VIVEK PRAKASH/AFP via Getty Images)
Travellers wearing face masks as a precautionary measure to protect against the possible spread of a SARS-like virus outbreak walk in the arrivals area at Hong Kong International Airport ahead of the Chinese New Year in Hong Kong on January 23, 2020. - Hong Kong has turned two holiday camps, including a former military barracks, into quarantine zones for people who may have come into contact with carriers of the Wuhan virus, officials announced on January 23. The international financial hub has been on high alert for the virus, which has killed 17 people since the outbreak started in central China.
- Over the last two months, as the COVID-19 outbreak has exploded around the globe, the airline industry has gone from jovially optimistic about its prospects for 2020, to preparing for a negative financial impact "almost without precedent."
- Travel demand has plummeted around the world as coronavirus anxiety has led travelers to postpone vacations, corporations to suspend business travel, and major events and conferences - such as SXSW - to be cancelled.
- Airlines have suspended routes, cancelled flights, and taken other cost-cutting measures to try and weather the storm, but the impact is already starting to hurt.
- We spoke with industry analysts trying to forecast the overall impact of the outbreak.
- Visit Business Insider's homepage for more stories.
In late-January, as the coronavirus outbreak began to pick up steam in China and gain traction in other parts of Asia, analysts began sounding the alarm for the airline industry.
However, the warnings were tempered. While the coronavirus could pose a "substantial" risk to global air travel and the aerospace sector, as an analyst at Canaccord Genuity said, any impact was likely to be brief, with recovery coming swiftly.
After all, there was precedent. The 2003 SARS outbreak, Avian Flu in 2005, and MERS in 2015 showed that while impact of widespread disease could be strong - airlines operating in the Asian region saw an 8% annual decline in revenue per passenger kilometer (otherwise known as RPK, and also measured in revenue per passenger mile, or RPM) due to SARS; recovery often came quickly, and there was little long-term impact on stocks.
Now, barely more than a month since the coronavirus entered the public consciousness, the landscape has changed drastically.
Travel demand plummets as the unprecedented virus has spread
The SARS outbreak initially seemed like it offered a useful model to predict the impact of COVID-19 on airlines, but it has become apparent that this time will be very different.
"It now appears that the models based on the SARS pandemic are too conservative," analyst Ken Herbert of Canaccord Genuity wrote in a research note on Thursday. "The SARS example is of limited relevance due to where the airline industry is today, and the relatively limited geographic impact of SARS."
When the virus appeared to be mostly contained to China, travel industries around the world already had enough to worry about. In mid-February, the American travel industry trade group known as US Travel warned that a sharp reduction in visitors from China could pull as much as $10 billion from the US economy over the next four years.
Airlines, however, hoped that managing their capacity - suspending routes to China, on which falling demand made continued operations commercially unviable - would blunt the impact. They also hoped that demand for domestic travel and to Europe would remain steady, or at least close to.
"We believe people will travel closer to home, and in the domestic market, including places like Hawaii, south Florida, and Southern California," Helane Becker, an airline analyst at Cowen, wrote in a research note on February 25. "At this time, we don't expect the impact to be that great in the US or in Europe."
Just three days later, the landscape changed significantly.
"Every day we think we could be near a bottom, and every day we are not," Becker wrote in a February 27 note.
As outbreaks have spread beyond China at a lightning pace - South Korea, Japan, Italy, and Iran are all hotspots, while cases have been reported in around 80 additional countries - traveler anxiety has skyrocketed both among leisure and business travelers, a major one-two punch for airlines.
"The impact is pretty significant in China," Herbert told Business Insider, "and the way things have been trending over the last week with flight cancellations, conferences, travel, and everything else coming in," the impact in the US is "probably going to end up being fairly close to China."
Despite efforts by airlines to communicate steps to disinfect planes, and guidance that flying itself did not pose a health risk, demand is falling across the board, including for domestic flights, an effect that was not expected by most early projections.
"We're 97% domestic, so what we're seeing is a dropoff in domestic travel," Southwest Airlines CEO Gary Kelly told CNBC on Thursday. "It has a 9/11-like feel."
Amazon, Google, and Salesforce have all restricted business travel, and diminished demand has led to cost-cutting at airlines.
The pace of new developments has been particularly troubling for the industry.
