COVID-19's Severe Aftereffects... Endless Global Aviation Industry Slump

On the 18th, the departure hall of Terminal 1 at Incheon International Airport was deserted due to the impact of COVID-19, as the aviation industry, hit hard by the novel coronavirus infection (COVID-19), faces a wave of layoffs. Photo by Mun Ho-nam munonam@

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[Asia Economy Reporters Yu Je-hoon and Kwon Jae-hee] The global aviation industry is suffering from large and deep aftereffects caused by the novel coronavirus disease (COVID-19) crisis. Restructuring such as layoffs has become routine for airlines worldwide, and bankruptcies and nationalizations are also commonly occurring everywhere.

As the unprecedented COVID-19 pandemic, the first of its kind since the dawn of the civil aviation era, continues endlessly, the domestic aviation industry is also being exposed to critical limits. There is widespread tension in the industry that the crisis may sequentially hit smaller airlines first.

◆Global Aviation Industry at a Standstill = According to the International Air Transport Association (IATA) on the 6th (local time), global airlines are expected to burn through a total of $77 billion (approximately 89 trillion KRW) in cash in the second half of this year (Q3 and Q4). This is a result of most international flights being suspended due to COVID-19.

In the second quarter, when the COVID-19 crisis fully intensified, global airlines undertook large-scale cost reductions such as voluntary restructuring but still consumed $51 billion (approximately 59 trillion KRW) in cash. However, in the second half of the year, the spread of COVID-19 has not subsided but rather expanded further, so the scale of losses is not decreasing.

In this situation, 'restructuring' and 'bankruptcy' have become commonplace in the global aviation industry. The world's first and second largest airlines, American Airlines and United Airlines, have decided to lay off about 19,000 and 12,000 employees respectively if the U.S. federal government support, which ends at the end of this month, is not extended. Thailand's and Mexico's flagship carriers, Thai Airways and AeroMexico, have even filed for bankruptcy. So far, governments around the world have operated various support programs worth $160 billion (approximately 186 trillion KRW), but according to IATA, this amount is insufficient to overcome the crisis.

The ripple effects are expanding beyond air transportation to related industries such as aircraft manufacturing. The world's largest aircraft manufacturer, Boeing, stated in its annual report published on the same day that the number of commercial aircraft deliveries to airlines worldwide over the next 10 years is expected to be 18,350 units, with sales amounting to $2.9 trillion (approximately 3,376 trillion KRW). This is an 11% decrease from last year's forecast, and it is expected that aircraft manufacturers dispersed across countries will inevitably face both short- and long-term impacts.

◆Recovery Timing Remains Uncertain = The problem is that it is difficult to estimate when the industry will recover. The industry expects that it will take at least 2 to 3 years, and possibly 4 to 5 years, for demand, which plummeted due to COVID-19, to recover. IATA also previously forecasted that air travel demand would only return to last year's level around 2024.

However, there are many skeptical views about this analysis. An industry insider said, "There is still no clear vaccine or treatment, and even if vaccines and treatments are developed, whether the pandemic will end is a separate issue," adding, "If the pandemic ends, the industry will recover rapidly due to rebound consumption, but it is necessary to study whether various predictions about the timing have scientific grounds."

The unprecedented nature of the COVID-19 crisis in civil aviation makes predicting the recovery timing difficult. Since the U.S. Carter administration opened the civil aviation era 40 years ago in 1978 with the 'Airline Deregulation Act,' there has never been a mid- to long-term shutdown of air routes. Although there were events like Severe Acute Respiratory Syndrome (SARS) and the 9/11 terrorist attacks, these all had localized and short- to medium-term impacts.

◆Domestic Aviation Industry Also Approaching Limits = The domestic aviation industry is also suffering from prolonged aftereffects of the COVID-19 crisis. The crisis atmosphere is hitting first those latecomers with weak financial structures. Besides Eastar Jet, which is on the brink of bankruptcy, the new low-cost carrier (LCC) Fly Gangwon delayed employee wages last month and is now engulfed in rumors of a sale.

Additionally, Air Premia, preparing for its inaugural flight, decided to place all employees on unpaid leave except for essential personnel required for the Air Operator Certificate (AOC) this month, and Aero K has almost exhausted its capital and is planning a paid-in capital increase of about 20 billion KRW. An industry insider expressed concern, saying, "New airlines have rapidly worsened this year and are unable to fulfill even the capital expansion promises made at the time of approval."

Even established players are not in a safe state. The securities industry estimates that the combined operating losses of listed domestic airlines, excluding Korean Air, will reach about 260 billion KRW in the third quarter. For LCCs, which have no escape routes such as cargo business, all four listed companies have either conducted or are planning paid-in capital increases.

Especially, since mid-month this month, the employment retention subsidies paid to each airline have been sequentially discontinued, heightening the sense of crisis. Some airlines are reportedly preparing to switch to unpaid leave. Professor Hwang Yong-sik of Sejong University pointed out, "Unfortunately, it is highly likely that the crisis will materialize sequentially starting with small airlines."

Experts advise that as the situation is expected to prolong, government support needs to become more sophisticated. Since continuous liquidity supply is not possible, mergers and restructuring within the industry should be encouraged.

Professor Heo Hee-young of Korea Aerospace University said, "For example, the Industrial Stabilization Fund (Kian Fund) applies a high interest rate of over 7% to companies meeting conditions such as total borrowings of 500 billion KRW and more than 300 employees, but it is largely ineffective," adding, "It is necessary to reconsider the content and scope of financial support to enable voluntary structural reorganization and restructuring among companies."

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