Airlines descent further on MCO 2.0

The reimplementation of MCO has thrown the spanner in the works for air travel industry which was beginning to see a slight recovery


LOCAL airlines, which have been badly hit by the impact of the Covid-19 pandemic since last year, are expected to plummet even further as domestic travel comes to a grinding halt with the implementation of Movement Control Order (MCO) 2.0.

Sobie Aviation Pte Ltd analyst and consultant Brendan Sobie said the outlook for the first half of 2021 (1H21) is rather dismal. It is expected to be worse than 2H20, but still better than the second quarter of 2020 (2Q20).

“The issue is, airlines have now gone through nearly a year of very challenging market conditions, so they are much weaker compared to when the first MCO was implemented,” Sobie told The Malaysian Reserve (TMR).

He said MCO 2.0 could drive traffic down to as little as 2% like what happened in April last year, or perhaps between a paltry 4% and 5%.

Last year, domestic traffic was at about 2% of normal levels in April. It partially recovered after the initial MCO was lifted, and peaked at about 40% of normal levels in September.

Sobie said domestic traffic in 4Q20 was the worst due to the surge in cases, but traffic was improving in December until towards the end of the month when it started declining again.

“All airlines really need to generate some domestic revenue to get through this crisis. So the latest setback is painful,” he said.

The reimplementation of MCO has certainly thrown the spanner in the works for the air travel industry which was beginning to see a slight recovery in the past few months.

Hong Leong Investment Bank Bhd analyst Daniel Wong said the MCO has hampered the demand for domestic flights and is adversely affecting airlines and airports.

“Since there is no interstate travelling allowed and people have to stay home, it will again cut the demand for domestic air travel. It would affect revenue and cashflow to airlines and airports,” Wong told TMR.

Overall, he said the recovery of air travel is not expected until the end of 2021, at the earliest.

An analyst said the new MCO is surely a negative sign for the industry, but airlines and other industry players could pin their hope on the vaccine rollout to see the effects not prolonging further.

“Airlines will continue to struggle in 1H21 as they reach a one-year milestone on whatever commitments deferred earlier. Some dues will have to be paid, posing further liquidity concerns and dire need of urgent funding,” the analyst, who requested anonymity, told TMR.

International Air Transport Association (IATA) chief economist Brian Pearce said global airlines are expected to continue suffering cash burn until 3Q21 before transitioning to cash generation towards the end of the year.

Cash burn is expected to continue in 1H21 at between US$20 billion (RM80.9 billion) and US$30 billion.

In IATA’s first media briefing of 2021 recently, Pearce said the domestic revenue passenger kilometres (RPKs) recovery stopped in November last year at -41% year-on-year (YoY) due to a resurgence of Covid-19 in the last two months particularly in Russia and to some extent in China.

He said international RPKs had very little recovery with it flatlined since August 2020, standing at -88% YoY in November 2020.

Global RPKs declined to slightly over 70% YoY in November 2020 with airlines flying about 220 billion RPKs per month compared to 740 billion RPKs in the same period in 2019.

“The key point is the recovery that we had seen (in summer months) is essentially stalled,” Pearce said.

IATA DG and CEO Alexandre de Juniac said while airlines could turn cash positive within the year, the near-term picture is bleak.

He said, instead of a boost from the year-end holiday period, the industry faced more restrictions as governments tightened borders in a knee-jerk response to a virus mutation.

He said Canada, the UK, Germany, Japan and other countries added testing to their Covid-19 measures without removing quarantine requirements. In other words, they have chosen policy measures that will shut down travel.

“This approach tells us that these governments are not interested in managing a balanced approach to the risks of Covid-19.

“They appear to be aiming for a zero-Covid-19 world. This is an impossible task that comes with severe consequences — the full extent of which would be impossible to calculate,” De Juniac said in a statement.

He said a more balanced public policy approach is needed — one that is based on testing as a replacement for quarantines so that the severe side-effects of Covid-19 policies can begin to be addressed.

He further said science tells that travellers will not be a significant factor in community transmission if testing is used effectively, but most governments have tunnel-vision on quarantine and are not at all focused on finding ways to safely reopen borders or alleviate the self-imposed economic and mental health hardships of the lockdowns.

Winair AS founder and aviation consultant Hans Jørgen Elnæs said airlines and governments should expect and plan for domestic markets to the first movers.

He said there seems to be light at the end of the tunnel, however fragile things are, and the industry players are recommended to have a conservative approach to recovery.

Read our earlier report

Air travel may recover in 2H21