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Explained: Why the coronavirus pandemic could kill off many airlines

The coronavirus outbreak has the aviation sector bleeding in what could well continue for months. What is the way ahead for airlines amid the coronavirus outbreak? What do experts have to say? We explain.

Written by Pranav Mukul , Edited by Explained Desk | New Delhi |
Updated: March 21, 2020 2:38:35 pm
Rows of empty seats of an American Airline flight are seen, as coronavirus disease (COVID-19) disruption continues across the global industry, during a flight between Washington D.C. and Miami, in Washington, U.S., March 18, 2020. (Reuters Photo: Carlos Barria)

A forced slump in the demand for air travel triggered by clampdowns by various authorities to contain the Covid-19 spread has put airlines in a precarious situation, where they are losing prized revenue even as they continue to incur certain high-quantum fixed expenses. In addition to the impending threat of a possible closure on a number of airlines, including ones in India, each day of curtailed flight operations perils the entire aviation value chain.

This is primarily because airlines are considered to be the cash conduit for the aviation sector — the first in the value chain to collect cash from the customer. This is then passed on to other players such as airports, ground handling companies, fuel suppliers, aircraft manufacturers, caterers, etc.

Why are airlines being affected by coronavirus to this extent?

Experts have pointed out that airlines are a high fixed-cost industry that depend significantly on cash-flow. Unlike manufacturing industries, for which revenues lost due to the current slowdown, is recoverable, airlines cannot put their product, which are seats, into storage and sell them later. Each empty seat amounts to a permanent revenue loss. Therefore, any curtailment of their revenues and cash flow causes disproportionate harm.

Also Read | Airlines may lose $113 billion in revenue due to coronavirus virus: IATA

How is the threat affecting the allied sectors?

The current downturn being witnessed by Indian airlines, which are staring at combined losses of $500 million to $600 million for the current quarter, therefore threatens facets ranging from employment and capacity expansions to the very survival of these allied industries. During the normal course of operations, as airlines continue to generate cash with ticket sales, they continue to take deliveries of new aircraft and continue to make rental payments for leased aircraft.

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However, with revenues dropping and airlines facing a precipitous cash crunch, some might be expected to delay deliveries of new planes. Similarly, even as airport operators may see an increase in parking fees from airlines on account of grounded planes due to reduced operations, it may not be enough to cover for shortfall arising from reduced landing charges and ancillary revenues from airport shops, etc.

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What is the way ahead for airlines amid coronavirus outbreak?

While the aviation industry across the world has been seeking government support, the very survival of any company in the sector depends on the factor of having enough cash to meet the daily expenses. A number of airlines have announced pay cuts and other cost-reduction measures to ensure they remain afloat for the time being. Experts believe it may be prudent for some carriers to temporarily shut operations down to bring costs down to a level where it is manageable with the reduced revenues.

Here’s a quick coronavirus guide for you to stay updated: Who all should be tested for Covid-19 and when? | How should you quarantine yourself? | How often (and how) should you clean your home? | What is the Janata Curfew announced by PM Modi? | Who are restricted from coming to India, and from when? | How long can the virus live on surfaces or in air around you? | Still more Coronavirus Q&A Explained news here

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