What's an Airline Nightmare? No Spring Break

(Bloomberg Opinion) -- If coronavirus fears sap demand for U.S. domestic flights, the aerospace industry is in real trouble.

United Airlines Holdings Inc. became the first carrier to officially reduce its U.S. flight schedule amid an uptick in infected Americans and a wave of canceled events and business travel. The company will trim U.S. flights by 10% in April and cut international capacity by 20%, with similar reductions likely to occur in May, according to an email to employees from United CEO Oscar Munoz and President Scott Kirby. “We certainly hope that these latest measures are enough, but the dynamic nature of this outbreak requires us to be nimble and flexible moving forward,” Munoz and Kirby said in the memo, as reported by Bloomberg News. In the meantime, United is offering staff an unpaid leave of absence, deferring the payout of merit-based raises and implementing a hiring freeze through June 30.

Like most major airlines, United had already suspended service to China and Hong Kong while cutting certain routes to Japan, Singapore and South Korea. But we're now seeing a pivot away from the hot spots of the virus outbreak – many of which were under travel advisories or outright bans – toward just generally weaker interest in going anywhere near an airplane. Joel Szabat, the Transportation Department's acting under secretary for policy, told a Senate committee Wednesday that the virus is already causing people to reconsider airline travel. Global airline passenger volumes by fell by 4.7% to 6% on the outbreak, he said, citing industry analysts. United's domestic capacity reductions will involve a rollback in flight frequency on certain routes, capacity cuts in cities served by multiple hubs and a pivot to smaller planes in some cases. Some of the international cuts involve service to Europe and Latin America, giving a sense of just how global this new reticence toward flying has become. In Europe, Deutsche Lufthansa AG is grounding 150 of its 763 aircraft due to lower demand. It plans to cut as much as a quarter of its short- and medium-haul flights across all of its brands.  

This travel-wariness comes at an inopportune time for airlines. Spring breaks are imminent, and then comes the Easter holiday. Many people are starting to plan their summer vacations. While some may be willing to try their luck and lock in low prices, quite a few might be tempted to skip that trip to Italy, or even Florida for that matter, and explore the wonders of their own backyard. The slump in business travel is even more troubling for airlines because that is where they make most of their money.And if people aren't traveling, they're not spending money at their destinations and potentially avoiding crowded places or concert venues at home. Not to mention the airline employees on unpaid leave will have fewer dollars to spend. This can spiral very quickly.

Should the cutbacks in inter-European and U.S. domestic travel become more pronounced, there will start to be serious questions about airlines's demand for aircraft. Jet-leasing company Avolon Holdings Ltd. hasn't yet seen deferral requests out of Europe and the U.S. the way it has in Asia and the Middle East, but that's likely an “inevitability” given the spread of the virus and the current facts, CEO Domhnal Slattery said in an interview Wednesday. He sees a slow recovery over the course of a couple quarters.

The market for widebody jets that ferry large amounts of passengers along international routes was already soft as carriers struggled with the dent to global growth from the U.S.-China trade war. Boeing Co., which hasn't seen a commercial order from China in more than two years, has twice rolled back the production rate for its 787 Dreamliner, and there's skepticism about the demand for its 777X jet once that finally enters service in 2021. Separately on Wednesday, Bloomberg News reported that Airbus SE is considering a cut in production of its A330Neo widebody jet after the plane's biggest customer – AirAsia X – said it would defer deliveries because of the coronavirus's impact on travel. This would seemingly be in addition to a February announcement that production of the A330 model would decline to 40 planes in 2020, compared with 53 last year, with the 2019 rate partly inflated because of delayed deliveries.

The U.S. domestic and inter-European capacity cuts raise the prospect of the narrow-body market getting dragged down, too. Those jets are the lifeblood of the aerospace industry, and demand for them had remained resilient. Should that change, there are wide-ranging repercussions for an aerospace supply chain already rocked by the grounding and production halt for Boeing's 737 Max. That plane is expected to re-enter service in mid-2020, assuming no major new regulatory hurdles emerge. Many airlines are going to look at that fresh capacity and say “please not now,” Slattery said. That raises the prospect of Boeing taking longer than expected to clear out its inventory of parked jets and delaying, or perhaps never reaching, its pre-crisis production pace.

Again, there's so much we still don't know about this virus. Markets were calmed on Wednesday by a bipartisan $7.8 billion emergency spending bill to fund the U.S. government's response to the coronavirus. But if spring breakers start bailing on Florida, it's time to worry.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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