The rapidly spreading coronavirus and the travel restrictions aimed at curtailing it have crimped air travel, forcing analysts to lower airline income estimates. But the impact should be temporary as containment measures take hold.
“A decline in cash flow is probably already hitting airlines with meaningful exposure to China and the wider Asia-Pacific region, and will continue until the virus is contained and normal travel volumes resume,” said S&P Global analysts in a report published on Thursday. “Any effect on air transport is usually temporary following containment.”
The death toll from the coronavirus has climbed to 170 and the number of infected cases has risen to over 7,000 as isolations and travel clampdowns remain in place.
The International Air Transport Association, the industry trade group said past episodes indicate that the coronavirus is unlikely to have a long-term effect on air travel demand.
“In the past, the airline industry has proven resilient to shocks, including pandemics. Even in the outbreak of SARS, monthly international passenger traffic returned to its pre-crisis level within nine months,” the report said. IATA is the trade association for the world’s airlines, representing some 290 airlines or 82% of total air traffic.
It estimated that passenger air traffic (revenue passenger kilometers) was about 35% lower at the SARS outbreak’s worst point for airlines in the Asia-Pacific region. For 2003 as a whole, IATA estimates SARS cost those airlines 8% of their revenues (about $6 billion at the time).
But such comparisons may be flawed.
“It is hard to compare with SARS as airlines are completely different these days – more destinations, higher traffic. There is pressure on yields (ticket prices) and that has a big impact,” said Andrew Lee, Jefferies aviation analyst.
Indeed, Credit Suisse said the passenger demand decline was off a base that was seven times smaller than today’s volumes and the IATA report said an additional 450 million passengers fly to from and within China per year compared with a decade ago.
As expected, Chinese airlines have suffered the most.
Share prices of the 3 Chinese airlines – China Southern, China Eastern and Air China – have fallen by 20-22% from this month’s highs, lagging the 14% and 7% decline in regional rivals Cathay Pacific and SIA, which have smaller exposure to China and thus are less affected by the lockdown moves.
“The impact will be felt more by Chinese airlines than others because the dominant share of their business is on the mainland and in any case they were expanding too fast even before the coronavirus outbreak,” said Jefferies’ Lee. “The Chinese new year holidays have been extended and therefore the lockdown will also continue. The catalyst for the next move will be a slowdown in the number of cases or lifting of travel restrictions.”
But he said there is pent-up outbound demand given the travel restrictions. When that will play out depends on how long the lockdown continues.
China’s share of global traffic is much more elevated than before, so the impact would be greater this time around.
“China’s air travel market is larger and better connected to the rest of the world than ever before, both in absolute terms and as a percentage of global aviation (Chinese airlines carry 15% of global air traffic). Hence, larger ripple effects are likely if the coronavirus continues,” said S&P Global.
For the moment the sector is likely to remain under pressure as confirmed cases are set to increase.
“During SARS in 2003, share prices bottomed only 2 months after [the pathogen was] first recognized by WTO on 26 Feb 2003 despite China total pax [passenger] traffic declining until June 2003. We expect pax yields to be under pressure if traffic declines,” said Jefferies analysts in a note.