Freefalling: Airlines struggle to survive the COVID-19 pandemic

April 11, 2020

2 min read

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What's going on here?

There is no doubt that the airline sector has been one of the worst casualties of the pandemic. Now, it seems that only state intervention can save it. The International Air Transport Association (IATA) has predicted that, globally, carriers may need $200bn to survive the COVID-19 pandemic.

What does this mean?

The numbers seem to confirm this prediction. Delta, an American carrier, says it may have to trim international schedules by 40%, Virgin Atlantic is offering staff eight weeks of unpaid leave, while Austrian Airlines has suspended flights altogether. The industry has already registered its first “death”. Flybe, a British airline, declared bankruptcy on March 5th.

The US has already decided to offer a $60 bn bailout to airlines. The bailout will take the form of loans and grants, given only under certain conditions. These could range from job protection to bars on dividends, or a prohibition on share buying. Yet, on the other side of the pond, the situation is different.

In Europe, healthier carriers like British Airways  (BA) or Ryanair strongly oppose the idea of a bailout. They have taken steps to secure their own credit lines. IAG, BA’s parent company can tap into $2.1bn if needed. Moreover, there is a sense of optimism stemming from the evolution in China. If 71% of China’s aircraft were stationed in February, the number decreased to 43% in March. This gives hope to many executives in Europe of a quick post-pandemic increase in demand.

What's the big picture effect?

The discrepancy in the interests of the healthiest airlines and the least profitable ones highlights a bleak truth about the air traffic industry.  It is over-competitive and very few carriers are actually profitable.

In Europe the bulk of the sector’s $7bn profit can be traced to six companies: IAG, AF/KLM, and Lufthansa, Ryanair, EasyJet, and Wizz Air. All other companies are fighting to survive. For example, Alitalia hasn’t turned a profit since 1998. If governments don’t intervene, the skies will soon clear.  Many small carriers will follow Flybe into bankruptcy. The chances of a US-style bailout are small. That would require a derogation from EU’s state-aid regulations.  Moreover, some countries, including the UK, have stated they will not take such a course of action.

A peculiarity of Europe’s airline sector could soften states’ response: their attachment to national flag carriers. We can already see this in action with the recently announced nationalisation of Alitalia, or in France’s promise to support Air France-KLM. It seems that member states are willing to give a hand to their national companies in need. It remains to be seen under what terms.

It is clear that after the pandemic the air transport sector will not be the same. In smaller numbers and under heavier control from their governments, carriers will surely find new challenges in their new horizons.

Report written by Bogdan Ciacli

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