Financial Times Europe 04Mar2020

Wednesday4 March 2020 ★ FINANCIAL TIMES 13

COMPANIES

TA N YA P OW L E Y A N D P E G GY H O L L I N G E R
LO N D O N
JAV I E R E S P I N OZ A— B R U S S E L S

Airbus s reviewing its 2020 deliveryi
targets, issued barely three weeks ago,
as the global spread of coronavirus in
recentdaysthroughEuropeandintothe
USpushestheaviationindustryintocri-
sismode.
Passengerdemandplungedsharplyat
the weekend, forcing carriers around
the world to freeze hiring andslash the
numberofflights,includingonlucrative
transatlantic routes. Iata, the airline
trade body, willtomorrow significantly
increase its estimate of the hit to global
sales as a result of the virus. Just 12 days
ago it estimated a near $30bn impact,
based largely on the reduction in flights
toandfromChina.
Data show a 2.8 per cent fall in global
aircraft capacity so far this year, accord-
ingtoaviationdataconsultancyAscend,
against IATA’sexpectations late last
yearforgrowthof4.7percentin2020.
In that context, Airbus will not be
aloneinreassessingitsguidance.Execu-
tives from both the aerospace and air-
line industries said they were monitor-
ing the situation on a daily basis. Airbus
has not yet decided to cut its delivery
targetbutonepersonwithknowledgeof
the situation said: “There are several
airlines trying to defer deliveries. It is
probable that guidance will have to be
reassessed before the end of March.”
Airbusdeclinedtocomment.
Analysts suggested that the impact of
deferrals on Boeing could be mitigated
by the year-long grounding of the 737
Maxaftertwofatalcrashes.
Someairlineswerealsoseekingatem-
porary holiday from lease payments,
accordingtotwoindustryinsiders.
MovesthisweekbycarriersfromBrit-
ish Airways ot Ryanair o sharply cutt
flights show how quickly the crisis is
escalatingforthesector.
“We’reinacrisiszoneforairlines.The
situation has rather dramatically accel-
erated over this last weekend,” said
BrianPearce,chiefeconomistatIata.
“This is far worse than the Sars epi-
sode,” he added. “It’s looking more like
the global financial crisis, where airline
revenues fell 16 per cent in 2009. We’re
not there yet but it will depend on the
success of which governments manage
tocontainthisEuropeanoutbreak.”
On Monday BA slashed more than
400 flights between March 16 and
March 28, to countries including Italy,
Germany and, crucially, the US. Its deci-
sion to cut transatlantic routes was
highly unusual. The last time this hap-
pened in any sustained way was during
the 2008/09 financial crisis, according
to Rob Stallard, aerospace analyst at
VerticalResearch.
Ryanair cut short-haul flights to Italy
by up to 25 per cent between March 17
andApril8,whileLufthansa nda easyJet
cutcapacitylatelastweek.
Sources atVirgin Atlantic aids it had
seen a 40 per cent drop in customer
demand compared with March 2019, in
a sign that concerns were hittingtrans-
atlantic routes, not just short-haul
flights in Europe. The airline is likely to
become the latest carrier to step up
emergencycost-savingmeasurestopro-
tectitsbalancesheetinthecomingdays.
Some European airline executives
played down concerns that the corona-
virus outbreak would cause significant
andlong-termdamagetodemand.
Michael O’Leary, group chief execu-
tive at Ryanair, Europe’s biggest low-
cost carrier, said: “The immediate
short-term panic about travelling will
erode very rapidly. It will erode over the
next two or three weeks.” He added:
“Willfamiliescontinuetotravelontheir
Easter school break? Yes, they will
unlessthereissomeunforeseenevents.”
Willie Walsh, CEO of IAG, which owns
BA, said thevirus situation was notlike

the 9/11 terrorist attacks. “9/11 was

clearly a transatlantic issue. It repre-

sented a very significant fall in demand

in transatlantic but it did recover pretty

quicklyonceUSskiesreopened.”

He too expected the decline to abate

soon. “If it follows the pattern that we

sawinAsia,youwouldexpectittostabi-

lisewithinacoupleofweeks.”

Nevertheless, airlines seemed to be

moving into “survival mode”, said Rob

Morris, global head of consultancy at

Ascend. “The name of the game is to

hunker down, reduce cost by paring

schedule as far as possible, seek capital

costreductionsbynegotiatingwithleas-

ing companies, enjoy lower fuel prices

that are resulting, and then ensure that

when the crisis ends... you are still in

business,”hesaid.

In a noteyesterday, HSBC aviation

analystAndrew Lobbenberg said on a

base case scenario the European listed

carriers could see earnings cuts ranging

from 87 per cent atAir France-KLM ot

23percentatWizzAir or2020.f

Johan Lundgren, CEO of easyJet, said

the hit to the sector would depend on

how successful countries were at con-

taining the virus. “We can see this is sta-

bilising in some markets and then we

canseethisisaveryshorttermeffecton

bookings,” he said. However he warned

that if containment failed, the situation

wouldbemorechallenging.

The 2.8 per centfall in global capacity

was “scary”, according to Mr Stallard.

“Wehavegonefrombeingupmorethan

4tominus2.8inamatterofweeks.”

