News:

The coronavirus has already taken its first airline victim, Germanwings, a part of Lufthansa Group. While this airline was already in trouble, the coronavirus and travel bans were the impetus to finally push it over the edge. While its profitable routes will likely be replaced by other members of the Lufthansa Group in the future, this provided an opportunity to shed an unprofitable brand in the short term.

Of course, the financial strain of no passenger revenues and continuing costs will impact every airline that isn’t bailed out through government financial support. The US have now received enough cash from the US government to keep them alive through the summer. Passenger counts, however, are about 4% of last year and many flights are being converted to cargo operations for needed medical supplies.

Internationally, some will be harmed more than others. Vietnam Airlines just sold its 49% stake in Cambodia’s Angkor Air. Air Asia is in financial trouble. There will be more carriers that end up in difficulty down the road.

Analysis:

Most international full-service have joined one of the three large alliances, Star, oneworld, or Skyteam. Each of these alliances has major players in North America, Europe, and Asia that anchor their networks, are major established players, and share frequent flyer miles and benefits. For Star, United, Lufthansa, and Singapore are key founding members. For oneworld, American, British and Cathay Pacific are anchor carriers, and for SkyTeam, Delta, AirFrance-KLM, and Korean provide similar critical mass. As other smaller national carriers that are members of the alliances potentially falter, should we expect that some of their alliance partners to take equity stakes? The answer is that it is possible. But with the financial condition of the entire industry in the tank, few will have the cash to invest at a time when they could likely obtain a bargain price.

Nonetheless, the legacy national carriers will in most cases seek and obtain a bailout from their respective governments. Whether the additional financial resources will be enough will depend on the progression of the disease and the shape of the recovery in traffic. Our expectation is that recovery will be slow, and an additional round of financial injections may be needed.

But that leaves most of the unaffiliated low-cost carriers on islands, and unlikely to receive aid from other industry players. Ryanair, easyJet, Southwest, Spirit, Frontier, JetBlue, Wizzair, Fly Dubai, Air Arabia, AirAsia and Norwegian are unlikely to find partners to help out – at least not yet. Nonetheless, the LCCs and ULCCs may be better positioned to survive and recover, from a cash flow standpoint, that their major airline counterparts with much higher fixed costs. They should also be seeing rescue financing from their respective governments, but that those will come at a price.

Insight:

Norwegian, which also operates long-haul routes using the Boeing 787, was in financial straits prior to coronavirus. They are a prime candidate for bankruptcy or restructuring, as while a Norwegian flag carrier, many of their operations are based in the UK through a subsidiary airline. How do Norwegian taxpayers feel about bailing out an operation flying out of other countries? The outlook is doubtful that the UK would bail out a Norwegian company as the optics would likely not fly politically. We’ve placed Norwegian on our watch list, which would have major implications for Boeing and their 787 and planned MAX-based operations.

Sometimes, it is good to have friends available to lend a helping hand. But LCCs and ULCCs in North America and Europe haven’t to date been able to join together due to a lack of transatlantic connecting flights. With the advent of the A321XLR, a narrow-body aircraft flown by many LCCs, the opportunity for connecting flights will soon exist as low-cost trans-Atlantic routes are introduced on narrow-body aircraft. Could a Ryanair-Southwest partnership take off using the MAX into Ireland? Would a JetBlue-Wizzair relationship make sense? Could Wizzair and AirAsia connect in the Middle East? There are several possibilities that could make sense for future partnerships that could provide route synergies. The new generation of A321s and MAXs may provide the solution with an adequate range for connecting flights.

We do foresee many smaller carriers going belly up, with other carriers picking up the pieces, routes, and airplanes at pennies on the dollar. India is particularly vulnerable, with state-owned Air India hanging by a thread, and several LCCs potentially following the lead of Jet Airways, which dissolved last year in a marketplace that was already difficult without coronavirus. The survival of a number of Indian carriers remains in question.

AirAsia is in financial difficulties, like other international carriers, having lost 96% of its traffic. AirAsiaX, the low-cost long-haul arm, has deferred 78 of the new Airbus A330neo aircraft it has on order, and many need financial support from the Government of or its sovereign wealth fund to survive. The Asian airline success story, growing from a start-up to a fleet of more than 500 aircraft in just 16 years, is facing an existential as a result of the coronavirus.

Government bailouts appear to be the primary answer for the industry today, and fortunately are coming for many in many countries. But those who do not receive financial assistance may find themselves in trouble should this completely shut traffic for more than a few more months.

We expect a few names to disappear from airports over the next year as the industry adapts to lower traffic levels. Those who survive and weather the will be leaner on the other side.

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