Spain Quarantine Pushes Airlines Back Toward the Abyss

(Bloomberg Opinion) -- The northern hemisphere’s summer was supposed to bring respite from the worst crisis anyone in the aviation industry can remember. Airlines used the lockdown period to put in place hygiene measures that they hoped would restore customer confidence and help prevent a second coronavirus wave. Restarting travel was risky, but southern European economies depend on tourism. They couldn’t afford a summer of empty sunbeds and restaurant terraces..So Britain’s decision to impose a 14-day quarantine on holidaymakers returning from Spain — after a spike in cases in the Barcelona region — is about the worst news imaginable for the beleaguered travel industry..It’s not yet clear whether a jump in infections in various parts of Europe heralds a second pandemic wave, or whether tourism has played a part, but the news will dent fragile confidence in flying. It’s similar in the U.S., where a rise in cases in the Sunbelt states has caused a rebound in flying to level off. United Airlines Holdings Inc. warned last week that, absent a widely administered vaccine, its revenue would only recover to half its pre-virus level..Airlines are going to have to cut even more costs or take on even more debt to survive. In a historic echo of Ford Motor Co.’s mortgaging of its iconic blue oval before the financial crisis a decade ago, American Airlines Group Inc. last week pledged its brand as collateral for a new loan..No-frills operators like Ryanair Holdings Plc, which have low and flexible costs, are best placed to survive aviation’s new Great Depression. The return of quarantines and the prospect of a slower recovery is more alarming for large intercontinental carriers such as British Airways. Its parent company, International Consolidated Airlines Group SA, has much larger fixed costs..The Spanish setback has happened just as it seemed the worst was over for airlines, who’ve pulled every lever imaginable to prevent cash pouring out the door. .On Monday, Ryanair reported a modest 185-million euro ($216 million) loss for the quarter to June, even though most of its fleet was grounded during that period. Famous for penny-pinching, Ryanair curtailed its losses by slashing operating costs by an astonishing 85%. Government wage-support programs have helped, and the Irish company’s workers have taken pay cuts to limit the number of permanent layoffs. With flights now restarted and departing roughly 70% full, Ryanair has stopped burning though its cash..However, if the virus spreads again in Europe, this could be the high point of a very brief recovery. Ryanair’s management said a second wave is its “biggest fear.”.If Ryanair is worried, airlines with much larger unionized workforces — and which depend on still-dormant business travel — will be quaking. Take IAG, which on Friday said it was considering a 2.75 billion-euro rights issue to strengthen its balance sheet. Its stock has fallen 71% this year. The BA owner was very profitable before the virus emerged, which is one reason why it’s received far less government support than rivals Lufthansa AG and Air-France KLM. That seemed like admirable resilience, but now it looks like a handicap. .Airlines are in a terrible bind. If they remain in hibernation, they can’t generate income from new bookings to cover their fixed costs. But if they bring back too many flights and can’t fill those seats, they lose money. Ryanair is offering 60% of its normal European schedule in August and 70% in September, which seems bullish considering the Spanish situation. .Until there’s a vaccine, testing is the only way to guarantee passengers aren’t carrying Covid-19. IAG and its peers are urging the European Union and the U.S. to create a joint testing program to let transatlantic travel restart. Germany will make testing available for all returning holidaymakers, and is examining whether this can be made compulsory. Its well-funded health system might cope with such a requirement, but other nations would struggle..If infections keep rising, passengers may decide the best way to avoid the virus is to not fly at all. If that happens, the aviation industry would descend further into the abyss..This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners..Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times..©2020 Bloomberg L.P.

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Spain Quarantine Pushes Airlines Back Toward the Abyss

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