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How deep are the scars from Covid-19?

As consumer spending recovers and people drift back to work in factories and offices, we need to remember that some sectors remain badly damaged.

As consumer spending leaps up and people drift back to work in factories and offices, we need to remember that some sectors remain badly damaged.

by
Charles Stanley

in Features

04.09.2020

Some sectors have been seriously damaged by the Covid-19 pandemic. The airline, airports, hotels and international tourism businesses face continuing controls, social distancing, and sudden bans on places and travel plans.

All the time there is no effective and widely-adopted vaccine, and all the time flare ups in the presence of the virus alarm people and governments, these businesses will operate under severe difficulties.

The scale of the impact is unprecedented. This is no mere recession in global travel, but a rolling series of bans that can stop almost everything. We are now seeing the numbers for the second quarter, at the height of the pandemic effects. IAG with a large share of the Spanish and UK airline business reported passenger numbers down 98.4% and cargo down 59% in tonne kilometres. Lufthansa in June recorded a 92.3% fall in passenger numbers over June 2019 and a 42.8% fall in cargo revenue. Air France/KLM in the second quarter saw a fall of 95.6% in passengers. The Air France Group published a Euro 4.2bn loss for the first half of 2020.

Now the national lockdowns have been relaxed we should expect a fast pick up from these catastrophically low levels, but there will be no early or easy return to the levels of flying achieved in 2019. Countries are still imposing quarantine requirements on people returning from holidays abroad, varied according to the incidence of the disease. Hotels organising themselves for social distancing may reduce their capacity and reduce and change their service in ways which makes it less appealing to people thinking of spending discretionary money on a fun experience.

Cities fall quiet

The impact of the temporary collapse of international travel is to be seen in the world's largest glamorous cities. New York, Paris and London are suffering from the lack of visitors, with bad knock on effects to attractions, shows, hotels and restaurants. The big cities may still be unable to offer the large sporting events, plays, films, shows and packed exhibitions of the past anyway. Some of these are still banned, and others greatly impaired by distancing rules. It's another reason to cancel the trip.

Airlines and airports are having to borrow huge sums to keep their staff paid and their assets maintained. Some are receiving state subsidy, others are turning to shareholders for additional capital. The airports are badly hit because they have a revenue model that is dependent on air traffic movements and passenger shopping – just as the airlines depend on ticket sales.

The makers of planes are also struggling. They benefit from miles flown by their products once sold, as well as from the sales of new planes. The demand for aircraft has fallen sharply as airlines conserve cash and wait to see what the future shape and size of their business may be. Meanwhile we have seen an especially large fall in orders for wide bodied jets, as many airlines agree they need to move on to newer and smaller models in anticipation of fewer passengers on any given service.

Boeing has lost many firm and potential plane orders. In the first half of the year, it delivered 70 planes compared to 239 equivalent period of last year. The problems with the 737 are part of the reason, but the impact of the pandemic on future air travel is central to the current and future situation. Despite having a commercial advantage over Boeing thanks to the uncertainties over the 737, Airbus delivered 245 jets from January to July this year compared to 458 for the same months last year. Airbus is planning for a reduced production rate for the next couple of years.

A large chunk of uncertainty

Some think we will get over this relatively quickly, and the market will leap back into life for international holidays. Others think there will be a longer-term contraction in the size of the market. The Green movement hopes that these worrying events will forge a new model of more local holidays with much less long-haul travel. Some think business now will continue with many more digital conferences instead of executive flying for face to face meetings, now they have discovered they are cheap and relatively easy to arrange.

It is difficult to reach a firm conclusion today as to what the longer-term future holds. It is easier to predict that there will be no fast and complete recovery from the massive slump we have just witnessed, as the virus is lingering and governments remain cautious in response. This means more months of much reduced revenues, of stretched balance sheets, more fund raising, further cuts in services and retirement of planes.

It also means more delay in getting great cities up to full economic speed, and more trouble for the many businesses supplying the airlines with everything from the aircraft to the catering. A lot of historic capital will be written off as planes are sent to a park in the desert and airports adjust to fewer shoppers and travellers.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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