Pegasus Airlines Boeing 737
Pegasus Airlines Boeing 737
Photo AFP

New York: Moody's Investors Service has revised its outlook for the global passenger airline industry to negative from stable.

"The negative outlook reflects the increasing risk to demand passenger air travel as the coronavirus expands globally," said Moody's Senior Vice-President Jonathan Root.

"The uncertainty and the speed of the outbreak will pressure airlines' operating profits and cash generation for at least the first half of 2020. We expect further capacity reductions as the number of infected people and affected countries grow," he said.

Moody's estimates an operating margin of less than 5 per cent for 2020 for the aggregate of the airlines it rates, down from its pre-coronavirus expectation of about 9%.

Major unknowns -- uncertainty about the virus's active period, its eventual geographic spread and the scale of infections in a given country or region -- complicate efforts to project operational and financial impact for the industry.

Even so, Moody's now anticipates a sharp decline in passenger demand through at least the second quarter of 2020 with significant uncertainty about how recovery would take shape until the still expanding infectious period subsides.

While there is a significant level of variable cost in the industry, it will not be sufficient to offset the revenue decline and mitigate pressure on operating margins.

Fuel hedging strategies will determine to what extent airlines can benefit from lower prices of Brent which have fallen fairly meaningfully already and will likely remain pressured as the virus spreads.

Moody's base case assumption -- based in part on the recovery following the 2003 Severe Acute Respiratory Syndrome (SARS) pandemic -- is that the virus will be mostly a first-half 2020 problem and that traffic should be close to pre-coronavirus levels by the end of 2020.

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Free Press Journal