Coronavirus: Italy is on lockdown, other parts of Europe will follow, and global markets are in crisis - it is hard to be optimistic, but there are actually a few positives

10 March, 2020

"The only certainty, is uncertainty." A phrase that was used in the United Kingdom to describe the Brexit process, but now as equally relevant for the COVID-19 coronavirus outbreak that has been infiltrating the Continent over the past month.

Italy is now in a country lockdown after seeing its own cases approach 10,000 and deaths exceed 500. Scientists suggest that France, Germany, Spain and the United Kingdom could follow over the next fortnight as their own rising cases following a similar trend to what was previously seen in Italy.

CHART - Italy-Europe capacity has hit its lowest level as airlines have cancelled flights into the countrySource: CAPA - Centre for Aviation and OAG

The daily headlines on the rising reach of COVID-19 has bred a general view of fear among the public and a sense of unease and caution they supplies of dry goods, anti-bacterial soap and toilet rolls are now limited in many countries across the globe as worried citizens start stock-piling ready for doomsday. It is a cloudy picture economically and the 'Black Monday' crash of global markets this week does not paint a positive picture.

Markets have recovered slightly, but concerns about the mounting costs of the coronavirus outbreak remain over the disruption to world travel and trade. Airlines are making further cuts to their networks and grounding aircraft. The coronavirus could see the quicker retirement of larger capacity aircraft from service; notably Korean Air, Lufthansa and Qantas have parked their A380s, an aircraft designed to support the good times of air travel.

It all seems rather bleak. Even the current Russia - Saudi Arabia oil stand-off, a direct reaction to the coronavirus outbreak and which has seen prices fall by more than a third, will not necessarily bring relief to all airlines many of which have learnt that a hedging policy has generally been the best policy in a volatile market.

The following graphic from S&P Global Platts, experts on the energy and commodities markets, explains the background to the oil price drop:

The significant fall saw Crude report a 26% decline to settle at USD31.13 a barrel on Monday. Brent crude, the global benchmark, plunged 24% to close at USD33.36 a barrel - both suffered their worst day since 1991, according to Refinitiv, a global provider of financial markets data and infrastructure, hitting four-year lows.

On the whole the decline cost of fuel is a positive for most. For the few, like Air France-KLM, Singapore Airlines and others, what was prudent fuel hedging for 2020 could see them with a hedging loss of more than USD1 billion. This will put such operators at a disadvantage with competing airlines even if their total fuel bills will decline year-on-year, driven mainly by their reduced output.

Talk of airlines flying empty aircraft to retain slots where required, frequency and route cuts elsewhere and even staff reductions, there appears little else to be positive about. However, Qantas has highlighted that the threat of picking up coronavirus during hub airport stopovers is providing a further fillip to the ultra long-haul travel niche and further endorsing its Project Sunrise strategy.

As part of its contingencies to overcome "a sharp drop in bookings" on its international network as the global coronavirus spread has continued, which includes the grounding of eight A380 aircraft until mid Sep-2020 (a further two A380s will undergo scheduled heavy maintenance and cabin upgrades), reduced frequencies on its network and the use of smaller aircraft to avoid exiting routes, Qantas is actually boosting capacity on its non-stop Perth-London route.

The carrier will reroute Sydney-Singapore-London service (QF1/2) to temporarily become a Sydney-Perth-London service from 20-Apr-2020, complementing its existing Melbourne-Perth-London service. This positive move highlights that demand, especially from corporate travellers, is still there, but that airlines may need to adapt their operations to better fit the increased duty of care requirements that are needed as a contagious viral outbreak spreads across the world.

While we are certainly in tough times for the travel and tourism industries, if anything, the coronavirus outbreak may support the merits for non-stop flights over the one-stop offers that have proliferated over the past decade. This unlikely tailwind could, at a time that airlines are announcing cuts, actually help influence the Australian flag carrier push ahead with its innovative ultra-long-haul plans.