IATA's New Forecast Adds Gloom To Coronavirus-Hit Airlines

The fast-evolving coronavirus outbreak rattled stock markets globally. Almost all sectors are reeling under its effects. However, it is the travel industry that is the worst hit. The dreaded coronavirus, having first emerged in Wuhan, China, now spread its tentacles to 86 more countries claiming the lives of more than 3,300 people and infecting over 95,000. As of Mar 6, United States reported in excess of 225 confirmed cases of the virus and a death toll of 12.

Given the rapid spread of the virus and the consequent plunge in air travel demand, airlines across the globe are trimming capacity on international routes. For instance, American Airlines (NASDAQ:AAL) suspended flights connecting Dallas with China, Hong Kong and Seoul due to lackluster demand following the coronavirus outbreak. The carrier also decided to call off all U.S. flights to Milan, Italy. Fellow U.S. carriers, namely United Airlines (NASDAQ:UAL) and Delta Air Lines (NYSE:DAL) also suspended multiple flights citing the same issue.

Latin American carrier LATAM Airlines (NYSE:LTM) also cancelled Milan flights from Sao Paulo. Due to significant drop in bookings, Ryanair Holdings’ (NASDAQ:RYAAY) fourth-quarter fiscal 2020 (ending Mar 31, 2020) results are likely to be heavily impacted. Notably, Ryanair will cut 25% of its Italian capacity for the Mar 17-Apr 8 time frame. Also, Germany’s Deutsche Lufthansa (OTC:DLAKY) , which has exposure to Italy and China, reportedly decided to ground 150 of its planes due to weak demand.

Among U.S. airlines, United Airlines, carrying a Zacks Rank #3 (Hold), is seemingly experiencing the maximum downfall. Flight cancellation apart, the carrier took some dramatic measures, such as putting a halt to hiring (except for crucial roles), delaying 2019 merit salary increases as well as giving employees the option to apply for unpaid leave of absence voluntarily. Per CFRA analyst Colin Scarola, the carrier reportedly generates approximately 40% of total revenues from international route and has greater international exposure among U.S. airlines. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The drab picture surrounding the airlines is well reflected in the industry’s price performance so far this year. The Zacks Airline industry has declined 27.5% in a month compared with the S&P 500 Index’s 9.3% decrease.

IATA Projects Higher Revenue Loss for 2020

Given the vast majority of countries that the virus outbreak has spread to and the resultant slump in forward bookings, the International Air Transport Association (IATA) now anticipates global passenger revenue loss of $63-$113 billion for 2020. This is significantly higher than the previous projection of a $29.3-billion passenger revenue loss when its estimate was based on the assumption that the coronavirus-led low demand would impact mostly the Chinese market.

The research firm anticipates a $63-billion passenger revenue impact, equivalent to an 11% decline, assuming that the outbreak will mostly impact demand in Asia-Pacific (China, Japan, Singapore, South Korea), Europe (France, Italy, Germany) and the Middle East (Iran). The markets included here have more than 100 confirmed cases of the COVID-19 disease as of Mar 2. Within the $63 billion loss, China’s share equals $22.2 billion, translating to a 23% decline in passenger numbers. Moreover, Asia is expected to suffer a loss of $47 billion.

In case the health hazard spreads to a larger extent affecting demand in Asia-Pacific (Australia, PR of China, Japan, Malaysia, Singapore, South Korea, Thailand, Vietnam), Europe (Austria, France, Italy, Germany, Netherlands, Norway, Spain, Switzerland, Sweden, the United Kingdom), Middle East (Bahrain, Iraq, Iran, Kuwait, Lebanon, the United Arab Emirates) and North America (Canada, United States), the IATA anticipates a $113-billion toll (or 19% decline) on global passenger revenues in the current year. The markets included here currently have 10 or more confirmed cases of the disease as of Mar 2. The Asia-Pacific countries alone are estimated to witness a 32% decrease in passenger numbers, equivalent to a $57.3-billion revenue loss. The European market is likely to report the second largest revenue loss of $43.9 billion, implying a 33% drop in passenger numbers. Canada and the United States are estimated to bear a loss worth $21.1 billion with 10% fall in passengers transported.

Is the Worst Coming for Airlines?

The impact of the coronavirus on the airline industry is already seen to be more damaging than the SARS outbreak in 2003. Additionally, it is worth nothing that China, which accounts for roughly 20% of the global GDP, is more important to the global economic scenario now than it was in 2003. Consequently, any slowdown in the Chinese economy will have ramifications across the globe.

As uncertainty looms large on the extent and duration of the virus, it is perhaps not far off for the industry to endure a situation similar to the Global Financial Crisis of 2008. In fact, the IATA’s forecast of a $113-billion passenger revenue loss for 2020 is nearly commensurate with what the airlines had faced during the financial crisis of 2008.

With substantial decline in oil prices since the beginning of 2020, the IATA expects fuel cost saving of up to $28 billion for the ongoing year over and above the savings from reduced capacity. This should provide some cushion to the airlines in dealing with this deep crisis.

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