The rapid spreading of the novel coronavirus has had a tremendous impact on the air transport sector worldwide, with airlines rapidly reacting in an effort to contain the spread, cutting down frequencies and cancelling flights. Governments have issued directives to block the entry/exit of passengers, and several airports have temporarily suspended operations, with the exception of cargo and emergency flights. With the Middle East being a major connecting platform for East-West macro-flows, how will this crisis impact the aviation sector in the region?
Measures taken against COVID-19 in the Middle East
Measures in the region started in early February, when airlines suspended flights to China (with some exceptions to Beijing and Hong Kong). Additional measures involved thermal screening on arriving passengers and mandatory use of passport for GCC nationals to travel the region. One month later, European and intra-Middle East routes were suspended, in a second attempt to contain the virus.
The General Civil Aviation Authority (GCAA), in the UAE, issued a series of Safety Decisions regarding the suspension of flights to several countries where major disease outbreaks had been detected, including China, Italy, Iran, Turkey, among others. Foreign Civil Aviation Authorities took similar measures, forcing airlines to ground their fleets and cut international capacity. Emirates, for example, suspended flights to over 100 destinations. More recently, on the 23rd of March, the GCAA took the decision to suspend all passenger flights to and from the UAE, starting from 25th March, 2020, for a period of 2 weeks.
In Saudi Arabia, upon commencement of the virus outbreak in the region, the General Authority of Civil Aviation (GACA) initially suspended all flights to Gulf countries (UAE, Kuwait, Oman, Bahrain) and other Middle Eastern countries (Egypt, Lebanon, Syria, Iraq). Many other flight suspensions followed to European countries, such as Italy and Germany, and Asian countries, such as Korea, Philippines and Sri Lanka. By mid-March, GACA took the drastic decision to suspend all international flights to/from Saudi Arabia. Following this move, on the 21st of March, all domestic flights were also suspended for a period of 14 days.
Additionally, Saudi Arabia and the UAE have suspended the rule that forces most of the scheduled slots in congested airports to be utilized to avoid losing them. Airlines that are still operational are now free to halt operations without consequences.
Oman has also applied heavy travel restrictions. As of March 18th, 2020, only Omanis were allowed to enter the country, and no Omani nationals were allowed to exit. Despite these restrictions, flights continue to be operated by the national carrier Oman Air, Salam Air, and foreign carriers. Heavy cuts in capacity have been seen throughout March to many of the aforementioned countries.
By late March, several countries in the region, such as Jordan, Egypt, Lebanon and Iraq, had decided to follow similar steps and suspend all passenger flights for few weeks as a precautionary measure, subject to reassessment and potentially extending the measures over time.
Recovery perspectives and recommendations
The COVID-19 has hit faster and harder than any other previous sector crisis, such as the 2001 9/11 attacks, the 2003 SARS outbreak, or the 2008 global recession. A study conducted by IATA Economics analysed the impact of those crises, which showcase deep troughs around 3 months after outbreaks, with a recovery to pre-outbreak demand levels after 7 months.
Considering that most airports in the region are already shut down, it could be said that the COVID-19 crisis has hit rock bottom. What is yet to be seen is how long will this situation remain.
Some parts of the world will control and minimise the outbreak in a few months, while for other countries it could take longer. As a result, air services will resume at a difference pace in each region, spanning the recovery period for the months to go. Some airlines will not have enough cash reserves and may be driven to technical bankruptcy or breach debt covenants. Governments could consider the temporary nationalisation of the (previous) flag carriers, as an alternative to providing financial support/aid.
The Middle Eastern region benefits in this aspect due to the large number of state-owned/participated carriers, which are likely to be supported by their respective governments with the cash needed to avoid bankruptcy. Furthermore, the road to recovery will provide opportunities for Middle Eastern flag carriers, given their ability to maintain their assets mobilised and be ready to ramp up activity, getting back to their full capacity at the earliest opportunity.
ALG has carried out its independent projections of annual air traffic for 2020, considering various recovery scenarios expected for the second quarter of the year. The analysis focuses on the UAE, Saudi Arabia, and Oman. This analysis has been conducted with the information available at end of March and will be continuously updated by the firm’s aviation analyst in the coming weeks.
The UAE’s total seat capacity for 2020 was expected to be nearly 155 Million seats. ALG foresees a 22% capacity reduction due to Covid-19, down to nearly 122 million seats. This analysis considers that operations will partially resume by mid-April, yet with several offering cuts to affected destinations. Should there be an extension of the traffic bans in the UAE, the impact on annual capacity could reach 32%.
Saudi Arabia’s total seat capacity outlook for 2020 was expected to be nearly 145 million seats. Major cancellations in flight schedules in February and March have already hampered this forecast. If operations were to resume by mid-April, ALG forecasts a 25% capacity loss by the end of the year. In a pessimistic scenario, the impact could be as high as 35%.
Oman was initially projected to offer an annual capacity of 23 million seats in 2020. ALG’s base case for Oman forecasts a 19% reduction in capacity, down to 19 million seats. In a pessimistic scenario, the impact could be as high as 28%
To sum up, the region is expected to see its annual offering reduced by 20-35% attending to the duration of the ongoing restrictions. The recovery period is expected to last at least 7 months and could be further extended depending on the financial situation of airlines at the end of this period. The capacity of airlines to ramp-up operations once the bans are lifted along with the airports operational readiness and passenger confidence in travelling again will be the key elements shaping the sector’s recovery.
Commercial air transport has both direct and indirect impact on many business activities including manufacturers, lessors, infrastructure providers, regulators, service providers, airlines, distribution channels based on the demand foundation, etc. The demand fall caused by COVID-19 has directly affected airlines, spreading financial distress to the whole industry: the cancellation of aircraft orders to manufacturers, lease relief to lessors, airports deprived of flights, passenger, retail, and handling services stopped.
The sustainability of the aviation sector in the Middle East depends to a large extent on the adequacy of the stimulation packages implemented by each government.
- In the short term, the liquidity of the weakest link in the chain, the airlines, should be ensured
- Subsequently, measures should be implemented to reactivate the demand so that the sector’s liquidity problems do not result in solvency problems and bankruptcies
- Airports will follow airlines in requiring relief measures. Governments will have to consider measures to rebalance the concession contracts of many airport operators
Focusing on foreign investment deployed in the Middle Eastern airports, it is certain that most of the concessionaires in the region will require financial support/aid from governments as well. Airports under the PPP scheme may be driven to apply Force Majeure Event clause, triggering reviews of their concession agreements. The review of the economic model of the concession should aim at ensuring the financial viability of the concessionaire and guarantee the sustainability of upcoming investment (yet to be deployed).
This situation can also be an opportunity to review concession frameworks used by governments, incorporating best practices and lessons learned from this crisis, and making the agreements more self-adjusting. The revision of contractual frameworks towards single/dual till schemes, looking at flexible on-demand behaviour, would allow the rebalancing of revenue streams in the event of demand outbreaks.
Finally, airport operators may require refinancing packages and loan modifications to partially offset the effect of the outbreak by cutting financing costs in the short term.