In view of an estimated 39 billion dollars in quarterly losses, airlines may be forced to use up 61 billion dollars of their cash reserves in the second quarter of the year if governments don’t step in with aid, according to a new analysis released by the International Air Transport Association (IATA).
IATA estimates that in the worst-case scenario – where stringent travel restrictions last for three months – full-year demand will drop by 38 percent and passenger revenues by an estimated 252 billion dollars compared to 2019.
“Travel and tourism is essentially shut down in an extraordinary and unprecedented situation. Airlines need working capital to sustain their businesses through the extreme volatility,” said IATA Director General and CEO Alexandre de Juniac.
The inevitable decline in demand would lead to declining revenues by 68 percent and a sharp drop in variable costs by some 70 percent in Q2 in line with the reduction of an expected 65 percent cut in capacity. The changes to revenues and costs are set to lead to net losses of 39 billion dollar in Q2.
Indicatively, in under two months, global airline capacity plummeted from 106 million seats to 90 million, with carriers operating on less than half of mid-January levels after slashing another 20 million seats from scheduled services last week due to the coronavirus pandemic, said OAG Aviation Worldwide.
At the same time, airlines have also been forced due to the Covid-19 travel restrictions to refund sold but unused tickets with Q2 liability amounting to 35 billion dollars.
Meanwhile, semi-fixed (together with fixed) costs – amounting to nearly half an airline’s cost are expected to be reduced by a third with carriers cutting what they can in efforts to preserve their workforce and businesses for future recovery.
“Airlines cannot cut costs fast enough to stay ahead of the impact of this crisis. We are looking at a devastating net loss of 39 billion dollars in the second quarter. The impact of that on cash burn will be amplified by a 35 billion dollars liability for potential ticket refunds. Without relief, the industry’s cash position could deteriorate by 61 billion dollars in the second quarter,” said de Juniac.
De Juniac noted that several governments have been responding positively to the industry’s need for aid through financial or regulatory packages. In the meantime, Canada, Colombia, and the Netherlands also eased regulations to allow airlines to offer passengers travel vouchers in place of refunds.