Could the coronavirus end the decade-long U.S. airline expansion?
This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.
We’ve all known it was just a matter of time before the decade-long U.S. airline expansion came to an end.
In an industry known for its boom-and-bust cycles, 10 years of growth — and profits — is more the outlier than the norm. Airlines have not retrenched since the 2008 recession when they shrank fleets, cut routes and introduced the first extra fees that travelers accept as a given today.
“We know that a slowdown is inevitably coming,” United Airlines CEO Oscar Munoz told reporters in 2018, even as his airline and the industry kept growing.
Ever increasing numbers of travelers have boarded flights in the U.S. since 2010. After traffic dropped to a low of 768 million passengers 2009, the number has risen every year since and hit a record 1.01 billion in 2018, according to the latest Bureau of Transportation Statistics data. Preliminary reports indicate 2019 was another record year.
However, that ever upward trajectory may have finally met its match in the novel coronavirus, or COVID-19.
Over the past few days, numerous cases of the coronavirus have emerged in Italy and South Korea, showing the outbreak is on the move beyond its origins in China. That news was followed on Tuesday by a warning from the Centers for Disease Control (CDC) that it is a matter of when, not if, the virus hits U.S. shores.
“The virus is out in the world, and it just is a fact,” wrote Helane Becker, an analyst at Cowen, in a report Tuesday. “As much as everyone wanted to limit the virus to China, you knew it was bound to escape the borders.”
That is bad news for airlines. U.S. carriers have already suspended flights to China and Hong Kong through April, and are taking a financial hit. On Monday, United said near-term demand to China had dropped 100% — in other words it has entirely dried up — and by about 75% to the rest of Asia.
And it’s not just China. Cathay Pacific Airways and Singapore Airlines have both cut intra-Asia schedules as photos of nearly empty planes abound. The latter has even changed its inflight service to help prevent further spreading the virus.
You could put the passengers on this 777-300ER onto an A320 and still not have a 50% load factor.
(This is Cathay’s HKG-SIN on the last day before schedule consolidation.) pic.twitter.com/8qvvyKsYvi
— Will Horton (@winglets747) February 9, 2020
What, then, happens to domestic demand when the coronavirus lands in the U.S.?
If the coronavirus does eventually land in the U.S. in a significant way, U.S. traveler’s fear of exposure could hit airlines even more than the actual possibility of exposure. This is because, as Skift pointed out, people make irrational decisions like cancelling or putting off trips when they think the risk of exposure outweighs the benefit of going — even if that risk is very low.
As of Wednesday, there were only 14 confirmed cases in the U.S., according to the CDC. There were another 45 cases among people repatriated to the country from Asia.
U.S. officials, during a press conference held by President Donald Trump on Wednesday evening, affirmed the CDC’s assessment that there will be more coronavirus cases in the country. They also said a vaccine in development for the virus should not be expected until the next flu season, or by next fall.
But what would an outbreak mean domestically? Possible flight suspensions — especially like the ones seen elsewhere — would mean capacity reductions at domestic carriers. However, if fear of the virus persisted, airlines could go a step further and defer aircraft deliveries or cancel orders — even with potential financial penalties for them — aviation analyst and former airline executive Robert Mann told TPG.
Should there be a large outbreak in the U.S., the impact on travelers would depend on if, and how quickly, airlines move to suspend flights. Suspensions have occurred with haste to China — and now South Korea — in response to fears of the coronavirus there. Similar moves domestically, while they could take place just as quickly, also could be a bit of a cat-and-mouse game of identifying where passengers are avoiding and reducing capacity there.
JetBlue Airways has already waived flight rebooking and cancellation fees for passengers with concerns about the coronavirus, and other U.S. carriers are expected to follow.
One looming question is, if demand plummets domestically, whether the U.S. industry will see a rerun of what happened during the last recession. Airlines ended service to cities that performed poorly — small cities were hit the hardest — and trimmed routes to secondary hubs in markets they kept.
For example, Continental Airlines ended service to at least five airports, including major gateways like New York John F. Kennedy (JFK) and smaller cities like Fort Wayne, Indiana (FWA) and Toledo, Ohio (TOL), between the end of 2007 and 2009, according to Cirium schedules. At the same time, the carrier cut 18 routes from its Cleveland Hopkins (CLE) hub.
No signs, yet
“Our bookings for the first quarter are solid across the whole network, and we’re not seeing any impact whatsoever in terms of demand,” said JetBlue chief financial officer Steve Priest when asked if the airline was seeing any coronavirus impact on Feb. 19.
The New York-based airline reiterated that it had not seen any erosion of demand on Wednesday when it waived change fees for travelers with coronavirus concerns. It cited customer “peace of mind” in its decision to waive fees.
Evercore analyst Duane Pfennigwerth noted in a Feb. 24 report that United had yet to see any impact from the coronavirus on domestic demand. However, the airline had suspended its 2020 financial outlook due to the “quickly evolving headlines, lack of visibility into duration of virus impact and regions it may ultimately impact.”
Prior to the outbreak, American Airlines planned to grow capacity by 4-5% year-over-year in 2020, Delta Air Lines by roughly 4% and United by 4-6%. Southwest Airlines, which has felt an outsized impact from the MAX grounding, has not released a full-year capacity forecast.
Americans, for their part, are still traveling domestically. Airlines have responded in kind by moving some of the wide-body jets idled by their China flight suspensions to domestic routes, particularly on flights to Las Vegas (LAS). Other planes are being deployed on flights to Europe that have high levels of demand.
“[The] consensus is that this coronavirus outbreak is going to get worse before it gets better,” wrote Raymond James analyst Chris Meekins in a report on Feb. 17. How prescient he was.
Updated with comments from President Trump’s press conference on Wednesday.
Feature image by Andrew Harrer/Bloomberg via Getty Images.
Welcome to The Points Guy!
WELCOME OFFER: 60,000 Points
TPG'S BONUS VALUATION*: $1,200
CARD HIGHLIGHTS: 2X points on all travel and dining, points transferrable to over a dozen travel partners
*Bonus value is an estimated value calculated by TPG and not the card issuer. View our latest valuations here.
- Earn 60,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $750 when you redeem through Chase Ultimate Rewards®. Plus earn up to $50 in statement credits towards grocery store purchases.
- 2X points on dining at restaurants including eligible delivery services, takeout and dining out and travel & 1 point per dollar spent on all other purchases.
- Get 25% more value when you redeem for travel through Chase Ultimate Rewards®. For example, 60,000 points are worth $750 toward travel.
- With Pay Yourself Back℠, your points are worth 25% more during the current offer when you redeem them for statement credits against existing purchases in select, rotating categories.
- Get unlimited deliveries with a $0 delivery fee and reduced service fees on eligible orders over $12 for a minimum of one year with DashPass, DoorDash's subscription service. Activate by 12/31/21.
- Earn 2x total points on up to $1,000 in grocery store purchases per month from November 1, 2020 to April 30, 2021. Includes eligible pick-up and delivery services.