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Coronavirus' Global Spread Poses More Serious Challenges For Airlines

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Coronavirus' Global Spread Poses More Serious Challenges For Airlines

The spread of COVID-19 cases across the globe has caused air traffic demand to plunge in recent weeks. With COVID-19 now present in more than 100 countries and territories, flight cancellations are accelerating and bookings are drastically declining as consumers delay or cancel trips, corporate travel policies are more heavily restricted, and major events are cancelled around the world.

The virus has broken through China's containment and spread globally. President Trump has announced new travel restrictions preventing anyone who has been in the Schengen Area (which includes 26 European states, but excludes the U.K. and Ireland) in the prior 14-day period from entering the U.S. Travel restrictions across Italy have driven many airlines to temporarily suspend flight schedules to, from, and within the country, and there is a risk that other countries will need to implement similar restrictions. These decisions will continue to be partly informed by the actions of governments and national and local health authorities' advice on travel to highly affected areas.

All airlines will need to make material adjustments to their capacity and operating cost bases in response to what may or may not be a short-term crisis, but is sure to have a lasting impact on air travel throughout 2020. For example, in the past few days several European airlines have announced temporary capacity cuts of up to 50% in the coming weeks and most U.S. airlines have announced significant, albeit less drastic, capacity cuts.

The global macro outlook has taken a turn for the worse since our last update ("SARS 2.0? Aviation Faces Risks From Coronavirus," published Jan. 29, 2020) due to a steep change in the spread of COVID-19, and previous industry forecasts for robust global air traffic growth of 3%-4% in 2020 have been reversed to reflect possible double-digit declines in passenger numbers in certain regions (for example, passenger numbers could decline almost one-quarter in 2020 in hard-hit areas of Europe, although this remains highly uncertain).

We believe that significant risks remain to the downside, given uncertainty about when the crisis will peak and whether the epidemic persists beyond second-quarter 2020; the impact on the economy and air travel could certainly persist well beyond second-quarter 2020. The IATA (a global airline industry trade group) notes that previous disease outbreaks have peaked after one to three months and recovered to pre-outbreak levels in six to seven months.

Our base-case assumptions remain very uncertain given the nature of the crisis.  We think that IATA's recent report estimating the potential loss of traffic and revenues for airlines in various regions provides a useful starting point (see "COVID-19: Updated impact assessment of the novel Coronavirus," IATA, March 5, 2020). The report laid out two scenarios: a "limited spread" case focused on China and certain other Asian and European countries that already have many cases, and an "extensive spread" case that adds more countries, including those in North America (this was before the U.S.–Europe travel ban was announced yesterday). The current situation appears to resemble the extensive spread scenario, and may worsen. As severe as the assumptions for that scenario are, they did not explicitly consider yesterday's announced ban on passenger travel from most of Europe to the U.S. or the potential for lower fares to stimulate traffic recovery, which could erode revenues further. We incorporate the extensive spread scenario in our industry analysis, but adapt it for subsequent developments and the particular circumstances of various airlines. Our base-case assumptions for the industry, which we expect to evolve as more information becomes available, now include:

  • At least a 20% revenue decline globally that varies by region, broadly in line with the IATA extensive spread scenario, with some potential loss of revenues due to pricing erosion and developments since the IATA scenario was prepared.
  • Capacity (available seat miles or kilometres) declines equal to about half of the decline in passenger numbers, because it is difficult for airlines to reduce flying as much as lower traffic while still maintaining a viable flight schedule.
  • Fuel costs linked to S&P Global Ratings' revised oil price assumptions in cases where an airline does not hedge fuel, but adjusted to account for hedging (which in this case means less savings from the lower fuel prices) where applicable.
  • Nonfuel cost per available seat mile or kilometer increases somewhat because airlines have fixed costs that do not vary with flight activity.
  • First-quarter results will be moderately affected by coronavirus, but some airlines may remain profitable. The second quarter will be the most difficult one, with heavy losses, the third quarter will see a slow recovery, and the fourth quarter will approach normal conditions. The outlook for the second half of 2020 is the most difficult to judge, and recovery could be slower or more rapid than we assume.
  • Airlines take various measures to save cash, including trimming discretionary spending, reducing capital expenditures (including deferring planned deliveries of new aircraft in some cases), and suspending share repurchases.

