PARIS/LONDON (Reuters) – European budget airlines bore the brunt of Monday’s plunge in global stock markets as the arrival of the coronavirus in Italy pointed to a longer, deeper crisis than many have banked on.
FILE PHOTO: EasyJet planes pictured at Tegel airport in Berlin, Germany, November 14, 2019. REUTERS/Fabrizio Bensch/File Photo
EasyJet (EZJ.L) dropped 16.4% and Ryanair (RYA.I) 13.5% as airlines were forced to reassess the fallout from the rapid spread of the COVID-19 virus across Asia and beyond, with South Korea, Italy and Iran now struggling to contain outbreaks.
Although airlines have yet to suspend any Italian flights, the new outbreaks raised the specter of serious upheaval extending into the lucrative summer tourism season on a day when European stocks suffered their biggest slump since mid-2016.
“Concerns are growing that COVID-19 continues to spread and will impact demand to and from other European countries,” Credit Suisse analysts said.
Ireland, meanwhile, advised citizens to avoid some destinations in Italy, a major leisure market.
While budget airlines are most exposed to Italy, Credit Suisse added that lower-margin legacy carriers are at risk from a broader traffic slump if the contagion unnerves consumers.
In an email to frequent flyers on Monday, Singapore Airlines highlighted the air filtration systems on its jets as well as “enhanced cleaning” procedures between flights, including “disinfectant fogging” and removal of headrest covers.
‘FEAR AND UNCERTAINTY’
“The market reaction is a reflection of the fear and uncertainty of the virus being in Europe and particularly in Italy,” said Stephen Furlong, transport analyst at Dublin-based brokerage Davy.
Air France-KLM last week said the virus would wipe 150 million to 200 million euros ($163 million to $217 million) off its earnings, assuming that flights suspended in January resume in April – a scenario that now looks increasingly optimistic.
On the same day, the International Air Transport Association (IATA) predicted that the impact would echo that of the 2003 SARS virus outbreak, with an estimated $28 billion hit this time.
“It could well be significantly more than that, given the news over the weekend of cases in Iran and Italy,” Phil Seymour, chief executive of aviation consultancy IBA, said on Monday.
Some carriers that have suspended China services are likely to add capacity on other routes in the hope that they will benefit from displaced Asia leisure traffic, Seymour said.
Carriers including Delta Air Lines (DAL.N) have already begun to reassign larger planes to transatlantic flights and Air France-KLM said it was considering redeployment options.
But there are inherent dangers, Seymour warned.
“If you increase capacity too much because you’ve overestimated that demand shift, you just create a price war,” he said.
The crisis could ultimately force more bankruptcies among weaker carriers, which would benefit a fragmented European sector in need of consolidation, Davy’s Furlong said.
In the nearer term, however, it has darkened the industry’s profit outlook just when market fundamentals had appeared to be improving.
“It looked like supply was going to be behind demand heading into this summer,” Furlong said. “This could rebalance that.”
Reporting by Laurence Frost; Editing by David Goodman
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