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Early identification of pandemic risk and mitigating actions in the airline industry

18-08-2020 | Insight

The COVID-19 crisis has had an extreme and almost immediate effect on the airline industry. Despite the industry’s vulnerability to pandemic risk, this analysis shows that airline companies have paid too little attention to this high impact risk and have struggled to publicly report on comprehensive action plans to respond to its potentially disruptive effects.

Speed read

  • A majority of airline companies did not report pandemics as a specific risk to their business before the COVID-19 crisis and as its onset.
  • COVID-19 has exposed airline companies’ lack of pandemic risk preparedness, with only two companies reporting mitigating actions related to the risk of pandemic before the outbreak of the COVID-19 crisis.
  • Lack of mitigating actions shown to correlate with negative ESG press coverage in connection with the handling of the current pandemic

While the airline industry faces longer term disruption effects from COVID-19, many experts agree that the frequency of such disruptive events will increase in the coming years. Investors increasingly expect companies to disclose their preparedness to such events in order to assess their agility and resilience, and thus their ability to survive in the long-term.

Against this background, 33 airline companies’ public reporting and responses to relevant questions in the annual SAM Corporate Sustainability Assessment (CSA) were analyzed, to find out to what extent key players in the airline industry had pandemic preparedness, response and recovery plans in place, and how they responded when COVID-19 grounded the industry in March 2020. The analysis shows that many airline companies still have a long way to go to meet investor expectations with regard to pandemic risk preparedness and response.

Pandemic risks are insufficiently reported

While no company reported the risk of a pandemic as an emerging risk in the SAM Corporate Sustainability Assessment, only 33% and 45% of the companies analyzed reported in their respective 2018 and 2019 financial year reports on pandemic risk, that is before the crisis and at its onset. In their annual reports for 2019, only five companies mentioned the eventuality of travel restrictions being imposed by authorities; none envisioned a complete ban on flying. Most airline companies focused their pandemic-risk reporting on the negative impact on demand due to fear of contagion, and potentially negative operational impacts due to employees or contractors falling ill or being quarantined.

Looking back to the risks companies reported in 2018, about 60% of the airlines covered in the analysis were aware of the fact that a pandemic would cause a risk to the company, either reporting it as a specific risk or mentioning it in a list of external risk factors in their overwhelmingly standardized 10-K reporting to the US Securities and Exchange Commission. However, they did not see this risk materializing as one of the key threats to their business. 26 out of 33 airline companies identified health and safety as one of their material issues, but no reference was made to the health and safety of passengers and employees with respect to on-board diseases, viruses, etc.

Mitigating actions related to pandemic risks are not comprehensive

Upon analysis of their public reporting, the airlines covered in this article do not seem to have had a comprehensive mitigating action plan in place, with a surprisingly low number of companies, two in 2018 and six in 2019, providing mitigating actions related to the risk of pandemic. Those measures mostly focus on early detection of potential pandemic risks, occupational health and safety measures, and coordination with relevant government bodies. However, a large majority of the airlines covered in this article appear to lack comprehensive mitigation plans that would correspond to such risk levels and would include elements such as a detailed scenario analysis, a set of measures to keep the trust of customers and to prepare for a recovery, flexibility in the allocation of resources to adapt to the evolution of the crisis, and frequent and transparent communication with internal and external stakeholders. 

COVID-19 negative media coverage

The airline industry’s insufficient crisis preparedness has also materialized in the media criticism that airline companies have faced in connection with their handling of the COVID-19 crisis. 64% of the identified controversies related to the COVID-19 crisis on the RepRisk ESG Risk Platform (www.reprisk.com) concern issues related to the health and safety of employees – a surprising finding considering that occupational health and safety is a material issue for 80% of the companies surveyed.

To gain a better understanding of the possible correlations between insufficient pandemic preparedness and related controversies, the companies with negative COVID-19-related press coverage were mapped against companies reporting pandemics as a risk, and companies reporting relevant mitigating actions.

This exercise shows that even if some of the companies with controversies related to COVID-19 had identified pandemics as a risk, none of the airlines had previously disclosed mitigating measures linked to the identified controversies. 

While it is difficult to draw conclusions from the above results, a comprehensive scenario analysis identifying potential crisis outcome and corresponding measures could be a first step in helping companies manage a crisis and avoid related public criticism.

Conclusion

Given its extreme vulnerability to pandemic risk, one would have expected the airline industry to have had pandemic preparedness, response and recovery plans in place. However, companies find it difficult to first report on risks with a potentially high impact but a perceived low probability and struggle even more to publicly report on a comprehensive action plan to respond to the disruptive effect of such risks, should they materialize. 

Many experts agree that the frequency of such disruptive events will rise in the coming years. Investors will increasingly expect companies to disclose their preparedness to such events in order to assess the agility and resilience of companies and eventually their ability to survive in the long-term. Based on the analysis in this article, many companies still have a long way to go to meet those expectations.

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