On February 13 Airbus said it

expected to deliver around 880 com-

mercial aircraft this year, assuming “no

major disruptions, including from the

coronavirus”. Now, however, it is in dis-

cussions with airline customers, many

of whom are Chinese, about possible

deferrals of deliveries, according to peo-

plewithknowledgeofthesituation.Chi-

nese carriers were still bound by travel

restrictionsandmanycouldnotcometo

collect their aircraft, according to one

industry executive. “The timing of this

isthebigquestion,”saidonesenioraero-

spaceexecutive.“Itishowdeepwillitbe

and where is the bottom, and then how

steeptheslopewillbeontheotherside.

“But it is still more wait and see at this

point. Conversations with airlines are

occurring, but not yet about making

majorchangesonamajorscale.”

Many aerospace executives were still

holding to targets set in the early weeks

of 2020. The experience of the Sars epi-

demichad shown that demand recov-

ered quickly — within six to seven

months — once the worst was over, said

one. “The next two months are pretty

important,”headded.

The spread of the virus outside Asia is

also hitting the so-called “super connec-

tor” carriers, such asEmirates nda

Qatar Airways, whose growth strategies

have largely been based on linking cities

in the Far East with the Middle East,

Africa,EuropeandtheAmericas.

Dubai’sEmiratesyesterdaysaidithad

offeredstaffvoluntaryunpaidleaveasit

cut flights to destinations affected by

theoutbreakandseesslowerdemandin

some markets. Employees note that the

picture is mixed across Emirates’ net-

work, with routes into Asia and Europe

still showing strong demand. “But it’s a

quiet period,” said one pilot. “The test

willbethestartofEasterholidays.”

While airlines globally are freezing

recruitment and investmentto protect

profitability,analysts said many weaker

playerswereatriskofcollapse.“Airlines

have to walk a line between taking

action to protect themselves in this

period and yet be in a position to take

advantage of a resumption in demand

whenitcomes,”saidMrLobbenberg.

Additional reporting by Simeon Kerr

Virus pushes aviation sector into ‘crisis zone’

Carriers rush to cancel flights and freeze hiring as demand falls while jet makers are forced to reassess delivery guidance

Airline earnings under pressure

Operating profits ($bn)

0

20

40

60

1960 1970 1980 1990 2000 2010 2020

Oil crisis

US airline

deregulation

Gulf War

Forecast (Pre-Covid-19 outbreak)

Asian financial

crisis 9/11 terrorist

attacks

Sars

Financial

crisis

Iceland volcanic

ash

Source: International Civil Aviation Organization

Coronavirus fallout

Estimated impact on 2020 profits (%)

-80 -60 -40 -20 0

Wizz

IAG

Norwegian

Ryanair

Aegean

SAS

Lufthansa

EasyJet

Finnair

Air France-KLM

Source: HSBC

K AT H R I N H I L L E— TA I P E I
S U E- L I N WO N G— H O N G KO N G

Apple supplier Foxconn said it
expected its China-based production
capacity to return to normal seasonal
levels by the end of this month, as it
steps up efforts to resume operations
after virus disruption.

In a call with investors, chairmanLiu
Young-way aid that more than 50 pers
centofthestaffnormallyworkingatthis
timeofyearhadreturnedtowork.
The update comes as thelargest con-
tract electronics manufacturer is push-
ing to bring production lines back into
full service afterauthorities in many
parts of China have refocused from
restricting movement to limiting eco-
nomicdamage.
The shares of Hon Hai Precision, the
group’s Taiwan-listed flagship,have

fallen 10 per cent since the start of the

year amid fearsweeks of plant closures

couldcripplethetech upplychains.

According to an employee at the Lon-

ghua campus in Shenzhen, one of the

group’s largest plants, staff there are

working under intense pressure. “We’re

currently working seven days a week.

We’re really under the pump right now

because of a shortage of factory work-

ers,”thepersonsaid.

The labour shortage was created by

various restrictions imposed by local

and regional governments on the move-

ment of people,trapping millions of

migrantworkers wayfromtheirjobs.a

Foxconn said it could not yet estimate

how the outbreak would influence its

full-yearperformance,though it had

warnedlastmonththattherewouldbea

negative impact. It forecast a double-

digit percentage drop in revenue for the

first quarter, sayingrevenues from

manufacturing consumer electronics

products, enterprise products and com-

puting products would fall more than 15

per cent compared with the previous

quarterandthesameperiodlastyear.

It gave a slightly less bearish outlook

for revenue from component produc-

tion and other business, which is fore-

casttodropmorethan10percent.

The group indicated that itexpected

thedisruption to delay rather than

derail operations.The second quarter

could be like the first would be under

normalcircumstances,MrLiusaid.

Foxconnsaidithadnotseenthelarge-

scale parts shortages thathad been

rumoured, with Mr Liu only citing price

rises for packaging materialsamid con-

cernsthatajumpinproductionofsurgi-

cal masks, which uses some of the same

rawmaterials,couldleadtoashortfall.

Technology

Foxconn set for normal capacity by end March

‘This is far

worse than

the Sars

episode.

It’s looking

more like

the global

financial

crisis’

Numbers up: the

cutting of flights

by airlines

mirrors moves

seen during the

financial crisis,

but some

executives are

hopeful that

the eventual

recovery will be

short —Oliver

Bunic/Bloomberg

MARCH 4 2020 Section:Companies Time: 3/3/2020- 19:04 User:timothy.digby Page Name:CONEWS2, Part,Page,Edition:EUR, 13, 1