Coronavirus Pushes Flybe Into Collapse, But Other Airlines May Follow

The collapse of Britain’s regional carrier Flybe has raised worries over what other airlines may suffer the same fate.

Flybe, already burdened by heavy debts, an onerous tax duty, rising fuel costs, falling demand and struggles to turn a profit on its domestic routes, finally went under due to the impact of the coronavirus sweeping across the world.

More than 2,000 jobs may be lost at Flybe, but the crisis has ensnared many other airlines, big and small.

A few days prior, Willie Walsh, chief executive of International Airlines Group, which owns British Airways and Aer Lingus, warned that the impact of the virus outbreak would be enough to push some failing airlines “over the edge.”

“We [IAG] are well able to adjust to this situation because our business is in great shape. It’s the failing airlines who will be most affected by this -- so without question, there will be more consolidation as a result,” he said.

However, British Airways has itself cut many of its transatlantic services due to weakening demand.

Miles Brignall wrote in The Guardian that other airlines, including Richard Branson’s Virgin Group – which was a co-owner of Flybe -- are more directly exposed than Flybe to the crisis, having already cancelled major Chinese routes and then witnessing a drop in demand.

On Wednesday, Brignall noted, Virgin unveiled emergency measures, including reducing executive pay and asking other staff to take unpaid leave, after reservations were cut in half in recent days. Other budget carriers, like Ryanair (RYAAY) and EasyJet have cancelled hundreds of flights to virus-torn Italy, as well as other locales.

“There are lots of airlines that have got relatively narrow profit margins and lots of debt, and a cash flow shock like this could certainly send some into a very difficult situation,” said International Air Transport Association’s Chief Economist Brian Pearce.

Ryanair CEO Michael O’Leary said it was “inevitable” the coronavirus crisis will lead to more airline bankruptcies.

Already, a slew of airlines has issued profit warnings arising from virus-related woes.

U.S. carrier Southwest Airlines predicted a $200-300 million loss in its first-quarter operating revenues.

“Firms are restricting business travel, and international conferences are being axed by the day, pulling the most valuable customers from the traditional carriers,” the Guardian wrote. “If further public health measures are needed and demand tumbles throughout the peak period, more airline casualties can be expected.”

The Wall Street Journal described Flybe’s collapse as the “first coronavirus bankruptcy.”

“[Flybe] is the epidemic’s first victim in the airline sector, which is under pressure not just because of route cancellations to regions under quarantine, but also expectations of a sharp slowdown in economic growth,” the Journal grimly warned.

Moreover, on Thursday, the IATA estimated that global air carriers could suffer revenue losses of anywhere between $63 billion to $113 billion this year depending upon the duration and magnitude of the virus. (On Feb. 20, IATA had forecast a hit to the industry of $29 billion.)

IATA noted that airline share prices have dropped almost 25% since the virus outbreak began, some 21% points more than the decline witnessed at a similar point during the severe acute respiratory syndrome, or SARS, crisis of 2003.

“The turn of events as a result of [coronavirus] is almost without precedent,” said Alexandre de Juniac, IATA’s director-general and CEO. “In little over two months, the industry’s prospects in much of the world have taken a dramatic turn for the worse. It is unclear how the virus will develop.”

De Juniac added that “many airlines are cutting capacity and taking emergency measures to reduce costs. Governments must take note. Airlines are doing their best to stay afloat as they perform the vital task of linking the world’s economies. As governments look to stimulus measures, the airline industry will need consideration for relief on taxes, charges and slot allocation. These are extraordinary times.”

Indeed, ForwardKeys, a global travel industry data provider, said on Thursday that new flight reservations to Europe from other parts of the world plunged by 79% in the last week of February.

“The drop-off in bookings to Italy is even worse than we have observed in the past for some of the most disruptive events such as terror attacks,” sais ForwardKeys’ Vice President Olivier Ponti.

The Guardian noted that it took global airlines five years to become profitable after the Sept. 11 terror attacks, losing more than $40 billion in the process. The financial crisis of 2008 also damaged airlines, when it lost $8 billion.

Now as airlines drastically cut services to places like China, South Korea, Italy and Iran, many of them cannot accurately estimate their annual losses since the virus seems to get worse every day.

Andrew Lobbenberg, an HSBC analyst, pointed out that while Air France-KLM projected a 200 million euro [$224 million] hit from coronavirus until the end of May, “the widening of the outbreak across Asia and into Italy makes the company’s estimate redundant. It is very hard to assess how long and how significant an impact we should expect.”

Andrew Charlton, managing director of Aviation Advocacy, an independent air transport consultancy, said airlines are facing a three-pronged problem.

“The first is their staff … they can’t risk flying them somewhere where they might get sick,” he said. “The second is the market. Demand for Venice and Milan [in Italy] has fallen through the floor, and there’s no point in trundling around with empty airplanes. The third is watching out for if a pandemic is declared – there will be all sorts of legal obligation to what they can and can’t do.”

Charlton emphasized many airlines are at grave risk.

“It’s a question of how much cash reserves they have, how agile they can be,” he said. “On the upside, fuel prices are falling, interest rates are low and governments are looking at what they can do. But we shall see if smaller airlines can survive.”

John Strickland, an analyst with JLS Consulting, also painted a bleak picture for the industry.

“Airline revenue management staff will be looking by the hour at booking trends, to see where demand is dropping,” he said. “This is not a situation where airlines can stimulate demand – they simply have to acknowledge it. There are limits to redeployment – you need a lead time of six to eight weeks to get a decent level of bookings to make it worth flying. It’s not a simple matter.”