Taking a nosedive

Coronavirus hits Chinese airlines but HNA is suffering the most


She can’t work from home

Back in 2005, when China’s commercial airline industry was developing rapidly, planes were taking off faster than the country could train new pilots. To that end, Chinese carriers paid generous salaries to foreign pilots to keep their aircraft flying. With the recent coronavirus outbreak, airlines have been forced to scale back their operations dramatically – two-thirds of the country’s passenger planes have been grounded – and costly foreign pilots were the first to be taken off the payroll.

China Southern, China’s largest airline with about 10,000 pilots, has offered unpaid leave to expatriate captains, the most expensive employees outside its executive ranks. “All foreign pilots, including those who have applied for leave exemption and those who have not, shall start a non-fixed term leave without pay as soon as possible,” it wrote in a company memo in early February, obtained by the South China Morning Post.

Many aviation analysts say the downturn is going to have a longer-term impact. Some reckon that 2020 will see the first year of negative growth in China’s civil aviation industry since 1990. Prior to the spread of Covid-19, the market was expected to grow 8% in 2020.

The total number of passengers carried by Chinese airlines between January 27 to February 12 was 10.2 million, down 70% compared with the same Chinese New Year period a year ago, with less than half of all seats filled on an average flight during the period, says the Civil Aviation Resource Net of China. Aerohome, an industry blog, believes that the three largest airlines – Air China, China Eastern and China Southern – may lose as much as Rmb3 billion ($430 million) in the month of February.

Hong Kong carrier Cathay Pacific has also cut capacity significantly amid the coronavirus outbreak. Earlier this month the company said it would cancel more than half its flights in February and March. It also has urged its employees to take unpaid leave on a voluntary basis between March and June to cope with the situation.

Hong Kong Airlines has gone a step further by slashing 400 jobs while asking its remaining staff to take at least two months of unpaid leave. The airline, partially owned by the indebted Chinese conglomerate HNA Group, has stopped offering in-flight meals, according to Business Traveller magazine (business class passengers get a bottle of water).

Some reckon the current epidemic will prove to be more devastating for the bottom lines of the region’s airlines than the spread of SARS 17 years ago.

“In 2003, the SARS outbreak was at its worst around April, but by late May the situation was already under control. It was almost eradicated by mid-June,” pointed out Aerohome. “On the other hand, air travel in February and March this year is expected to go down 77% and 40%, respectively. The first quarter of this year alone would see a decrease of 60 million in the number of trips. There is no way the next three quarters could make up for that loss.”

Smaller operators like HNA, which has already sold its budget carrier HK Express to Cathay Pacific in an attempt to reduce debt, could be the worst hit.

On Wednesday, Bloomberg reported that the Hainan government is planning to take over the previously acquisitive aviation group and sell off most of its airline assets to cut debt further.

Should the virus continue to spread, other players in the aviation industry will be increasingly vulnerable.

“The big firms have sufficient capital reserves and state-owned enterprises have state support. But private airlines that are already in the red and have relied on shareholder support and debt to stay afloat have now suspended their flights so cashflow is even tighter. Without any external cash inflow, a lot of these airlines will need life support,” says Aerohome.

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