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With the world in lockdown, the airline industry has already proven to be one of the first casualties. Domestic and international travel has been banned by numerous countries, in a bid to halt the spread of the Coronavirus, leaving skies empty and turning airports into giant parking lots filled with planes with nowhere else to go.
It is an unprecedented situation and like everything to do with the pandemic, is one which is forcing changes the like of which we have never seen before. Just like the virus too, the crisis in the airline industry is turning out to be indiscriminate - affecting budget carriers as well as national airlines.
The International Air Transport Association has been blunt, warning that without state aid, Europe’s airlines could go bust by May, as it forecasts that the industry could lose a quarter of a trillion dollars in revenue this year.
These are difficult times and let’s not forget that the airline industry had already been struggling, before the coronavirus took hold.
Like the retail sector, airlines have been bearing the brunt of the economic slowdown and shift in consumer spending for a while now.
A little over a year ago Flybmi made headlines when it ceased trading, blaming an increase in fuel and carbon costs, along with Brexit uncertainty.
A month later it was Wow Air, the Icelandic ultra-low-cost carrier that disrupted the transatlantic market by offering flights between North America and Europe for as little as £99, that was also permanently grounded.
In September of last year Thomas Cook shook the entire travel industry when the 178-year-old British travel company and airline collapsed after failing to secure £200 million in emergency funding following a demand from its lenders. About 600,000 holidaymakers were left stranded, leading to the largest peacetime repatriation effort - at that time - in British history.
A spate of other collapses saw off airlines across the globe. Bankruptcies, in many cases caused by flawed business models, fierce competition, bad management, and unexpected costs caused those with weaknesses to fail. Long-running Brexit worries were partly to blame, fuel costs and the grounding of the Boeing 737 Max jets also caused notable issues across the industry.
In October airline consulting firm IBA acknowledged the problems, telling Reuters: "2019 has seen the fastest growth in airline failure in history.”
While 2019 was tough for airlines though, 2020 could be worse as the pandemic wreaks havoc on the entire travel industry.
In the UK, just this month regional airline Flybe ended a 40-year run and left 2,000 people out of work after it went into administration.
Despite a takeover in July 2019 by a Virgin Atlantic-led consortium, and efforts at a bailout by the British government, Flybe ultimately could not overcome its financial difficulties. Reduced travel bookings due to the coronavirus proved to be the final straw.
Richard Branson’s Virgin Atlantic has already made a plea for help, asking for £7.5 billion for the industry to save it from collapse. That request has, so far, been rejected by the UK government.
More recently central and Eastern European airline Wizz Air became the latest carrier to warn it could ground its entire fleet as a result of travel restrictions.
However, analysts say that while there could be more casualties in the year ahead, not all airlines are in a dire position right now. According to analysts at Citi, Wizz Air and Ryanair don’t have any need for emergency funding and even the likes of British Airways owner IAG and easyJet are in a healthy-enough position, for the time-being. They say that Lufthansa and Air France-KLM are in a more precarious position.
Leigh Himsworth, manager of the Fidelity UK Opportunities Fund, is also confident that airlines with strong net cash and variable costs, which give them more flexibility to adapt and change as needed in the current climate, stand to weather the storm. He cites Dart, which owns Jet2 and Whizz Air as two good examples.
He also believes that while a recessionary mindset could well remain long after the more imminent problems related to the virus threat have passed, smaller, supportive airports that are keen to support airlines and work with them throughout the crisis, will help protect airlines from the worst effects of the pandemic.
Important information: Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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