COVID-19 Impact on Philippine Airline Industry

Pinoy Money Talk

One of the industries severely affected by the current global coronavirus pandemic is undeniably the airline industry. With dozens of countries implementing a lockdown — effectively closing their nations from non-citizens and non-residents — foreign, and sometimes even domestic, travel has been restricted.

Flights are grounded, tourism is halted, and as a consequence, airline companies will unfortunately have to deal with significant financial burden in the long haul. In fact, the Philippine airline industry is predicted to lose as much as P250 billion ($4.9 billion) this year, according to the International Air Transport Association (IATA).

The Air Carriers Association of the Philippines (ACAP) disclosed that the top three airlines in the country — Philippine Airlines, Cebu Pacific, and AirAsia Philippines — have already incurred losses of P5 billion in just the first 3 months this 2020.

The amount of losses will certainly balloon in the 2nd quarter given the complete cancellation of flights during the implementation of the Enhanced Community Quarantine (ECQ) policy which began in March 2020.

With the government-imposed lockdown, airline companies had no choice but to cancel flights and offer revenue-diminishing options, such as the following, to passengers who have already booked flights:

(1) Rebook flight tickets to another date, free of charge;

(2) Cancel the flight and transfer the paid amount to an online wallet or credit account, which can be used to pay for future flights; or

(3) Get a full refund.

These solutions certainly have negative impact on the revenues and profitability of the airline business. Bloomberg News reported that Philippine airline companies have paid out more than P5 billion in refunds to customers as of April 2020, while shouldering P7 billion per month in fixed costs.

Job Layoffs in the Airline Industry

The problem is just starting for airline companies. For the rest of the year, the COVID-19 health crisis is projected to cause a 47% decline in passenger demand in the Philippines compared to 2019, according to the IATA. Earlier in March, the IATA assessed a much smaller decline — 36% year-on-year versus 2019 — but revised this upwards after the government extended the community lockdown.

Potential job losses were also revised upwards from less than half a million people (419,800) estimate in April to more than half a million people (548,300) estimate in May. Simply put, the IATA expects the pandemic to cause more than half a million workers in the airline and tourism sectors to lose their jobs this year.

The pandemic is expected to cause more than half a million workers in the airline and tourism sectors to be laid off this year.

With a gloomy industry outlook, airline companies in the Philippines are asking Congress for a lifeline worth P8.6 billion monthly assistance. According to ACAP, the funds if granted would be used as follows:

  • P6.8 billion for working capital;
  • P1.3 billion for wage subsidy; and
  • P500 million for payment of fees

If Congress will provide this subsidy, ACAP predicts this can partly help sustain the operations of airlines and reduce the possibility of laying off hundreds of thousands of workers in the industry.

Passenger volumes have plunged and, in the coming months, earnings of airline companies are expected to further suffer. Here’s an analysis of the short-term outlook on companies in the Philippine air transport sector.

COVID-19 Impact on PAL

The country’s flag carrier, Philippine Airlines (PAL) is currently “fighting for its future” after reporting net losses for 2019 reaching P10.31 billion, more than double the P4.33 billion net loss incurred in 2018.

Although Revenues in 2019 grew 2.7% year-on-year to P154.54 billion, this was weighed down by expenses and other charges. Financing charges were P6.8 billion, up 128.4% from the previous year, due to additional aircraft financing and compliance in adopting PFRS 16 which impacted the accounting and taxation of PAL’s leases.

PAL is projected to book another net loss for the 1st Quarter of 2020, which could be worse than the losses recorded in previous quarters. This is primarily due to a plunge in revenues brought about by flight cancellations during the ECQ period and higher financing charges, which is stiffer compared to competitor Cebu Pacific (CEB) which is relatively less leveraged.

As part of its streamlining initiatives, the company announced in February 2020 a “voluntary separation” program wherein they terminated some 300 ground-based administrative and management personnel. PAL President Gilbert Santa Maria said they are not looking to lay off more employees in the short-term, but could resort to these measures if “demand just isn’t there.”

PAL claims it is losing over $300 million or P15 billion in revenue every month during the lockdown

PAL claims it is losing over $300 million or P15 billion in revenue every month during the lockdown, and including the losses in February and March, the company is estimated to have already lost $1 billion or P50 billion in revenues so far, Santa Maria said.

COVID-19 Impact on Cebu Pacific

Cebu Pacific (CEB) recently reported its 1st Quarter 2020 performance and the numbers are unsurprisingly not good.

The company announced it booked a loss of P1.18 billion during the quarter, a reversal of its P3.36 billion net income in the same quarter in 2019. Similar to PAL, this was primarily due to reduction of flights that contributed to flying just 4.4 million passengers in the first quarter, a 16.5% decline in passenger volume compared to the previous year.

As the coronavirus started spreading globally, travel bans were implemented and flights to and from China, Hong Kong, Macau, and South Korea were grounded. For CEB, these four (4) flight routes alone contribute around 16%-17% of company revenues. Analysis of the company’s financials also shows that international passengers account for 29% of CEB’s total passengers in 2019.

