$35b in ticket refunds pushes airlines further to turbulence

Friday April 10 2020

Uganda airlines

CRJ900 bombardier jets for Uganda Airlines at the Entebbe International Airport on April 23,2019. PHOTO | MORGAN MBABAZI | NMG 

MICHAEL WAKABI
By MICHAEL WAKABI
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The unprecedented shut down of the aviation industry has left airlines holding a prospective bill of up to $35 billion as refunds to passengers for sold but unused tickets.

The bill triggered by the covid-19 crisis, will further put pressure on airline reserves with new analysis by the International Air Transport Association IATA, predicting that airlines could drawdown as much as $61 billion of their cash reserves during the second quarter ending 30 June, 2020. They will also post a net loss of $39 billion for the quarter.

“In addition to unavoidable costs, airlines are faced with refunding sold but unused tickets as a result of massive cancellations resulting from government-imposed restrictions on travel. The second quarter liability for these is a colossal $35 billion. Cash burn will be severe. We estimate airlines could be burning through $61 billion of their cash balances in the second quarter,” IATA says.

Brazil, Canada, Columbia and the Netherlands have tried to help their airlines by allowing them to offer passengers travel vouchers in place of cash refunds.

Kenya Airways has already appealed to the government for a cash bailout in order to stay afloat. Almost all categories of staff have taken a pay cut too.

Uganda Airlines halted plans to open new regional routes after the airspace was closed. Rwandair too has ground its fleet

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Pierce Brian, IATA’s chief economist said the impact of covid-19 on quarter one revenues would be limited because it was not until mid-February that disruptions to air travel became pronounced.

“We started the year strongly and it is not until February that we saw revenues begin to struggle,” he said during a conference call on March 31.

IATA which has projected a 38 per cent dip in demand and full year losses of $252 billion for 2020, also says that the fall in demand will peak during the second quarter which will see a 71per cent drop year on year.

However, the continuation of cargo services will limit the fall in revenues to 68 per cent.

Variable costs are expected to fall by 70 per cent, tracking a 65 per cent reduction in the number of aircraft flying and sharp drops in the price of jet fuel. However, fuel hedging contracts that were based on pre-crisis projections will see airline fuel costs fall by just 31per cent.

Equal to roughly half of a typical airline’s cost profile, fixed and semi-fixed costs, are expected to fall by a third as carriers watch the bottom line while trying to preserve the workforce that will be required fora future recovery.

IATA’s director general and chief executive Alexandre de Juniac says without immediate intervention, the industry’s cash position will be precarious.

“Airlines cannot cut costs fast enough to stay ahead of the impact of this crisis. We are looking at a devastating net loss of $39 billion in the second quarter. The impact of that on cash burn will be amplified by a $35 billion liability for potential ticket refunds,” he said.

IATA welcomed the mix of relief measures to the industry that have been announced by countries such as Colombia, the United States, Singapore, Australia, China, New Zealand and Norway.

The US announced a $2 trillion economic stimulus package more than $50 billion of which will go to airlines.

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