fixed Costs Constitute a significant amount of all the expenses incurred and hence the companies would now have to use their Reserves to pay for these costs and hence leading to depleting Reserves. The second chart shows that about 75% of all the airlines will only survive for 0–1.5 months with their existing cash reserves and about 10% of the airlines can survive for about 1.5–3 months.
The companies with reserves will not face the threat of bankruptcy but on the other hand, the companies with no reserves will have a hard time recovering from their deep wounds and would have to rely on Government bailouts to rescue them.
Current Ratio = Current Assets/Current Liabilites
This Financial Ratio is a measure of the Liquidity of a company. It measures a company’s ability to pay its short term debt that is due within a year. A current ratio of less than 1 seems alarming and indicates a higher risk of distress or default
So on an average, we see that the Airline companies have a current ratio of less than 1 which shows that they will not be able to pay their short term debts using their current assets and would have to borrow again to finance its debt which can be very disastrous in the long run.
Will the Bailout Help?
On March 25, 2020, the U.S Government announced a $2 Trillion stimulus package and out of which $50 Billion was assigned for the Aviation Sector. This Bailout is for the Airlines so that they don’t layoff employees or send them for Unpaid leaves.
Talks are underway with U.S. airlines, promised a $50-billion chunk of the federal stimulus package, on how to deliver aid to them as they endure a dearth of passengers in the wake of the coronavirus pandemic, -U.S President Donald Trump.
The Decision is yet to come on how these packages are going to be delivered so that it has the highest impact, But It is sure that these bailout packages are not going to be free money for the companies. There will be conditions attached to it so that the companies do not use these benefits for themselves but rather pass it on to their employees.
Will the Bailouts help the companies overcome this difficult phase?
Only Time Will Tell!
Indian Scenario
The Indian aviation sector contributes USD 72 billion to the national GDP. For India’s coronavirus-wrecked aviation sector, the bad times are likely to continue and given the current lockdown parameters, if a 25% decline in industry revenue is assumed, the losses may be around USD 1.5-USD 2 billion. Even before COVID-19, most Indian carriers had strained balance sheets and liquidity crunch and this pandemic have just added salt to their wounds.
InterGlobe runs IndiGo, India’s largest airline with a 49% market share for domestic air travel and hence has the highest Reserves which will be sufficient to cover its losses due to the pandemic.
IndiGo’s sufficient cash buffer ( ₹9,400 crores as of December 2019) should be enough to weather this storm, though other airlines will need external support in the form of interest payment moratoriums and lower taxation on crude and other imports. - LiveMint March 26,2020
The other Airlines which have a minority market share will need government aid to stay afloat. But as things stand, IndiGo is clearly better off with its higher cash position. As such, its share of the market may well increase on the other side of COVID-19.
The Uncertain Future.
Given the current circumstances, the future of the airline industry in India is surely uncertain. Domestic air traffic is expected to fall from an estimated 140 million passengers in FY20 to around 80–90 million in FY21, consultancy Centre for Asia Pacific Aviation India Pvt. Ltd said in a report. Various reports suggest that the market is going to be smaller for a while. Even when the lockdown is lifted the demand of the Passengers is not going to increase for about a month and various airlines would still have to ground most of their flights and lay-off their employes or send them on Unpaid leave. The Future journey is surely going to be a roller-coaster ride for the Industry.
Even though bankruptcies are not unknown in the airline business, having them collapse now would add even more instability to our economy and endanger even more jobs. -The Washington Post April 7,2020
From the above analysis, we can conclude that the Airline industry is going to face a tough challenge ahead and the impact is expected to have a ripple effect throughout the value chain that supports the airline Industry.
