Tuesday, 19 May 2020

Is the Aviation Industry Flying Without Wings?

It's only when the tide goes out that you discover who's been swimming naked.
                                                                                                -Warren Buffet-

 Source: GIPHY

Amidst the doom and gloom that comes with the pandemic, Warren Buffet must have discovered he was swimming naked. In recent news, his firm, Berkshire Hathaway had pulled out stock ownership from four major airlines in the United States, namely, Delta Airlines, American Airlines, Southwest Airlines and United Airlines. Does that mean the tide has left the aviation industry, globally? What does that mean for MAS, Air Asia and the rest?

According to Brian Pearce, Chief Economist at the International Air Transport Association (IATA), the aviation industry has lost approximately $252billion in revenue, as compared to the same period in 2019.

Source: Economics Team at IATA.

Based on this table, it can be said that the Asia-Pacific region took a hit with a loss of $88billion dollars. The IATA economics team has also forecasted that the global (revenue passenger kilometre) or RPK is set to plummet to -8% as the global GDP growth is on a decline.

Source: Economics Team at IATA and Oxford Economics.

The Malaysian aviation industry looks fairly similar to the global outlook. Based on a report from the International Law Office, Malaysian Aviation Group (MAG) which includes Malaysian Airlines Berhad, MASwings, MAB Engineering and Firefly, had offered its 13,000 employees two unpaid leave options, commencing the start of April 2020. The first option being, taking 3 months of unpaid leave or the second, 5 days of unpaid leave per month for a period of 3 months.

Besides MAG, AirAsia Group has its management team and senior employees sacrificing from 15% to 100%, of their salaries. It also has also grounded most of its fleet and encouraged affected passengers by the movement control order, to accept credit instead of flight ticket refunds. According to CGS-CIMB research, AirAsia Group only has a current cash balance to last for a period of less than 5 months.

So, what now?

Source: Post Covid-19 Flight Plan for Airlines, by BCG.

According to Boston Consulting Group’s report on the impact of the aviation industry post COVID-19, there is a glimmer of hope. Distinctions have been made between travel for business and leisure travels. Once international borders reopen, the demand for business travels will increase quickly. Nevertheless, this spike is dependent on the state of the economy and the long-term effect of remote working practices.

Leisure travel, on the other hand, is distance dependent. As lockdowns are being slowly lifted in various countries, many would like to escape the confines of home with a short vacation. This, of course, is subject to the assurance from the airlines that the health of passengers is prioritised. After all, until a vaccine is discovered, the danger of COVID-19 is still very potent.  Long-haul leisure travel would have a longer rebound as this has to take into account both, planning time and money.

The report also illustrates five demand recovery scenarios, based on current events and previous data from the SARS outbreak and the 9/11 attacks. It is believed that the middle scenario (prolonged U-shape) is the most likely. This would mean a very slow yet steady recovery, of 12-18 months.

What can Malaysia do in the meantime?

IATA has written to 18 governments in Asia-Pacific, including Japan, South Korea, Malaysia and Thailand to provide emergency relief to their respective carriers. This includes direct financial support, loans, loan guarantees and tax relief.

The Malaysian Aviation Commission (MAVCOM) is suggesting that the government should only bailout the airlines industry when necessary. This route is very similar to the United Kingdom’s approach -- a bailout can only happen when the airline has exhausted all financial resources and sources of private borrowings. Instead of a financial bailout, MAVCOM suggested some non-fiscal policy and regulatory responses. These include policy changes in allowing the airline to obtain sources of funding from domestic and international capital markets and the possibility of airline mergers. MAVCOM has also suggested targeted measures of funding, as listed below:

i)               Funds allocated to combat the spread of Covid-19 (the purchase of flight disinfection, medical and hygiene equipment);
ii)              Incentives and subsidies for airline employee payroll retention;
iii)             Waiving government-imposed charges such as air traffic control charges, airport levies and industry development levies, for a brief period;
iv)             Subsidizing interest rates for public or private loans; and
v)              Tax subsidies and exemptions for transportations services of goods and aviation personnel.

In a nutshell, the sun has not set on the aviation industry, just yet. However, as a captain would say “Ladies and gentlemen, please return to your seats and fasten your seatbelts. We are currently experiencing turbulence. Thank you.” That may sum up the present predicament!

1.     Berkshire Sells Entire Stakes in U.S. Airlines, Focus Malaysia, 5th May 2020. (Link: https://focusmalaysia.my/others/berkshire-sells-entire-stakes-in-us-airlines/)
2.     Covid-19: Updated Impact Assessment, by Brian Pearce, Chief Economist, International Air Transport Association, 14th April 2020.
3.     Airline Metrics Revenue Passenger Kilometers, by Airline Geeks. (Link: https://airlinegeeks.com/2016/01/17/airline-metrics-revenue-passenger-kilometers/)

4.     The Post COVID-19 Flight Plan for Airlines, by Boston Consulting Group, 31 March 2020.(Link: https://www.bcg.com/en-sea/publications/2020/post-covid-airline-industry-strategy.aspx)
5.     Staying airborne during the Covid-19 pandemic, by Sharon Chong, SKRINE, International Law Office, 6th May 2020. (Link: https://www.internationallawoffice.com/Newsletters/Aviation/Malaysia/SKRINE/Staying-airborne-during-COVID-19-pandemic)
6.     Asia-Pacific Governments Urged to Provide Emergency Support to Airlines, Press Release, International Air Transport Association, 26th March 2020.(Link: https://www.iata.org/en/pressroom/pr/2020-03-26-01/)
7.     Commentary on Government Assistance To The Aviation Industry Amidst The Covid-19 Pandemic, by the Malaysian Aviation Commission, March 2020.

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