IATA: Airlines globally facing rapid cash burn over COVID-19

- A Monitor Desk Report 07 Apr, 2020 | 945 Views|-+
Dhaka: Airlines globally may burn through USD 61 billion of their cash reserves during the second quarter ending on June 30 this year while posting a quarterly net loss of USD 39 billion amid the coronavirus outbreak, according to the latest analysis published by the International Air Transport Association (IATA).

This analysis, by Brian Pearce, Chief Economist of IATA, is based on the impact assessment the industry body released in March-end, under a scenario in which severe travel restrictions last for three months. In this scenario, full-year demand falls by 38 per cent and full-year passenger revenues drop by USD 252 billion compared to 2019. The fall in demand would be the deepest in the second quarter, with a 71 per cent drop.

The impact will be severe, driven by the following factors:

Revenues are expected to fall by 68 per cent. This is less than the expected 71 per cent fall in demand due to the continuation of cargo operations, albeit at reduced levels of activity Variable costs are expected to drop sharply—by some 70 per cent in the second quarter—largely in line with the reduction of an expected 65 per cent cut in second quarter capacity. The price of jet fuel has also fallen sharply, although they estimate that fuel hedging will limit the benefit to a 31 per cent decline.

Fixed and semi-fixed costs amount to early half an airline’s cost. They expect semi-fixed costs (including crew costs) to be reduced by a third. Airlines are cutting what they can, while trying to preserve their workforce and businesses for the future recovery.

These changes to revenues and costs result in an estimated net loss of USD 39 billion in the second quarter.

On top of unavoidable costs, airlines are faced with refunding sold but unused tickets as a result of massive cancellations resulting from government-imposed restrictions on travel. The second quarter liability for these is a colossal USD 35 billion. Cash burn will be severe. They estimate airlines could be burning through USD 61 billion of their cash balances in the second quarter.

Several governments are responding positively to the industry’s need for relief measures. Among countries providing specific financial or regulatory aid packages to the industry are Colombia, the United States, Singapore, Australia, China, New Zealand and Norway. Most recently, Canada, Colombia, and the Netherlands have relaxed regulations to allow airlines to offer passengers travel vouchers in place of refunds.

“This is a vital time buffer so that the sector can continue to function. In turn, that will help preserve the sector’s ability to deliver the cargo shipments that are vital today and the long-term connectivity that travellers and economies will depend on in the recovery phase,” said Alexandre de Juniac, Director General and CEO, IATA.

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