GENEVA — The second quarter of 2020 will be especially tough for airlines, which may have to burn through US$61 billion in cash reserves.
The analysis, published by IATA and based on a scenario in which severe travel restrictions last for three months, also shows that for the second quarter ending June 30, airlines may end up posting a quarterly net loss of $39 billion.
In this scenario, full-year demand falls by 38% and full-year passenger revenues drop by $252 billion compared to 2019. The fall in demand would be the deepest in the second quarter, with a 71% drop.
The impact will be severe, driven by the following factors:
• Revenues are expected to fall by 68%. This is less than the expected 71% fall in demand due to the continuation of cargo operations, albeit at reduced levels of activity.
• Variable costs are expected to drop sharply—by some 70% in the second quarter—largely in line with the reduction of an expected 65% cut in second quarter capacity. The price of jet fuel has also fallen sharply, although we estimate that fuel hedging will limit the benefit to a 31% decline.
• Fixed and semi-fixed costs amount to nearly half an airline’s cost. We expect semi-fixed costs (including crew costs) to be reduced by a third. Airlines are cutting what they can, while trying to preserve their workforce and businesses for the future recovery.
In addition to unavoidable costs, airlines are also faced with refunding sold but unused tickets as a result of massive cancellations. Q2 liability for these is a colossal $35 billion.
“Airlines cannot cut costs fast enough to stay ahead of the impact of this crisis. We are looking at a devastating net loss of $39 billion in the second quarter. The impact of that on cash burn will be amplified by a $35 billion liability for potential ticket refunds. Without relief, the industry’s cash position could deteriorate by $61 billion in the second quarter,” said Alexandre de Juniac, IATA’s Director General and CEO.
Several governments are responding positively to the industry’s need for relief measures. Among countries providing specific financial or regulatory aid packages to the industry are Colombia, the United States, Singapore, Australia, China, New Zealand and Norway. Most recently, Canada, Brazil, Colombia, and the Netherlands have relaxed regulations to allow airlines to offer passengers travel vouchers in place of refunds.
“Travel and tourism is essentially shut down in an extraordinary and unprecedented situation. Airlines need working capital to sustain their businesses through the extreme volatility. Canada, Colombia, and the Netherlands are giving a major boost to the sector’s stability by enabling airlines to offer vouchers in place of cash refunds,” adds de Juniac. “This is a vital time buffer so that the sector can continue to function. In turn, that will help preserve the sector’s ability to deliver the cargo shipments that are vital today and the long-term connectivity that travelers and economies will depend on in the recovery phase.”