The International Air Transport Association has revealed that airlines are likely to burn through $61bn of their cash reserves during the second quarter ending 30 June, 2020 while posting a quarterly net loss of $39bn.
The association said on Tuesday that the new analysis was based on the impact assessment it released last week, under a scenario in which severe travel restrictions last for three months.
According to IATA, in this scenario, full-year demand falls by 38 per cent and full-year passenger revenues drop by $252bn compared to 2019 while the fall in demand will be the deepest in the second quarter, with a 71 per cent drop.
IATA said the impact would be severe as revenues were expected to fall by 68 per cent.
“This is less than the expected 71 per cent fall in demand due to the continuation of cargo operations, albeit at reduced levels of activity. Variable costs are expected to drop sharply—by some 70 per cent in the second quarter—largely in line with the reduction of an expected 65 per cent cut in second quarter capacity. The price of jet fuel has also fallen sharply, although we estimate that fuel hedging will limit the benefit to a 31 per cent decline,” the association said.
“Fixed and semi-fixed costs amount to nearly a half an airline’s cost. We expect semi-fixed costs (including crew costs) to be reduced by a third. Airlines are cutting what they can, while trying to preserve their workforce and businesses for the future recovery. These changes to revenues and costs result in an estimated net loss of $39bn in the second quarter,” it added.
The association explained that on top of unavoidable costs, airlines were faced with refunding sold but unused tickets as a result of massive cancellations resulting from government-imposed restrictions on travel.
It noted that the second quarter liability for these would be a colossal $35bn.
“Cash burn will be severe. We estimate airlines could be burning through $61bn of their cash balances in the second quarter,” the association said.
The Director General, IATA, Alexander de Juniac, said airlines could not cut costs fast enough to stay ahead of the impact of the crisis.
“We are looking at a devastating net loss of $39bn in the second quarter. The impact of that on cash burn will be amplified by a $35bn liability for potential ticket refunds. Without relief, the industry’s cash position could deteriorate by $61bn in the second quarter,” he said.
According to him, several governments are responding positively to the industry’s need for relief measures, adding that among countries providing specific financial or regulatory aid packages to the industry are Colombia, the United States, Singapore, Australia, China, New Zealand and Norway.
He said Brazil, Canada, Colombia and the Netherlands had also recently relaxed regulations to allow airlines to offer passengers travel vouchers in place of refunds.
De Junaic said, “Travel and tourism is essentially shut down in an extraordinary and unprecedented situation. Airlines need working capital to sustain their businesses through the extreme volatility. Canada, Colombia and the Netherlands are giving a major boost to the sector’s stability by enabling airlines to offer vouchers in place of cash refunds.
“This is a vital time buffer so that the sector can continue to function. In turn, that will help preserve the sector’s ability to deliver the cargo shipments that are vital today and the long-term connectivity that travellers and economies will depend on in the recovery phase.”
