The Global Travel Industry Will Not Fly

From its onset in late-2019 to the current full-blown pandemic, the burgeoning novel coronavirus has now infected close to 3,000,000 people as it makes its way from Wuhan to other parts of the world. In response to the pandemic, policymakers around the globe have restricted travels, essentially shutting their national borders. Having made multiple headlines, the coronavirus’s impact on the global aviation sector has been nothing short of catastrophic.


As domestic and international travels are being clamped down, airlines suddenly found themselves deprived of demand. Struggling to keep their heads above the water, many carriers began reducing their capacity or grounding all flights immediately. To name a few, Qantas and Jetstar have halted all international flights, while EasyJet, Cathay and Singapore Airlines have stopped virtually all flights. In the absence of demand, IATA and Bloomberg noted that a typical airline only had cash reserves to last for 1.5 months. As it is, the downward pressure on revenues has already obliterated some airlines, with the most notable one being Virgin Australia which declared bankruptcy in April. Meanwhile, the IATA estimates that Malaysia’s airline industry could face up to $3.32 billion revenue losses, putting some 169,700 jobs at risk. In particular, the country’s flagship carrier, Malaysian Airlines reported a 94% drop in revenues. In light of that, there are perhaps no words better suited for the circumstance than Warren Buffett’s quote – “Only when the tide goes out do you discover who’s been swimming naked.”


The travel industry accounts for 10.3% of global GDP or 330 million jobs. In the aviation sector, 98% of passenger revenues come from major countries already in severe travel restrictions with a total forecasted revenue loss of $314 billion. While some optimists have turned to affordable fuel as a silver lining for the aviation industry, it is somewhat a double edge argument as aviation demand accounts for the largest demand of fuel. Firstly, in order to capitalize on what would be a lower cost of sales, aviation companies first need to be able to have flights. Second, due to the general volatility of prices, airlines tend to engage in hedging activities for their jet fuel consumption in the coming months. In other words, even if oil price fell drastically, majority of carriers will still be paying the hedged price for months. Recognizing the elephant in the room, governments in different countries have provided financial support or bailouts to carriers in their homeland – including the $58 billion loan and grant from the US government, and Singapore Airlines’s $15 billion support from state fund Temasek Holdings. Despite that, various airlines around the world have appealed that it would take much more ammunition to save the whole aviation sector.


By the same token, the global economic downturn and widespread imposition of social distancing has presented a double whammy to the hospitality industry. Occupancy rate, available daily rate (ADR) and revenue per available room (RevPAR) have all fallen substantially. In Prague, Paris, and Barcelona, RevPAR fell more than 95% in March, whereas hotel occupancies in China plummeted by 89% in January. The American Hotel and Lodging Association (AHLA) reported that an estimated $3.5 billion in revenue is vanishing each week. In Malaysia, survey by the Malaysian Association of Hotels (MAH) indicated that 50% of hotels are considering to cease their operations, while another 35% would temporarily halt their businesses. Owing to the disruptions, the association predicted that the local hospitality sector could see a potential loss of up to RM3.3 billion in room revenue. As rooms remain largely vacant and cancellations come pouring in, major hotel chains like Marriott, and Hilton began cutting down on staff costs, either through furloughs or layoffs to weather the storm.


Notwithstanding that, it is worth mentioning that compared to their peers in the aviation sector, the hospitality sector is in a much better position to withstand a temporary paucity of demand. For one thing, leading hoteliers, including Marriott, InterContinental Hotel Group (IHG), Wyndham Hotels, etc. have relatively healthy balance sheet. Average EBITDA margin for most hotel groups are above 50%, a far cry from the majority of airlines operating at margins of 15% or lower. On top of that, the sector has also proven itself to be extremely resilient. To elaborate, after the SARS epidemic subsided in 2003, hotel occupancy in affected regions was able to bounce back to normal levels in mere months, with ADR and RevPAR following closely. In fact, in China where COVID-19 is allegedly under control currently, 87% of hotels have already resumed their operations as of the end of March, with occupancy climbing from below 10% in February to above 30% in March.


By and large, while the hotel sector appears to be relatively stable at the moment, the aviation industry seems to be headed towards a debacle. As a result of airlines’ internal mismanagement from bad hedging practices to obscure pricing and lavish sponsorship policies, policymakers may find themselves in a conflicted position. In that case, are we going to spend money to bail out the aviation sector or to let free markets take its course and allow a merger and acquisition between the airlines groups?