Airline Industry Prepares Cost Cuts -- WSJ

Date : 02/27/2020 @ 8:02AM
Source : Dow Jones News
Stock : Deutsche Lufthansa AG (QX) (DLAKY)
Quote : 9.87  0.14 (1.44%) @ 6:08PM

Airline Industry Prepares Cost Cuts -- WSJ

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By Alistair MacDonald and William Boston 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 27, 2020).

As coronavirus continues its spread outside of China, the global airline industry is recalibrating its response to a threat that could be its worst since the financial crisis a decade ago.

Deutsche Lufthansa AG, Germany's flagship airline, said Wednesday it would start slashing costs in anticipation of a coming hit to revenues and profits from canceled flights to China, where the virus first emerged. Among other measures, it is offering its staff voluntary, unpaid leave.

Several big Asian carriers have done the same in recent days, in some cases resorting to more extreme measures. Cathay Pacific Airways Ltd., Hong Kong's flag carrier, has asked all its staff to take three weeks of unpaid leave. Singapore Airlines Ltd. joined other Asian carriers on Wednesday in unveiling its own plan to begin trimming costs amid the downturn.

Lufthansa's cost-cutting punctuates how grounded flights, canceled bookings and a new reticence to fly -- even among typically hardy business travelers -- are affecting the global industry outside Asia, too. On Wednesday, Nestlé SA said it had asked hundreds of thousands of its employees world-wide to postpone all overseas business travel for the next three weeks. It is urging workers to forgo domestic travel, too, if a phone call or videoconference would do the trick.

While much of the pain for airlines comes from canceled flights to and from China, European airlines are also now dealing with a falloff in tourism and the prospect of canceled sports, commercial and cultural events amid a growing outbreak in Italy. A major rugby match between Italy and Ireland in Dublin and a high-profile international furniture fair in Milan were both rescheduled in recent days because of the epidemic.

"What we are now seeing is a state of panic over coronavirus," said Phil Seymour, chief executive of the International Bureau of Aviation, an industry consultant. Mr. Seymour estimates the hit to revenues at airlines, airports and other related industries could be as high as $100 billion to a sector that was estimated to earn around $30 billion in profits before the virus struck.

While the effects could turn out to be a temporary blip in terms of the drop off in passenger numbers, previous disruptions that might have seemed short term -- such as the 9/11 terrorist attacks and the financial crisis -- have resulted in some carriers going bankrupt, he said.

Sabre Corp., which provides the reservations systems of many airlines and hotels, said global travel-booking levels so far in the first quarter are down in the "midteens" from a year ago, with cancellations focused in Asia-Pacific but spreading through the Middle East, Europe and North America. "We've seen increased cancellations in the European market," said Sean Menke, Sabre's CEO.

British Airways, owned by International Consolidated Airlines Group SA, is offering passengers the opportunity to rebook their flights to northern Italy, where infections are now higher than anywhere outside Asia.

Alitalia SpA, the Italian flag carrier, said the rate of passenger no-shows at airports has "increased abnormally" while new bookings have slowed.

"The airline will shortly implement a series of capacity adjustments in line with the lower seat demand," a spokeswoman said.

Shares of European airlines continued to lose ground Wednesday. Budget carrier Ryanair Holdings PLC, Europe's biggest airline, fell 1.8%. Lufthansa was also down 1.8%. Shares in the five airline companies in the Stoxx Europe 600 Travel and Leisure Index have fallen more than 10% this week. Shares in U.K.-based easyJet PLC, another discount carrier, are down 20.3% this week.

Lufthansa said it would begin cutting expenses in administration and would cancel some projects in the pipeline. A spokesman for the company said no jobs were on the line yet, but Lufthansa is reviewing options for part-time work and offering employees unpaid leave effective immediately.

"In the administrative areas, the core brand Lufthansa will reduce its project volume by 10% and the budget for material costs by 20%," it said. The company is also canceling scheduled training for attendant and station personnel scheduled from April 2020.

Separately, Singapore Airlines said it has implemented a general recruitment freeze for all ground positions in response to the downturn triggered by the virus.

Airlines world-wide have already canceled more than 200,000 flights to, from and within China as the threat of a hit to their revenues grows more serious amid a continued rise in coronavirus cases.

U.S. carriers have stopped flying to mainland China and Hong Kong, too, and they have started to review their operations in other areas where the virus has spread. Delta Air Lines Inc., United Airlines Holdings Inc. and American Airlines Group Inc. are waiving fees to change scheduled travel to South Korea's Incheon International Airport in Seoul. Delta is waiving fees to change flights to Bologna, Milan and Venice, Italy.

Delta on Wednesday said it would also cut back on flying between the U.S. and South Korea. It is suspending service there from Minneapolis/St. Paul and reducing the number of weekly flights between Seoul and Atlanta, Detroit and Seattle. The airline is also delaying the launch of a new flight between Seoul and Manila.

In a sign of growing concerns about the potential impact on global demand, JetBlue Airways Corp. said it would waive fees on passengers changing new bookings.

JetBlue's network is largely U.S.-focused, though it does rely on customers booking via an array of overseas carriers including Lufthansa and Dubai-based Emirates Airline.

A drop in fuel prices is helping to blunt the virus's financial impact on American carriers. Some U.S. airlines have said they will look for ways to put their bigger jets to work serving domestic markets when demand is high, such as during a spring break. Others are accelerating maintenance works.

Alison Sider and Doug Cameron contributed to this article.

Write to Alistair MacDonald at alistair.macdonald@wsj.com and William Boston at william.boston@wsj.com

 

(END) Dow Jones Newswires

February 27, 2020 02:47 ET (07:47 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.

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