How will Coronavirus (COVID-19) Impact the Global Aviation Sector?

 In today’s unprecedented situation, airlines and airports are at the forefront taking the brunt of this global COVID-19 crisis. The Airport Council International (ACI) estimates that this year the sector will have a loss of approximately US$46 trillion by the end of 2020. 

Governments across the world have announced or are planning to announce measures to ensure the aviation industry can survive this crisis. GRI members expect the global air passenger segment to reduce by up to 30% this year, given extreme measures to restrict travel, which will therefore impact airline operations and airport concessions.

This crisis has been traveling from East to West, impacting first Southeast Asia and Japanese markets, and then made its way to the more mature European market which is the hardest hit at the moment. 

As in the backdrop of this situation, GRI Infra global members met and discussed during March 26th eMeeting what are the common challenges faced by all of them and what the way forward looks like. 

Government support and relief measures

The coronavirus rapid spread led to different levels of severe lockdown measures around the world, including many countries closing their borders and others, such as India, where air traffic is concentrated in domestic flights, closing all airports.

The most visible impact is on the airlines as in most countries the domestic as well as international air traffic has come to a standstill. Airlines are more fragile than the airport operators at the moment since a considerable percentage of airlines were struggling to survive even before the COVID-19 crisis started showing its impact. So if rescuing these airlines was a tough task before, now it seems next to impossible.

Airlines face different challenges in different parts of the world. While the majority of these are looking to reduce the number of flights in certain sectors, one major challenge discussed was the restrictions due to antitrust laws. These laws restrict the airlines from communicating with each other before cancelling flights intelligently. This may impact certain travel sectors more adversely than others. 

There was a consensus that even on declaration of force majeure, operators and retailers will face challenges, as their claims will be extremely difficult to prove, and offsetting declining cash flow should be priorities of both airlines and airport operators.

Whichever be the model of operation, the airport operators are economically impacted by both sides, concessionaires & airlines. Working on a shared revenue model ensures that the operator doesn’t need to pay the government anything if there are no profits, however the fixed cost of the operator does not reduce in crisis situations, which in the long run creates a bigger liquidity crunch.

In this regard, airport operators reported that their CAPEX expenditures have been greatly freezed and staff has gone into technical unemployment.

A good practice shared by GRI members was the recent announcement by the Brazilian government allowing the airport operators to postpone payment obligations. However, executives reported that it is unlikely that other national governments, such as Chile and Mexico, will follow the example and announce similar measures to safeguard neither airport concession contracts nor airline companies.

Pause, wait and see...

Much is said about airport privatization processes in emerging markets, and Brazil is the country leading on one of the largest programs of its kind in the world. 22 airports in Brazil are part of an ongoing public hearing and were expected to go to the tender phases by December 2020.

GRI members therefore expected that, not only in Brazil, but everywhere else that was structuring airports concessions to the private sector, auction should be postponed for the simple reason that their traffic forecast is irrelevant at the moment. 

International airport operators stated that international development is not on the top of their priorities at the moment while they are facing challenges at their basis. Appetite for international development will not be based on a country by country basis, but on a global perspective of the sector instead, given that countries are closing borders and that there are no ways to predict how long it is going to last.

GRI members mentioned that they expect from Latin America governments similar action as the Greek and Montenegrin governments did: a 6-8 week pause by the governments in the ongoing processes until the private sector has a clearer global view of the situation and level of State support to the airport operations and airlines.

Summary

• Constant communication between various airport operators and the government is the key to ensure appropriate relief measures are announced by the governments. After all this is the sector which is facing the maximum impact of the COVID-19 crisis.

• Benchmarking is important for emerging markets to learn from mature markets what best practices are being followed to deal with this crisis. 

• Keeping a positive outlook is important at this time. Operators will need to maintain enough liquidity to cover their fixed costs and meet their debt obligations.

• Banks should be more supportive to the Aviation sector, as this crisis can cripple the sector for long term if required support is not given to the industry at this time.

• Not knowing how the crisis unfolds, investors and operators are in a pause, wait & watch mode for the next 6-8 months regarding ongoing auctions and M&A transactions.