Losing Streak

Daltium Opinions

More than a public health issue, the coronavirus is taking a significant toll on specific industries – and compared to the search for an antidote, business recovery for those crucially affected may take even longer, and possibly in some cases, they may never be the same again. The coronavirus could represent a ‘paradigm shift’ when you consider the Chinese economy is now eight times larger since the SARS outbreak 17 years ago, and Chinese tourists now represent 9% of global tourism as opposed to just 2% back then.

With both Chinese and international governments limiting travel to and from China, the aviation industry is being hit hard at a time when it is already struggling. Airlines around the world are already worrying thanks to the Boeing Max catastrophe, and cutting flights to China is certainly not helping. Air Canada, among many others, has already canceled flights to China, HK, and some parts of Asia. European airlines such as Air Italia, Lufthansa, and Air France have followed suit. With the growing global pandemonium of a coronavirus pandemic – air traffic between the rest of the world and China is in terrible shape, and this emergency delivers a significant blow to both Chinese and American airlines servicing this once profitable route.

Forbes contributor Michael Boyd observed in a recent column that the aviation industry is full of unknowns, and tracking its recovery may not be just financial or numbers specific. Just as we were looking at rising figures in air travel from China’s increasing middle class two years ago - with more Chinese travelers going to the US and other destinations for shopping and vacations – that is all going to change overnight.

Boyd, who has looked into the airline industry for some time now, is revising his previous forecast of 7 million passengers on US-China flights. He added that the figure might fall drastically, and the damage done by the Wuhan virus will linger for at least six months or longer.

Worst case scenario, a decrease of 70% of the number of passengers on US-China flights this year is very likely. With countries banning travel into and from China as well as putting travel restrictions on Chinese passport holders – the global leisure market will dry up and half of the passengers (mostly Chinese) from these flights will disappear.

Boyd, in his column, added the following:

“As of today, and depending on the developments in China, through this June we are forecasting a 75% drop in passenger traffic between the US & China. That figure sounds extreme, but as the knowledge of the nature of the extent of the virus grows, it may actually be optimistic.

Cutting to the chase, airline flights between China and the US are going to be a financial disaster. That assumes, somewhat optimistically, they all will even continue to operate.

For one thing, leisure traffic – about 60% of the passenger base – is effectively ended. Gone. No More. Evaporated.

Now you see, the biggest casualty of this coronavirus epidemic outside the realm of public health and safety – is the airline industry. It comes at a time when airlines were placing orders on the prospect of a burgeoning Chinese middle class. Now those bright prospects are fading and quarantined. Politicians and other experts should look at this beyond being a public health issue. Very soon, there will be more important things to worry about. Like who is going to bail out the airlines?

As a postscript to this disaster, Boeing’s problems as a consequence of the coronavirus just got a whole lot worse. The suspension of the Max aircraft continues, and the related costs escalate as it investigates the alleged software problems of the aircraft. To compound matters, reports are circulating of other fault issues, albeit not as dangerous, on other models. When you consider Boeing products represent 7% of all American exports, you begin to realize what a critical component the company is to the USA.

Boeing is now having to tap the Banks for credit lines exceeding 20 billion dollars. It seems more than an extraordinary thought that Boeing has since the start of this century bought and spent 43 billion dollars buying in its own stock, but now is having to borrow money for its survival. There seems to be something wrong with a corporate culture that can allow this shocking state of affairs that would seem to have promoted financial shenanigans to boost its share price instead of investing in engineering excellence.