Virus turbulence could give airlines cover to make cuts
A cost-saving programme by Lufthansa and hiring freeze at KLM come at a time when the industry is already under immense pressure.
Thursday 27 February 2020 12:39, UK
Some attribute the saying to Niccolo聽Machiavelli while聽others credit it to Sir Winston Churchill.
Either way, as the coronavirus continues to spread around the world, the expression "never let a good crisis go to waste" is front of mind for many businesses right now.
Unsurprisingly, it is the aviation sector taking the advice closest to heart, with two of Europe's biggest players announcing cutbacks on Wednesday on the back of the outbreak.
Lufthansa, Germany's largest airline and the third-largest in Europe by stock market value, unveiled a cost-saving programme in which it will suspend new hires and offer employees unpaid leave in an attempt to mitigate the financial impact of coronavirus.
It will also look at offering employees the option to go part-time and suspend training courses.
And it was revealed that KLM, which is the Dutch arm of Air France-KLM, Europe's fifth-largest carrier by market value, is to delay all IT and property projects that have not yet got underway and will be suspending hiring in certain departments.
Elsewhere in the aviation sector, the Scandinavian carrier SAS announced that a decision in January to suspend all flights to Beijing and Shanghai, which was later extended to the end of next month, would cost it SEK200m (£16m).
Like SAS, Lufthansa had already cancelled all flights to and from mainland China - including those of its subsidiaries SWISS and Austrian Airlines - until the end of its winter flight schedule on 28 March.
It said that, along with changes on its routes to and from Hong Kong, a total of 13 of its aircraft would be grounded.
The carrier added: "It is not yet possible to estimate the expected impact of the current developments on earnings.
"The group will be commenting on this matter at the press briefing for the annual results on 19 March."
Shares of Lufthansa fell by 1.8% on the news.
The measures from KLM, meanwhile, emerged in a letter from Erik Swelheim, the airline's chief financial officer, sent to senior managers on Tuesday.
KLM has already suspended its flights to mainland China until the end of March while its parent company has warned that the coronavirus could clip €200m (£168m) from its profits this year.
In his letter to colleagues, Mr Swelheim wrote: "The impact [of coronavirus] on KLM's revenues will be very significant and only partly mitigated by lower costs and a lower fuel price.
"We urge you all to reduce your cost levels to a minimum level to ensure safe operations. Only 'must do' expenditure is allowed."
He warned that, while KLM was yet to change any of its routes to and from Italy, it was bracing itself for disruption. Air France-KLM's shares fell by nearly 1%.
The point about not wasting a crisis is that several of these carriers, notably Air France-KLM and Lufthansa, have been grappling for years to reduce their headcount but have been prevented from doing so by the unions.
The current situation may give them the cover to take more dramatic action.
The difficulty all airlines currently have, however, is in trying to quantify the potential hit to their balance sheet.
Rickard Gustafson, chief executive of SAS, said that, as long as the COVID-19 outbreak was contained and the suspension of flights was isolated to the winter season, the outbreak would have only a marginal impact on the company's earnings for the year.
But he added: "The economic outlook remains uncertain.
"If the situation does not stabilise before the important summer season, it could have major consequences for the industry and SAS."
What is interesting about the affair so far is that, while Air France-KLM has issued a profits warning related to the coronavirus outbreak, neither of Europe's largest two airlines by market capitalisation - Ryanair and International Airlines Group, the parent of British Airways - have done so far.
That may be because, thus far, most concerns have surrounded travel to and from China: Ryanair, as a regional airline, does not fly to China while IAG, of the major European carriers, has a lower market share in routes to and from the country than its rivals.
It accounts for just 8% of routes between Europe and China while Air France-KLM, with a 21% share, is the most affected.
This also explains why, to date, IAG's share price has not been hit quite as badly as those of its competitors.
Since 13 January, when concerns about the outbreak in China became widespread, shares of IAG - which also owns Iberia and Aer Lingus - have fallen by 16% while those of Lufthansa have fallen by 18% and those of Air France-KLM by 20%.
That could change, however, if short-haul routes across Europe start to be disrupted by events in Italy.
Markets appear to be pricing in this eventuality.
Shares of easyJet, for example, are down by 20% since 13 January while those of Ryanair are off by 21% during the same period.
Falls of that magnitude would normally, under the listings rules, require a public company to either issue a profits warning or to issue a statement saying - in the boilerplate wording used on these occasions - that they "know of no reason" for the share price movement.
All of this comes at a time when the European aviation sector was already under immense pressure due to over-capacity in the market and an uncertain backdrop for consumer spending.
Unlike the early months of 2019, when the industry was under similar pressure, there has been a slight tonic in the form of a drop in the oil price but that may not - as KLM pointed out - be enough to make up for the harm done by coronavirus.
In the background, meanwhile, the disruption to schedules created by the grounding of Boeing's 737 MAX jet continues to cast a shadow.
The interruption to air travel could also be seen in two other profits warnings on Wednesday.
One of the big success stories on the UK stock market in recent years has been SSP, an operator of food and drink concessions in stations and airports around the world.
But it warned that its sales across Asia in February would be half their usual level while overall revenues in February would be down by £10-£12m.
Such are the margins in this business that this will translate to a drop in operating profits of between £4-£5m.
More dramatic still was the update from Diageo, the Johnnie Walker Scotch whiAG百家乐在线官网, Gordon's gin, Captain Morgan rum and Guinness drinks giant, which flagged a fall in eating out and drinking in China, a drop in conferences and banqueting across Asia and closures among shops, cafes and restaurants - as well as a potential loss of sales in duty-free outlets.
It said this could clip between £225m and £325m from sales and between £140m and £200m from annual operating profits.
Diageo, despite headwinds from Donald Trump's tariffs on Scotch whiAG百家乐在线官网, is already a well-run company. It is hard to see how this is a crisis from which it can really benefit.