Fuel prices will provide some cost relief, although with a substantial time lag for many airlines that hedge.  One factor that will provide some much-needed relief to airlines' cost bases is the recent plunge in oil prices following the breakdown of negotiations between certain oil-producing countries to scale back production. On March 9, 2020, we revised our assumptions ("Unrestrained Supply Swamps Oil Outlook: S&P Global Ratings Revises Oil & Gas Assumptions") for Brent and West Texas Intermediate (WTI) crude oil prices for 2020 to $40 per barrel (bbl) and $35/bbl (from previous levels of $60/bbl and $55/bbl, respectively). For 2021, we now foresee crude oil prices of $50/bbl for Brent and $45/bbl for WTI. This will save billions of dollars for large airlines that do not hedge their fuel costs, such as most U.S. airlines, as fuel typically represents between 25% and 35% of operating costs. European airlines will typically take longer to gain the full benefit of lower fuel prices due to their more extensive use of fuel hedging, which typically covers a 12- to 24-month period. We expect benefits will ramp up going into next year given the time lag.

Airlines have been reducing capacity, flexing flight schedules, and cutting staff.  Airlines across the globe have announced a variety of measures in recent days to combat the demand slump:

  • Some airlines have announced drastic capacity cuts, although this has varied widely across regions and operators. As a significant proportion of costs (perhaps as much as 40%-50%) are considered flexible, flight cancellations can swiftly bring costs down, but this will not likely totally offset lost revenues.
  • Aside from jet fuel, staff costs are another major cost for airlines. Many airlines have asked employees to take unpaid leave or are furloughing employees.
  • Airlines have announced more flexible booking options for consumers so that customers can rebook at no extra charge.
  • Many airlines pay out substantial dividends and buy back shares with excess cash flows, which can be eliminated or significantly cut back.
  • Airlines face difficult choices regarding upcoming aircraft deliveries. Many of these are part of longer-term strategic plans and provide greater fuel efficiency and environmental benefits. However, some airlines may seek to defer deliveries, and the larger ones, in particular, have bargaining power to negotiate with aircraft manufacturers.
  • We understand that the European Commission has temporarily suspended the 80/20 EU slot use rule, which states that airlines must operate 80% of their slot allocation to ensure that they do not lose them. This will stop airlines operating empty flights to retain slots and should help to protect yields somewhat.

The crisis will further widen the gap between the strong and weak in Europe.  In Europe, we think this crisis could further widen the difference between its few strongest airlines and the weaker majority. We believe that financial conditions have tightened more severely for lower-quality borrowers (through higher funding costs and more limited market access channels) and that over the medium term, stronger European airlines could benefit from further industry consolidation as weaker operators fail (such as Flybe). We will continue to monitor the outbreak and related developments.

Table 1

Ratings On Airlines*
Company Issuer credit rating Long-term national scale rating (where applicable)

easyJet PLC


Ryanair Holdings PLC


Southwest Airlines Co.


British Airways PLC


Deutsche Lufthansa AG


International Consolidated Airlines Group S.A.


Delta Air Lines Inc.


Air Canada


Alaska Air Group Inc.


United Airlines Holdings Inc.


JetBlue Airways Corp.


Air Baltic Corp. AS


Allegiant Travel Co.


American Airlines Group Inc.


Hawaiian Holdings Inc.


Latam Airlines Group S.A.


Spirit Airlines Inc.


TAP - Transportes Aéreos Portugueses, SGPS, S.A.

BB- prelim/Stable/--

Grupo Aeromexico S.A.B. de C.V.


Azul S.A.

B+/Stable/-- brAA/Stable/--



Turk Hava Yollari A.O.


WestJet Airlines Ltd.


Virgin Australia Holdings Ltd.


Gol Linhas Aereas Inteligentes S.A.

B/Stable/-- brA/Stable/--

Avianca Holdings S.A.

*As of March 11, 2020.

Related Research

  • Coronavirus Impact: Key Takeaways From Our Articles, March 11, 2020
  • Unrestrained Supply Swamps Oil Outlook: S&P Global Ratings Revises Oil & Gas Assumptions, March 9, 2020
  • COVID-19's Wider Reach Darkens Shadow Over Global Credit Conditions, Report Says, March 3, 2020
  • SARS 2.0? Aviation Faces Risks From Coronavirus, Jan. 29, 2020

This report does not constitute a rating action.

Primary Credit Analysts:Philip A Baggaley, CFA, New York (1) 212-438-7683;
Rachel J Gerrish, CA, London (44) 20-7176-6680;

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