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Coronavirus Hits Come Fast For Aviation Sector

The airline industry is becoming a leading indicator of the global economic contraction now projected for the first quarter, and possibly for the full year, as the new coronavirus escapes containment efforts in China.

Benzinga · 03/02/2020 17:41

The airline industry is becoming a leading indicator of the global economic contraction now projected for the first quarter, and possibly for the full year, as the new coronavirus escapes containment efforts in China.

German companies seem particularly aggressive in trying to cut expenses in line with declining revenue trends as passenger demand dries up. On Friday, Fraport AG, which operates the large European hub in Frankfurt, Germany, and has activities in 30 airports around the world, followed German flagship carrier Deutsche Lufthansa AG in announcing a series of cost containment measures.

The airport operator said it is freezing all new hiring except for exceptional circumstances, and offering administrative and operational employees voluntary unpaid leave or temporary reduced working hours to align resources a massive slump in passenger and cargo traffic at Frankfurt Airport.

Fraport has about 20,000 employees and the entire airport supports more than 80,000 jobs. 

The company said it is evaluating other steps to reduce costs and will issue guidance for the current fiscal year when it releases financial results on March 13. 

Lufthansa Group this week announced it will park 23 aircraft, reduce short- and long-haul operations, freeze new hiring and training, and encourage workers to take reduced work hours. In the past two weeks, the company's stock has dropped 23%.

The coronavirus is hitting the German aviation sector just as it prepares for an April increase in Germany's aviation tax. 

British Airways is also implementing a hiring freeze and cutting flights. 

The coronavirus is now in 60 countries. On Friday, Italy, Iran and South Korea announced 3,500 new cases, more than 10 times the number of new cases in China and double the number of cases announced Thursday. Preliminary indications are that for every person infected the disease gets passed on to two more people, on average, according to health authorities.

Travel demand is falling fast as people look to reduce their chances of exposure to the coronavirus, and airlines are reacting with reduced schedules. Some countries are banning travel to certain destinations and the U.S. government has raised its warning level for travel to Italy and Iran.

Tokyo Disneyland is now closed. The Swiss government ordered all events with more than 1,000 people canceled, ending a popular ski marathon, next week's Geneva International Motor Show and a big watch convention. Amazon said it is even restricting non-essential domestic travel within the US.

After previously shutting down operations in China, where the new coronavirus originated and where there are about 80,000 confirmed cases, airlines are reducing flights to other parts of Asia, including South Korea, Japan and Singapore. 

Fewer passenger aircraft in the air means fewer options for companies to ship cargo. Dedicated all-cargo carriers could benefit by the new market dynamic, but that assumes that the disease doesn't force manufacturers to halt production as part of quarantine efforts to control the outbreak.  

Earlier this month, the International Air Transport Association estimated airlines would generate almost $30 billion less revenue this year. That amount is certain to increase as the coronavirus reaches pandemic proportions.

Meanwhile, investment bank JP Morgan forecast the global economy will shrink in the first quarter because of the crisis. And Goldman Sachs on Thursday said S&P 500 companies, on average,  won't generate any earnings growth this year as the impact of the coronavirus spreads.  

Buckle up.

Image Sourced from Pixabay