For airlines, China boom now exposes them to risk as coronavirus slams market

SYDNEY/CHICAGO (Reuters) - China’s growth has helped power a global aviation boom over the last decade, but as the country curtails travel in the face of a new coronavirus, a slowdown could hit the industry harder than ever before.

FILE PHOTO: A member of the Thai Airways crew disinfects the cabin of an aircraft of the national carrier during a procedure to prevent the spread of the coronavirus at Bangkok's Suvarnabhumi International Airport, Thailand, January 28, 2020. REUTERS/Athit Perawongmetha

United Airlines UAL.O, American Airlines AAL.O, Air Canada AC.TO, Cathay Pacific 0293.HK, Lufthansa LHAG.DE and Finnair FIA1S.HE are among carriers that have cancelled some or all China flights as countries expand travel warnings and demand plummets due to the coronavirus outbreak.

British Airways ICAG.L has also halted bookings of direct flights from London to Beijing and Shanghai until March, according to its website.

The virus has killed more than 130 people and sickened more than 6,000, the vast majority of them in China.

U.S. officials said the White House had decided against suspending all flights there for now, but was still considering the measure.

The virus appears to represent the biggest epidemic threat to the airline industry since the SARS outbreak, which at its peak in April 2003 led to a 45% plunge in passenger demand in Asia, analysts said.

The global airline industry has been profitable for the last 10 years, according to the International Air Transport Association (IATA). Airlines are in a stronger financial position than in 2003, but also far more dependent on China.

“Airlines and airports that are financially strong and well managed are able to overcome a drastic drop in air travel,” said Shukor Yusof, head of Malaysia-based aviation consultancy Endau Analytics. “Weak and poorly managed airlines will suffer.”

Margins at many carriers remain narrow, economic growth has been fragile amid a U.S.-China trade war and there are fears that the return of the 737 MAX, expected mid-year, could lead to overcapacity and push down fares. Airbus and Boeing orders have fallen from the peak levels of 2013 and 2014.

The epidemic is particularly concerning to the industry because China is the world’s biggest outbound international travel market and the second-largest domestic aviation market.

The country accounts for about 25% of global sales for airplane manufacturers Airbus SE AIR.PA and Boeing Co BA.N. About 450 million more passengers fly to, from and within China per year compared with a decade ago, according to IATA.

For Chinese airlines, the biggest of which are state-backed, the impact of the new coronavirus has been swift. On Wednesday, 23% of departures from Shanghai Hongqiao airport had been cancelled, according to FlightRadar24, compared with 8% at the more internationally focused Shanghai Pudong airport.

Overall, almost 9% of Chinese domestic and international flights did not take off as scheduled from Jan. 23 to 27, according to Cirium aviation data reflecting aircraft movements and official cancellations. Besides Wuhan, the worst-affected airports were Beijing, Ghangzhou and Shanghai.

Mike Boyd, head of U.S.-based aviation consultancy Boyd Group International, said he had forecast airport traffic in China to rise 8.1% in 2020 but now sees traffic growing at less than half that rate.

“It is a real slam,” he said.

Cathay Pacific, already battered by a fall in demand because of anti-government protests in its home market of Hong Kong, said on Tuesday evening it would cut flights to mainland China by 50% or more through the end of March.

The fate of Cathay and local rival Hong Kong Airlines could depend on the willingness of travellers to transit through Hong Kong airport, BOCOM International analyst Luya You said. The protests have already led to a collapse in demand from mainland tourists and business travellers, she said.

Asian jet fuel prices have dropped and refiners’ profits for the product have slumped to their lowest in more than 2-1/2 years over concerns that the coronavirus will hurt demand, although that will also help unhedged carriers keep a lid on costs.

U.S. and European carriers have less relative exposure than their Asian rivals. Chinese carriers dominate airline travel between China and long-haul destinations. But they were racking up international losses even before the virus.

Flights to China account for 2%-6% of estimated revenue at United Airlines, Delta Air Lines Inc DAL.N, American Airlines Group Inc AAL.O and Air Canada, according to analysts at Cowen, an independent investment bank, although they added there were concerns the virus would not be contained in China given how it was spreading.

Among the Europeans, Lufthansa and Air France-KLM AIRF.PA have the most to lose in a China traffic slump, and the Franco-Dutch airline group has so far maintained flights to Beijing and Shanghai. Both groups rely on China for 7% of their capacity, according to UBS data, compared with 3% for BA parent IAG.

Historically, air traffic has returned to normal after health scares. In the case of SARS, it took nine months to recover, according to IATA.

"It (SARS) meant we did cut back on some international capacity but it rebounded very fast," Qantas Airways Ltd QAN.AX Chief Executive Alan Joyce told reporters on Wednesday, saying that earnings took a A$55 million ($37.61 million) hit from that epidemic.

“We do now have a lot of experience over the years with MERS, with Zika virus, with volcanoes, with all sorts of activity that’s impacted the airlines,” he said.

($1 = 1.4622 Australian dollars)

Reporting by Jamie Freed in Sydney and Tracy Rucinski in Chicago; Additional reporting by Laurence Frost in Paris; Editing by Gerry Doyle and Hugh Lawson