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The Virus and Post-Virus Hit to All Airlines - FBNQuest

May 28, 2020   •   by   •   Source: Proshare   •   eye-icon 1093 views

Thursday, May28, 2020 / 11:49 AM / by FBNQuest Research / Header ImageCredit: CNBC

 

Alongwith tourism, event management and large sports events, the airline industryhas been heavily affected by the impact of the virus. Warren Buffett has solddown his positions in US carriers while Lufthansa has negotiated a 9bn Euros bailoutwith the German government. British Airways has made 12,000 employeesredundant, and Virgin Atlantic may have hopes of being included in ProjectBirch, a UK government programme under development to support viable companiesunder acute pressure but deemed strategic.


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Thestory is the same in emerging and frontier economies. Air Mauritius went intovoluntary administration on 22 April, the first casualty in Africa. Thestrategy of Kenya Airways has been representative: conserve cash, reduce allcosts where possible and cut salaries up to 80 per cent in some cases. SouthAfrican Airways is not flying and has been ordered to come up with a businessrescue plan if it wants another injection of governmentmoney.     

 

Theimmediate challenge for all airlines, once they have resumed operations, is topersuade customers that flying is safe with social distancing and othermeasures in place. This will be a gradual process. We have seen from surveysand opinion polls that for some, the experience of extended lockdown has leftthem wary of leaving their home and braving public transport, let alone takinga flight.

 

Airlinesmight be thinking that once a vaccine is discovered and made widely available,their businesses will return to normal. They would be advised to be morecautious in their optimism. The hit to government, corporate and householdfinances has been huge, which equates to squeezed demand. Additionally, someconsumers may still expect distancing after a vaccine has been launched. Othersat the high end of the market may feel that expensive holidays in distant locationsaccelerate climate change, and that they should forgo the trip to the Okavangoswamp or the Mountains of the Moon. The CEO of a privately-owned regionalairline, based in Johannesburg, has suggested that 40 per cent of the world'sgrounded aircraft will not fly again.

 

Initially,airlines will offer competitive prices to get customers back into the habit offlying but before too long they will have to raise their tariffs to cover theloss of revenue (from distancing) and to service their increased debt burden.Prices should also rise because we expect a large amount of consolidation.


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Thereare more than 200 African carriers. A large number look vulnerable includingstate-owned carriers when their governments are so squeezed fiscally that theymay have to sacrifice the said prestige of running the national airline. TheNigeria case is a little different: there is no national carrier, and arguablythere are not too many local companies when we allow for the size of the marketand the poor state of the infrastructure. Their problem is the domination ofthe international business by foreign firms. One local media source calculatedthat these firms earned US$3.1bn from ticket sales in 2019. 

 

Thereis one African flier that is not in danger of going under and will surely playa role in the consolidation. Ethiopian Airlines famously made a positivecontribution to the balance of payments during the Derg (post-Imperial andpro-Soviet era through to 1987). It has massively expanded its fleet and madeAddis Ababa into the leading regional hub in Africa. It is operating at about60 percent capacity, having introduced discounts for cargo and converted 25aircraft (out of 130) for freight. We observed last week that Addis Ababa hasessentially developed into China's gateway to Africa.    

 

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