The Economy

Airlines Brace for Profit Hit From Coronavirus

The U.S. airline industry's long run of profitabiilty could be at risk if the virus causes a "broad slowdown" in travel.
Matthew HellerFebruary 27, 2020
Airlines Brace for Profit Hit From Coronavirus

The coronavirus outbreak is raising fears of a broad slowdown in travel that could bring the U.S. airline industry’s long run of profitability to an end.

U.S. airlines in 2019 posted their 10th consecutive year of profitability but their shares have already taken a hit as investors worry about the outbreak’s impact on demand.

The NYSE Arca Airline Index, which tracks 16 carriers in North America, Latin America and budget carrier Ryanair, has dropped more than 15% this week as of Wednesday’s close, putting it on pace for its biggest weekly percentage loss since March 2009.

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American Airlines’ shares on Wednesday closed the lowest since before its 2013 merger with US Airways and United Airlines. United suspended its full-year guidance this week because of the virus.

The International Air Transport Association is now predicting a contraction in global air demand of 0.6% in 2020 after previously forecasting growth of 4.1%, with the virus costing airlines globally more than $29 billion in revenue — mostly in the Asia-Pacific region.

The forecast assumes the virus remains largely concentrated in China but IATA warned the impact could be greater if it spreads to other markets in the region.

“The risk here for airlines is this triggers a broad slowdown in travel,” Samuel Engel, head of the aviation practice at consulting firm ICF, told CNBC. “Airlines are by their nature diversified enterprises. They can withstand a loss of traffic on a single route or region but where the airlines get hit is when the fear makes people cancel or postpone trips.”

More than 81,000 people have been sickened with the coronavirus and new cases are emerging outside of China. Some carriers are already preparing for flyers too worried to travel, with JetBlue eliminating change and cancellation fees that can reach $200 on tickets booked through March 11 for travel through June 1.

“If this epidemic continues to spread, it may need to extend that offer, and you may see some other competitors copying it,” New York Magazine said.

A research report released Thursday by Mercer said if the virus continues spreading there could be “random shocks” to the global economy. Mercer analysts said they expect heavy-handed measures by governments, such as lockdowns and travel restrictions, that will come with economic costs. “The political cost of inaction would be far too high for most governments to contemplate.”

JACK GUEZ/AFP via Getty Images

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