With the aviation industry stalling due to the coronavirus, the global economy cannot take off too

As Covid-19 lockdowns can only be relaxed gradually, the economic fallout is set to be deeper than some wishful thinkers predict
With the beating heart of our globalised world bleeding losses, so too will the related travel, tourism, hotel and catering businesses

David Dodwell

Published: 11:30am, 18 Apr 2020

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As political leaders talk about getting through the worst of the pandemic catastrophe, and warm to the prospect of reopening the economy by early May, I hate to be the harbinger of unwelcome news. But the brutal reality is that we are still far from discovering the road back to wellness – whether in terms of lives or livelihoods.

I pray that leaders are right that we are past the peak of mortalities, and that our health care systems are going to be under less severe strain. That seems more likely to be true here in Asia than in the United States or Europe. But a lot of expert medical analysis still suggests this is more a prayer than a measurable expectation.

And as the lockdowns are likely to have to stay in place not for weeks, but for months to come, only to be relaxed one careful step at a time, the economic catastrophe is set to be deeper, and longer-lasting, than many wishful thinkers currently predict. The bankruptcies have only just begun to be reported. The job losses are set to get progressively worse in the months ahead. As spending power weakens, even healthy companies are going to hit heavy weather.

Look only at the aviation sector, and the travel and tourism activities that are integrally linked with it, to see how deep a trough we are in, and how rough the road out. The World Travel & Tourism Council constantly reminds us that the travel sector, which also drives hotel and restaurant patronage worldwide, supports one in 10 of the world’s jobs: if aviation is in a deep trough, the rest of the world economy can’t be far behind.

In Hong Kong, Cathay Pacific has reported that so far this month it is averaging 1,000 passengers a day. On one day this week, the number dipped to just 302 passengers. From five flights a day to London’s Heathrow, it has cut back to two flights a week.

Of its 200 aircraft, over half are grounded. Chek Lap Kok has become one of Hong Kong’s most expensive aircraft parking lots. Of Cathay Pacific’s 33,000 staff, most are taking unpaid leave. Nearly 300 of its staff in the US are to be let go in its latest retrenchment.

Coronavirus could leave the world an even more unequal place

Similar stories are being told by airlines worldwide. Around 40 airlines have grounded their entire fleets. About half of the world’s 26,000 commercial aircraft have been mothballed. In Germany, Lufthansa has fully decommissioned 40 of its aircraft, wound up its low-cost carrier Germanwings, and is restructuring two other subsidiaries, Austrian Airlines and Brussels Airlines.

Brian Pearce, chief economist of the International Air Transport Association (IATA), reports that flights worldwide were down 80 per cent as of early April compared to a year ago. About 2.7 million direct jobs in the airline sector are in jeopardy, and a total of 25 million jobs linked to aviation are at risk.

For the year as a whole, IATA is forecasting passenger demand to be down 48 per cent and passenger revenues down US$314 billion. Demand for air cargo has not been so badly hit, but since the majority of cargo is carried in the bellies of passenger aircraft, much of this demand cannot be met. In March, Cathay Pacific flew 257 passenger aircraft empty of passengers just to fill the bellies with cargo.

IATA is predicting that the world’s airlines will burn through US$61 billion of cash reserves in the second quarter as their losses mount. When the average airline has cash to cover just two months’ revenue, such a prediction suggests perhaps terminal challenges for many.

New York City’s John F. Kennedy Airport stands mostly empty on April 16 due to the ongoing cutbacks in travel because of the coronavirus outbreak. IATA is forecasting passenger demand to be down 48 per cent this year and passenger revenues down US$314 billion. Photo: Getty Images / AFP

IATA argues that the world’s airlines are going to need government support to the tune of US$200 billion. Already, US airlines such as Delta, American, United and Southwest are queuing for government bailouts, and are likely to have to surrender stakes to the government as a price of rescue.

Around the airlines, aircraft manufacturers Boeing and Airbus face massive production cutbacks. Boeing is seeking US$60 billion in support, on top of existing debt of around US$35 billion. Rolls-Royce, a major supplier of engines to both Airbus and Boeing, faces an excruciating challenge: it deliberately sells its engines at a loss, but then earns its profits from “power by the hour” deals by which it is paid a fee for every hour the engines are in use. With planes sitting on the tarmac, its income literally evaporates. “Power by the hour” has become “poorer by the hour”.

The airlines most in danger of going under in a cash crunch

Pain around the aircraft industry is acute. Hong Kong has three airport catering companies that have the capacity to make 198,000 inflight meals a day. At present, if they make 1,000 meals, they are lucky.

Airport retailers, which pay among the highest rents in Hong Kong for the privilege of selling to incoming and outgoing passengers, are haemorrhaging. The airport authorities themselves are having to give concessions to tenants, though income from landing and parking fees has fallen through the floor.

As tourists and business travellers arriving in Hong Kong slump from 200,000 a day to under 3,000, hotels and thousands in the retail and restaurant sectors have seen business evaporate, with bankruptcies and layoffs already mounting. No wonder IATA says so many millions of jobs are at risk.

How quickly can this self-imposed paralysis be lifted? Even when quarantine rules can be relaxed, and passenger testing rules agreed worldwide, the resumption of anything resembling normal services will be slow. The willingness of people to travel will be even lower. Will social distancing rules mean that planes have to fly half empty?

It has always been an aviation industry joke that to become a millionaire you have to start off as a billionaire, and then invest in aviation. Today that is no longer a joke, but the implications for millions who work in the industry, and for the hundreds of millions who rely on their services, are even worse.

The workhorse that is the beating heart of our globalised economy is facing immolation, its always-precarious business model in tatters, and no global economic recovery is likely to be possible until it is fixed. Whatever politicians and businesses hope, the economic catastrophe now unfolding is set to be deeper, and longer-lasting, than many wishful thinkers imagine.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view

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