INDUSTRY OUTLOOK: NEGATIVE
The coronavirus (COVID-19) pandemic, occurring since November 2019 until now, has caused a severe shock to the global aviation industry. The Thai aviation industry is no exception. The airline operators in Thailand are faced with the toughest challenge ever in the commercial aviation history. Beyond the immediate challenge of securing sufficient cash to keep the business afloat, the operators will be faced with a recovery path full of uncertainty. We expect the industry to recover at a very slow pace, and it will likely take more than one year for the industry to return to where it was before the pandemic. From the credit perspective, liquidity risk is of the greatest concern for all airlines in the near term. For the medium term, we expect most airlines will be under strain to maintain positive cash flow and meet obligations while on a slow recovery path.
The Thai government has been in discussion with the airline operators in Thailand to provide financial support, possibly in the form of loans. That may help solve the short-term liquidity problem. The next challenge is how the airlines are going to cope with the drastic drop in revenue for a potentially long period of time.
MARKET RECAP
In 2019, air passenger numbers in Thailand faced minimal growth even before the onset of the COVID-19 pandemic. The total number of passengers through Thailand’s six international airports was 143 million, up 1.8% from a year earlier. The growth rate was lower than in previous years for two key reasons.
Firstly, US-China trade tensions significantly impacted the global economy
and aviation industry. According to the International Monetary Fund (IMF), world gross domestic product (GDP) grew by 2.9% in 2019, lower than the 3.6% recorded in 2018. Consequently, the growth rate in global air passenger numbers dropped to 3.7% in 2019, from 6.9% in 2018.
Secondly, a surge in the value of the Thai baht made trips to Thailand more expensive for foreign tourists. The Thai currency appreciated by 4% against the US dollar in 2019 and also hit its highest point in the past six years.
KEY FACTORS
COVID-19 pandemic causes a crisis for the global aviation industry
The COVID-19 was first detected on 17 November 2019 in Wuhan, China. Since Wuhan is a transportation hub and large industrial city, the virus quickly spread into many other provinces in China. By the end of January 2020, human-to-human transmission of the virus was confirmed and outbreaks began to occur in other countries. The Chinese government suspended all outbound group tours on 24 January 2020, immediately affecting the worldwide aviation industry.
The virus spread rapidly in the Asia-Pacific region, before hitting Europe, the Americas, and the Middle East in March 2020. In the same month, the World Health Organization (WHO) classified the global COVID-19 outbreak as a pandemic. On 14 April 2020, the International Air Transport Association (IATA) projected the aviation industry would suffer lost revenues in 2020 of around US$314 billion, with losses in the Asia-Pacific alone of US$113 billion. The world revenue passenger-kilometers (RPKs) are expected to drop by 48% this year while RPKs in the Asia-Pacific region are projected to drop by a similar rate. This is much greater than the impact from the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003, when RPKs in the Asia-Pacific declined by 8%.
As of April 2020, around 70 countries worldwide had imposed travel bans. According to the International Civil Aviation Organization (ICAO), airline seat capacity worldwide fell by 85% from the pre-crisis level. Although the strict travel bans may have slowed new COVID-19 transmissions in some counties, a second wave cannot be ruled out.
Aviation industry in Thailand severely affected
TRIS Rating expects Thailand’s air passenger traffic to plunge deeply in 2020. The travel restriction policy has had an immediate effect on the aviation industry in Thailand. Air passenger arrivals began to drop after the Chinese government halted all outbound group tours. Air passenger arrivals fell by 47% year-on-year (y-o-y) in February and 78% y-o-y in March. Furthermore, the Thai government instituted an emergency decree on 26 March 2020 lasting until 31 May 2020 prohibiting most foreigners from entering the kingdom, with few exceptions. To follow the travel restriction policy, airline operators in Thailand started canceling flights in March 2020. In April 2020, all carriers suspended all flights. Thai Airways and Thai Smile Airways have deferred services until June 2020, while other airlines will begin providing domestic services in May 2020.
The number of foreign tourist arrivals in 2020 is projected to drop drastically as well. The number fell by 76% y-o-y in March, which is the lowest monthly figure for foreign visitors in the past decade. Asian tourists dropped the deepest by approximately 90% y-o-y. American and European tourists fell by 74% and 51% y-o-y, respectively. In March 2020, the Ministry of Tourism and Sport forecast foreign visitor numbers in 2020 to be 27 million persons, down by 32% from the previous year. The Bank of Thailand (BOT) offered a more conservative view, estimating only 15 million tourist arrivals for the year, a 61% contraction from 2019.
Air traffic to recover at a very slow pace
TRIS Rating anticipates a slow recovery in air traffic demand. Domestic flights will be the first to rebound once the outbreak in Thailand is largely contained. Any resurgence in international air traffic demand will likely depend on the confidence in air travel safety at the global level. It is inconceivable that all countries will be able to contain the pandemic at the same time. Until a vaccine is successfully produced and made available to a large portion of the world population, we should expect travel restrictions in some form will continue to be in place. According to the IATA surveys in 11 countries, 40% of participants prefer to wait six months after containment before returning to travel. Those countries with higher proportions of domestic air passengers will rebound at a faster rate. Unfortunately, the aviation industry in Thailand is characterized by a greater proportion of international travelers, around 60% of total air passengers. This is likely to affect the recovery rate in Thailand.
Economic recession is also likely to impede any recovery in demand. Several economies have already been affected by global supply chain disruption. Shutdown and lockdown policies in many countries have also depleted household incomes. The combination of weak travel confidence and economic recession is likely to have a huge impact on the aviation industry worldwide. We expect that it will take more than one year for the market to fully revive. However, the Thai government will likely come up with measures to stimulate the tourism sector once the COVID-19 outbreak is brought under control, which hopefully could quicken the rate of recovery.
Airlines worldwide facing liquidity challenges
IATA shows that on average, airlines worldwide have cash equivalent to around two months of revenues. Without financial assistance, airline operators will run out of cash before the market rebounds. For the two airline operators rated by TRIS Rating, Thai Airways has debt repayments of around Bt21.7 billion due over the next 12 months, while Thai AirAsia has Bt3.3 billion. We estimated Thai AirAsia to record a cash deficit of around Bt700 million per month, while Thai Airways is assessed to have a cash shortfall of around Bt30 billion in 2020.
During this turbulent period, all airline operators are resorting to aggressive cost-cutting measures to preserve cash. Some airlines in Thailand are cutting executive salaries by up to 50% and ask some staff to leave without pay. Nonetheless, the operators will still have some fixed costs to cover as well as scheduled debt repayments that need to be met.
Significant government support will be needed
In March 2020, IATA wrote to many governments worldwide, including the Thai government, requesting assistance for airline operators in the respective countries. ICAO also consulted with the G20 leaders about providing large-scale fiscal support for airline operators. Most national carriers worldwide are likely to be closely assisted. However, support for private carriers will vary. The simplest measures applied in many countries are reducing or waiving taxes, fees, and charges for operators. Some governments have allowed airlines to postpone their payments and provided loan guarantees. The United States (US) and Chinese governments have pledged stronger support through direct cash injections.
The Thai government has been in discussion with the airline operators in Thailand on potential financial assistance to the Thai aviation industry. We are of the view that the support from the government is likely to be formulated to address the short-term liquidity need of the airlines, to enable the airlines retain their staff and restart their operations in the near term. The next question is how the airlines are going to cope with a potentially long period of revenue drop before most people regain confidence in air travel.
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