"A point of anxiety for travelers is that we know which today's high-risk countries are. We're not so sure about who's going to be put on that list later today, or tomorrow, or in two or three days' time," said Henry Harteveldt, a travel industry analyst and consultant. "I think a lot of people are going to say it is simply safer for me to stay home."
Airlines are trying to adapt, but uncertainty remains
The pace at which the landscape continues to change has posed a challenge for airlines, which typically need time to re-plan equipment allocations, staffing, and other operational aspects.
"It's a problem because it contributes to the uncertainty," Ken Herbert, an analyst with Canaccord Genuity, told Business Insider on Friday. "Nobody exactly knows where the bottom is because things are moving so fast."
Citing reduced demand - rather than concerns of the virus itself - airlines began canceling individual flights to mainland China and reducing frequencies on some routes toward the very end of January, following an upgraded travel warning to the country from the US State Department. Airlines initially parked the expensive widebody jets that fly transpacific routes, but have also reallocated them to some domestic flights, just to avoid leaving them idle.
By January 31, American Airlines, Delta, and United had suspended all flights to the mainland. Within days, they began suspending flights to Hong Kong. In the closing days of February through the first few days of March, airlines have either reduced frequencies or suspended routes altogether to Japan, South Korea, and Italy.
Cutting operating expenses on routes to outbreak hotspots hasn't been enough.
Each US airline is waiving change fees on new tickets - details of each airline's offer are here - to try and convince US travelers to book vacations. The idea is that, if Americans are nervous about booking something in case there's a larger outbreak, this could offer a degree of confidence.
On Wednesday, United announced that it would reduce its international schedule by 20% and its domestic network by 10% in April, with similar cuts planned for May. The airline is also offering voluntary unpaid leave to all employees, freezing new hiring, postponing training for new hires who have not started yet, and deferring raises for management and administrative employees.
Other airlines are expected to follow suit in the coming days. Even JetBlue, which does most of its flying within North and Central America, was forced to reduce flights.
The latest impact estimates.
Early Thursday morning, the first airline casualty of the outbreak was recorded, as British regional carrier Flybe ceased operations and entered administration.
Flybe was already in a precarious financial position, and its survival was uncertain, but reduced bookings due to the virus pushed the struggling airline over the edge.
According to most observers, the ultimate determining factor will be whether the virus' spread slows down as the weather gets warmer. As much as 85% of US airlines' traffic comes from leisure travelers who fly once a year or less, providing half of the airlines' revenue, according to the Cowen airline analyst Helane Becker. Airlines will likely offer discounts to attract those leisure passengers, she wrote, even if most of that traffic is domestic.
However, depending on the weather and the virus' behavior, it could be too late to save the full peak summer season.
"Airlines certainly can pull the pricing lever and reduce economy fares and even maybe premium cabin fares to stimulate travel and start to generate cash," Harteveldt said. "But that is not always easy to do, in terms of the volume that the airlines may need, simply because of the complexities of our modern-day lives."
"Let's say we see the coronavirus start to abate by May, there may be a chance to rescue some part of the summer travel season," Harteveldt added. "But a lot of consumers need to request time off in advance, and need to plan."
Last week, the International Air Transport Association, or IATA, a trade organization representing most of hte world's major airlines and cargo carriersm, revised its estimates of the impact of the virus, saying it expected 2020 global revenue hit of $63 billion to $113 billion, depending on whether the virus is contained to the currently affected markets.
IATA's previous estimates, issued two weeks earlier, projected a $29.3 billion loss.
At the higher end of IATA's estimates, US and Canadian airlines would see $21.1 billion in lost revenue, while European airlines would lose $43.9 billion. The global impact would be greater than during the Great Recession.
Initial estimates predicted a V-shaped recovery profile, where steep declines would be followed by a sharp recovery. Some industry analysts still expect to see that. Herbert, of Canaccord, wrote that "it is likely the industry will see a V-shaped recovery in the impacted regions (in fact, manufacturing activity in most of China appears to be recovering)."
However, others are beginning to think that a V could be less likely.
"We believe it will look more like a 'U,': Becker wrote, "even with pent-up demand and summer vacations coming."
Regardless of the recovery, the virus' economic impact on the airline industry has already been beyond what anyone had seen coming at the start of the year.
"The turn of events as a result of COVID-19 is almost without precedent," Alexandre de Juniac, IATA's CEO, said in a statement. "In little over two months, the industry's prospects in much of the world have taken a dramatic turn for the worse."
"These are extraordinary times."