Airlines are cutting flights to China — and the coronavirus could be a 'substantial' risk for the industry, an analyst warns
- United Airlines said on Tuesday that it was cancelling a total of 24 flights to and from China, as the Wuhan coronavirus outbreak leads to plummeting demand.
- The US Department of State issued a travel warning on China, upgrading its alert to level three, or "reconsider travel."
- One analyst warned of "substantial" risks to the airline and aerospace sectors, citing revenue declines during past outbreaks such as the SARS and MERS.
- The coronavirus, which originated last month, has infected more than 4,600 people and killed at least 107.
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The mysterious coronavirus spreading around the world poses a "substantial" risk to global air travel and the aerospace sector, an analyst for Canaccord Genuity is warning, and the effects are already being seen in flight cancelations.
However, the long-term financial impact of the outbreak could be less severe.
Ken Herbert, an analyst at financial-services firm Canaccord, said in a research note that although it's "very early into the current coronavirus outbreak," several other outbreaks in recent years provide a framework that can be applied to the current situation. The note mentioned that although the current outbreak appears to be spreading faster than those past viruses, it has been less deadly so far.
Herbert said an average revenue drop of 13% has been observed over past outbreaks, citing data from the International Air Transport Association, an airline trade organization.
"However, we believe that all things considered, traffic tends to recover relatively quickly after a pandemic outbreak," Herbert said.
The brunt of the impact is expected to be borne by Chinese airlines that service Wuhan, the epicenter of the outbreak - particularly those like China Southern, China Eastern, and Air China.
International airlines that fly to the region are likely to see an impact as well. For instance, United Airlines announced on Tuesday that it would cancel 24 flights to and from China in early February, as customer demand has plummeted due to the coronavirus outbreak.
"Due to a significant decline in demand for travel to China, we are suspending some flights between our hub cities and Beijing, Hong Kong and Shanghai beginning February 1 through February 8," a spokesperson for the airline said in a statement. "We will continue to monitor the situation as it develops and will adjust our schedule as needed."
Past outbreaks as 'an economic sledgehammer'
The current virus has drawn comparison to the severe acute respiratory syndrome, or SARS, outbreak in 2003, a natural connection because both are caused by a coronavirus. SARS had a higher fatality rate - about 10%, compared to 3% from the current virus - which made it "an economic sledgehammer to airlines in the Asia-Pacific region," the Canaccord report said.
As a result of SARS, which ultimately infected around 8,100 people, the report said revenue per passenger kilometer - otherwise known as RPK, and also measured in revenue per passenger mile, or RPM - fell by 35% at the worst of the outbreak, and led to an 8% decline in RPKs in the region for all of 2003.
The 2015 Middle East Respiratory Syndrome, or MERS, outbreak also led to a strong impact. Although the infection only reached 1,300 people in the Middle East and South Korea, the report cited an unusually high 38% fatality rate led to a 12% dive in RPKs in the South Korean market for the first month of the disease's spread, although passenger volumes recovered within two months.
In the past, the size of the total infected population seemed to have more of an impact on airline revenue than the lethality of the disease. The 2005 Avian Flu outbreak in Asia had a staggering 52% mortality rate, but only about 116 people were infected. Regional RPKs only dropped 2%, and recovered quickly.
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