Virus seen pushing some struggling airlines out of business

The fast-spreading coronavirus could spell the end for the weakest airlines as travel demand dries up in and out of China.

The outbreak, which originated in the Chinese city Wuhan, has claimed 170 lives. Total infections have soared past 7,700 in China, surpassing the country’s official number from the 2003 SARS epidemic. SARS cost the global economy an estimated $40 billion in just six months and led to a 45% plunge in traffic for Asia-Pacific carriers in April that year.

The novel coronavirus hasn’t killed anyone outside China, but infections are spreading faster than SARS and that’s triggering a raft of flight cancellations to and from one of the world’s fastest-growing markets for air travel. For Asia-Pacific carriers, already buffeted by U.S.-China trade tensions and protests in Hong Kong, the new virus is potentially an existential threat, Qantas Airways Ltd. Chief Executive Officer Alan Joyce said.

“A lot of airlines may not be able to keep some of these operations going,” Joyce said in an interview. “It’s survival of the fittest.”

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At the height of the SARS outbreak in April 2003, global airline traffic fell 19%, a slump exacerbated by the second Gulf War. Overall in 2003, Asia-Pacific carriers lost $6 billion in revenue and 8% of their passenger traffic, according to the International Air Transport Association. Hong Kong’s Cathay Pacific Airways Ltd. posted a net loss of HK$1.2 billion ($155 million) in the first half of 2003.

Travel demand has boomed in Asia since then, spawning new budget carriers and hundreds of millions of first-time fliers. The number of passengers in the Asia-Pacific region is expected to double to 3.9 billion by 2037, according to IATA. The rush to meet such demand has caused oversupply in some Asian markets, with some airlines losing money or collapsing.

“A lot of them have huge growth and not much profitability,” Joyce said. “Things like this can have an impact on these models.”

While it’s unclear what the financial toll of the current outbreak will be, British Airways has already decided to halt flights to Beijing and Shanghai, joining peers from South Korea to Finland that scrapped services to the Chinese mainland. Cathay Pacific, which warned about earnings last year because of the Hong Kong protests, is being hit by this fresh crisis given the size of its China business. Hong Kong’s flag carrier is cutting flights to the mainland by 50% or more to at least the end of March.

Qantas, with services to Shanghai, Beijing and Hong Kong, is prepared to slash international capacity by 20% to get through any slump in demand, Joyce said in an interview. That would match cuts Qantas made during SARS, which cost the airline A$55 million ($37 million).

The Australian carrier previously planned to end its Sydney-Beijing service in March, and will bring that forward if necessary. There’s also scope to reallocate, ground or retire aircraft, Joyce said. Qantas’s domestic business, by far the biggest-earning division, is largely insulated from virus risks, he said.

China last week ordered travel agencies to suspend sales of domestic and international package tours, and will also restrict visits to Hong Kong. Hana Tour Service Inc., South Korea’s biggest tour agency, said 90% of its China packages are being canceled.

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Even with some 50 million people quarantined near the outbreak’s center, cases are mounting. Budget carriers, which rely heavily on leisure travel demand, have been hit the hardest from the travel restrictions. Of those that have announced flight suspensions, half of them are low-cost carriers.

“Airlines are starting to suffer,” said Shukor Yusof, founder of aviation consulting firm Endau Analytics in Malaysia. “Losses could reach multi-billion dollars. This could be as big as SARS or could be even bigger.”

Even before the Wuhan virus, 19 of 51 listed Asian airlines were unprofitable, according to data compiled by Bloomberg. Only six of the carriers, including top-ranked Spring Airlines Co. in China, have profit margins fatter than 10%.

The 15-member Bloomberg Asia Pacific Airlines Index has fallen 9.4% in the past two weeks as coronavirus fears escalated. Tway Air Co., a South Korean budget carrier, has plunged 16%, Cathay Pacific has tumbled 15% and Qantas 7.4%. The Hong Kong shares of Air China Ltd., China Southern Airlines Co. and China Eastern Airlines Co. have fallen more than 17%.

Operating margins at Asia-Pacific airlines in the third quarter of 2019—before the virus emerged—narrowed to 6.9% from 8% a year earlier, according to IATA. Cash-strapped Hong Kong Airlines Ltd. nearly became a high-profile casualty in December as local authorities threatened to revoke its flying license because of liquidity concerns, while Malaysia is seeking an investor for Malaysia Airlines Bhd., which has been struggling with losses and debt.

“Low-cost carriers are going to be hit the most from this because there aren’t many alternative destinations they can add to make up for the lost China flights,” said Kim Yu-hyuk, an analyst at Hanwha Corp. in Seoul. “People will put off traveling for at least three months before they’re confident things are under control.”