FOCUS: Airline sector risking decimation after COVID 19 groundings

Analysis FOCUS: Airline sector risking  decimation after COVID 19 groundings
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Updated 08 April 2020

FOCUS: Airline sector risking decimation after COVID 19 groundings

FOCUS: Airline sector risking  decimation after COVID 19 groundings

What happened:

Eurozone finance ministers failed to reach an agreement on a rescue package on Wednesday, April 8, with a rift persisting between the southern nations, arguing for common issuance of “Coronabonds” and northern countries insisting on using the European Stability Mechanism, which would see countries borrow on their books.
Markets reacted swiftly, with the spread between the 10-year Bund and Italian 10-year government bonds jumping to 230 bps, an indication of investors’ risk perception.
The euro fell by 1 percent against the dollar immediately after the failure to reach an agreement was announced.
The two-day rally on global stock markets started to abate towards the end of Tuesday, as pessimism grew on when of the pandemic would end globally. Markets continued their downward slide into Wednesday morning, particularly in Europe, where the failed eurozone finance meeting weighed heavily.
Lufthansa announced the closure of its low-cost carrier Germanwings as part of a coronavirus crisis-induced restructuring effort. The airline also announced that it would decommission 40 aircraft. Lufthansa CEO Carsten Spohr said that the airline would only reach 75 percent of capacity by the year’s end, and that air travel would remain depressed for years to come.

Why it happened:

The news from Lufthansa comes on the back of a standstill in global air travel, with 43 airlines grounding their entire fleets, with Gulf Cooperation Council (GCC) carriers like Emirates, Etihad and Saudia among them.
The International Air Transport Association expects this to cost the industry more than $260 billion in revenue this year. Its director general, Alexander de Juniac, said the industry would burn through $61 billion in the second quarter alone. He indicated that airlines would also struggle to pay the $35 billion in refunds they owed on flights that had been canceled.
De Juniac issued a strong warning that the industry would run out of cash within the next two to three months, and that more than 50 percent of carriers would go bankrupt, without government support.
Receiving that support is easier in some countries than others: Dubai’s ruler Sheikh Mohammed bin Rashid Al-Maktoum, for example, has vowed to support Emirates. The same will hold true for most, if not all, of the GCC. The US rescue package of $2 trillion earmarks $52 billion for airlines.
In Europe and elsewhere, the ability of governments to support their national carriers will depend on their access to liquidity. A further question is whether governments should take equity stakes in the carriers they save. This is straightforward in countries where the airline is owned locally, but more difficult in countries where it is not, like Switzerland, where Swiss International Airlines is owned by Lufthansa Group.
The industry employs 65 million people, and 25 million stand to lose, or have already lost, their jobs. Emirates, meanwhile, has slashed salaries by 50 percent.

Where we go from here:

The rumbles in the airline industry will carry through to aircraft manufacturers (Boeing, Aircraft Industries, Bombardier, etc.) when orders are cut, which will have ramifications throughout the supply chain. EasyJet founder Stelios Haji-Ioannou threatened to fire his board of directors if they did not cancel an existing order with Airbus.
Today the US Federal Reserve will release the minutes of its March meeting explaining its reversal in interest rate policy.

On Thursday all eyes will be on the reconvening of the eurozone’s finance ministers and particularly on a virtual OPEC + meeting and the subsequent virtual Friday meeting of G20 energy ministers. Oil rallied on market expectation of a global production cut of 10 million barrels per day. This may be a drop in the ocean given the demand destruction and global storage threatening to overflow.