The near-total shutdown of air travel in and out of China because of the coronavirus will result in a 4.7% contraction in global traffic and deprive global carriers of $29.3 billion in revenue, according to an initial impact assessment by the airline industry.
The International Air Transport Association (IATA) estimates that COVID-19, the technical name for the flu-like virus, will decrease demand for Asia-Pacific carriers by 13% this year after initial forecasts were for 4.8% growth, for a net contraction of 8.2%. Asia-Pacific carriers are expected to forego $27.8 billion in revenue, with the bulk of the revenue loss – $12.8 billion – shouldered by carriers registered in China.
Carriers based outside the region are forecast to lose $1.5 billion in revenue, assuming the loss of demand is limited to markets linked to China, IATA said Thursday.
About 120 airlines have canceled or curtailed flights through China and Hong Kong, eliminating close to 90% of international capacity. The elimination of widebody passenger transport has also wiped out a popular air-shipping option for cargo owners, although export demand is very low at the moment because Chinese production is at a virtual standstill due to widespread quarantines.
The combined revenue loss is 5% lower than the trade association forecast in December and represents a 4.7% hit to global demand. The loss would more than eliminate expected growth this year, resulting in a 0.6% global contraction in passenger demand in 2020 – the first decline in demand since the 2008 financial crisis.
IATA said its estimates are based on models that consumers will quickly return to normal travel patterns once the outbreak is stopped, as happened after the SARS epidemic. SARS was responsible for a 5.1% fall in revenue-per-kilometers for Asia-Pacific airlines.
The estimated impact of the COVID-19 outbreak also assumes that the center of the public health emergency remains in China. If it spreads more widely to Asia-Pacific markets then impacts on airlines from other regions would be larger.
IATA said it is premature to estimate what the revenue loss will mean for global profitability. Unknown is whether the outbreak will follow the same profile as SARS or not, but governments are likely to use fiscal and monetary policy to try to offset adverse economic impacts and airlines may see some relief in lower fuel prices, depending on how they’ve hedged fuel costs.
The Singapore government, for example, is allocating SGD 112 million ($80.4 million) to provide financial relief to airlines struggling financially to continue flights to the city-state.
“These are challenging times for the global air transport industry. Stopping the spread of the virus is the top priority… The sharp downturn in demand as a result of COVID-19 will have a financial impact on airlines – severe for those particularly exposed to the China market,” IATA Director General Alexandre de Juniac said in a statement. “Airlines are making difficult decisions to cut capacity and in some cases routes. Lower fuel costs will help offset some of the lost revenue. This will be a very tough year for airlines.”
In its financial report on Tuesday, Air Canada said the coronavirus is one of several factors that are expected to lower operating earnings by CA$200 million ($151 million).
New figures for Chinese airlines show traffic declines in January, when the coronavirus outbreak became a public health crisis. China Eastern Airlines and China Southern Airlines each reported a 1.2% decline in traffic, while Air China reported a 4.1% decline.
Cowan investment bank estimates that as much as 75% of the Chinese fleet is idle and that it will take at least a year for traffic to rebound, with others indicating an 18-month recovery period.
Analysts say other markets could benefit as people take summer vacations in Europe and the Americas. Air Canada, for example, said it already has redeployed a few aircraft from the Pacific to the Atlantic market. It’s unclear at the moment how the extra capacity will impact passenger and freight rates in those markets.
There are 75,000 confirmed cases of coronavirus and 2,118 deaths, with 99% of the cases in mainland China. But South Korea in the past two days has confirmed 73 new coronavirus cases, making it the largest outbreak area outside of China, not counting a contaminated cruise ship in Japan, and raising concerns that the virus is breaking out beyond China.