Prior to the lockdown that began in March 2020, the company announced in February that losses from the pandemic could be “up to P4 billion” if the situation persists for around six months. Expect losses to further swell given the extended lockdowns and continued flight cancellations.

Cebu Pacific stock price plunged because of COVID-19

Consequently, CEB’s stock price has suffered tremendously. From a high of P89.00 per share in January this year, it plunged to a record-low of P35.35 in May — a 60% stock price drop in just four months.

Covid-19 Impact on MacroAsia Corp.

Airline companies are not the only ones directly hit by the pandemic. Macroasia Corp. (MAC), a company that provides aviation-related support services in the Philippines, estimates it will see loss of revenues of around P867 million because of the coronavirus.

Due to the government-imposed travel ban, MAC says they are losing almost P300 million every month that flights are grounded. This is so because more than 90% of MAC’s revenues come from ground-handling, aviation support, and in-flight catering services provided to airline companies.

As losses pile up due to the ban on air travel, the company is now resorting to cost-cutting measures to offset losses, including offering “unpaid leaves” to some if its employees while top management officials have agreed to a 10% pay cut.

In recent weeks, the company’s stock price have plummeted and the plunge was even exacerbated by news that MAC will be removed from the MSCI Philippines Small Cap Index. Further price downtrend is expected as foreign funds that follow the MSCI Philippines Small Cap Index start selling the stock to realign their portfolios.

Impact of COVID-19 on MacroAsia (MAC) stock price

From a high of P14.08 per share in January 2020, MAC’s stock price fell to a low of P3.38 apiece — a 76% drop in four months.

Covid-19 Impact on Tourism sector

COVID-19 also directly impacted the country’s tourism sector especially since many of the Philippines’s top sources of tourist arrivals are also the countries with the most COVID-19 cases, including China, US, and South Korea.

The timing of the outbreak unfortunately amplified its impact as it falls during the hot summer months of April and May, traditionally the peak season for the sector. In the country’s prime beach destination of Boracay, foreign arrivals in March dropped from a daily average of 4,100 foreign tourists to just 1,400.

Department of Tourism (DOT) Sec. Bernadette Romulo-Puyat said total foreign arrivals to the country in January to April 2020 have dropped 54% from the same period last year. Worse, the Philippines expectedly recorded zero tourist arrivals in April because of the travel ban.

Hotels and casino operators are also feeling the brunt. Under the Bayanihan to Heal as One law (BAHO Act), hotels are not allowed to accept any bookings during the ECQ period unless they are meant to accommodate frontline health workers or employees of essential companies operating within the area.

Casinos and gambling venues were also prohibited to operate during the ECQ. Bloomberry Resorts Corp. (BLOOM), operator of Resorts World Manila (RWM), is expected to record steep losses especially since 50-60% of its gross gaming revenues (GGR) come from Chinese and Korean patrons.

Overall, the DOT estimates that the Philippine tourism sector only generated P85 billion revenues from January to March this year — a huge 36% drop compared to the P134 billion revenues generated last year.

Airline Industry Outlook

It will certainly take some time to restore the confidence of passengers back to pre-COVID levels. Unfortunately for the airline industry, as the virus outbreak lasts longer, flights will continue to be grounded but airport fees and airline maintenance costs will continue to accumulate. It will thus be challenging for the airline business to catch up on revenues if the travel ban and community lockdown will be extended.

There is hope, though, once the ECQ is lifted and commercial air travel is allowed again. Data from Colliers International shows that tourist arrivals can rebound by at least 20% once the pandemic subsides. Based on historical data, tourist arrivals in the Philippines declined by 3.9% during the H1N1 outbreak in 2009, but surged by 16.7% the following year when the WHO declared that the virus had been contained.

Aggressive marketing by airlines could help pump up demand. Once the travel ban is lifted, PAL, Cebu Pacific, and Air Asia will surely implement aggressive marketing campaigns through low fare promotions to encourage demand. This could help pay for operating expenses and translate into higher airport activity as travelers frontload their travel plans in anticipation of the outbreak resolution.

On the other hand, such promos could negatively impact the margins of airlines in the short run, but this is a better tactic moving forward in a bid to secure revenues. Piso fares or low-cost promo fares will certainly drive tourism demand, which could help reinvigorate the transportation sector and also the consumer retail sector.

Safety measures, though, such as leaving middle seats open will certainly hurt profitability. If this becomes the norm, ticket prices could surge and low-fare promos might see an end because airlines will have to deal with a higher breakeven load factor, or the average percentage occupancy of seats in a flight for the flight to breakeven.

Challenges abound and will continue to persist for the airline industry even after the pandemic subsides. It will certainly take months or years of additional turbulence before airline companies get to see brighter skies again.

Pinoy Money Talk is an educational website about money, banking, investments, and personal finance which started in 2005. Its group of five writers consists of one equity research analyst, one fintech startup owner, one finance educator, and two investment professionals.