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Update on the impact of the Coronavirus on the Aviation Industry

06.03.2020 Aviation & travel

Gillie Belsham

Gillie Belsham Global Head of Aviation, Partner

Impact

The COVID-19 outbreak has already had a severe impact on the aviation sector. “Air traffic has collapsed on key Asian routes and it is rippling throughout the air transport network globally, even between countries without major outbreaks of COVID-19.”[1] Flybe yesterday announced its collapse, in part it says due to the effect of coronavirus upon bookings.

Airlines are experiencing a serious decline in demand: “one carrier has taken a 26% reduction in passenger numbers across its entire operation and a major carrier has reported booking to Italy collapsing to zero with customers demanding refunds. Many carriers are reporting 50% no-shows across several markets, future bookings are softening and carriers are reacting with flight cancellation, crew being given unpaid leave, freezing of pay increases and plans for aircraft to be grounded.”[2]

This decline will have an enormous financial impact on airlines. IATA suggest that the revenue loss in the Asia- Pac region could be as high as a $27.8 billion in 2020 for carriers in the region, with possibly a revenue loss of $1.5 billion for carriers outside the region. This assumes the loss of demand is limited to markets linked to China, which already it is not. This would bring total global lost revenue to at least $29.3 billion (5% lower passenger revenues compared to what IATA forecast in December) and represents a 4.7% reduction in global demand. In addition, Airline and tour operator shares have plummeted as Italy has emerged at the centre of coronavirus crisis in Europe. 

Aircraft Manufacturers 

Airbus is already feeling the effect as it has closed its single-aisle final assembly line in Tianjin due to a lack of workers; global production systems for its European and American production lines rely on Chinese suppliers.[3] Capacity may well be constrained by any further delays in delivery and leases extended; an active second-hand market for Airbus aircraft, especially narrowbodies, may well emerge.

Although the impact of COVID-19 on Boeing’s production may be less dramatic, if Covid-19 causes a prolonged decline in air travel, both Boeing and Airbus may see reductions in future orders and cancellations; not good news for the already weakening widebody market.[4]

Aircraft Lessors 

Aircraft lessors are generally well protected from events like the coronavirus travel restrictions but “a pandemic will start affecting lessors if there are increased airline bankruptcies, if air travel is suspended for a prolonged period of time, if a ban of air traffic to a specific country creates a problem for aircraft lessors to repossess and redeploy aircraft to other regions, or if airlines start refusing new aircraft deliveries.”[5]

In short, ultimately few within the aviation sector will be unaffected by any prolonged drop in passenger revenues.

How is the aviation sector responding?

Apart from cancellation of flights, a number of airlines are waiving change fees for the next two weeks in order to stimulate changes to their bookings without any cost implications. 

Slots

Following discussions with IATA, the European Commission announced on 10 March that it is preparing legislation to amend the EU Slot Regulation, temporarily suspending the 80:20 ‘use it or lose it’ rule, which requires carriers to operate at least 80% of their allocated slots. Having initially refused to take action and requested ‘hard evidence’ of the effect of Covid-19 on air carriers, the Commission’s position has softened significantly in recent days, with its latest statement acknowledging that the suspension will release pressure ‘on the whole aviation industry and in particular smaller airlines’ and reduce emissions by rendering any ‘ghost flights’ of empty aircraft unnecessary.

EU slot coordinators had already agreed that affected airlines in the case of flights between HK and mainland China could rely on ‘force majeure’ in the EU Slot Regulation so as not to lose their grandfathering rights.  

Practical steps

EASA has recommended that aircraft and airport operators should provide information to crewmembers and airport staff regarding the management of an acute case of the virus on board an aircraft with passenger flights to or from affected areas to be equipped with one or more Universal Precaution Kits (UPKs) to protect crewmembers who are assisting potentially infectious cases of suspected COVID-19.

IATA has also issued practical guidelines for airline employees in relation to suspected communicable disease generally. These cover, for example:

  • “Cabin crew: how cabin crew can identify passengers with suspected communicable disease and the actions to take following identification of the infected passengers. This includes informing the captain who is required by the ICAO Regulations to report the suspected case(s) to air traffic control. The cabin crew are also advised to contact the medical ground support for assistance on board; and 
  • Cleaning crew: the procedure the cleaning crews have to follow when cleaning an arriving aircraft with a suspected case of communicable disease.” 

Air carrier liability 

If adequate measures are not taken, airlines may be exposed to liability in relation to COVID-19. Whilst levels of risk from being a passenger on board a flight are not considered greatly dissimilar to those in other transport modes or, for example, being in a theatre or cinema where large numbers sit together in close proximity, air carriers must ensure that they take reasonable measures to avoid passengers from becoming infected. Where a claim is made by a passenger who is alleged to have become infected, the passenger must establish the following: 

  • That he/she sustained an injury (illness) or, worse, died, as a result of having been infected – the mere fear of the infection would not suffice; 
  • That the infection occurred during carriage by air. This means that he/she must prove that the infection occurred either in-flight, or during embarkation or disembarkation - this will not necessarily be easy - and
  • That the ‘injury’ (illness) or death resulted from an “accident”.  An airline’s act or omission in failing to prevent passengers becoming infected might constitute an “accident” pursuant to the Montreal Convention. Case law has established that a carrier can be liable for the death of a passenger because of their failure to act. In one case, the passenger was an asthmatic who was seated near to passengers who were smoking. The passenger asked to be moved as he was having difficulty breathing. After his request was refused, he suffered a severe asthma attack and died. Whilst an asthma attack is not in itself an ‘accident’ the failure by cabin crew to protect an asthmatic passenger from smoke inhalation by moving him was an “accident”.  In another case, however, a passenger’s adverse reaction to insecticide which had been used on board prior to embarkation was not  an “accident” within the meaning of the Convention. This should provide some comfort to those air carriers looking to fumigate or deep clean aircraft in certain circumstances. However, poor air quality has been held to contribute to an “accident”.

We, therefore, recommend that air carriers take practical steps to mitigate the potential risk of claims by implementing measures such as: 

  • requesting declarations of health from passengers;
  • requiring passengers to submit to medical examination if suspected to be suffering from possible symptoms; 
  • fumigating aircraft following disembarkation of passengers and crew;
  • moving passengers with possible symptoms as far away from from other passengers as possible; and
  • reviewing aircraft deep clean and sterilising plans and ensuring such steps are possible in all destinations.  

Regulation 261 compensation 

There is as yet, unsurprisingly, no case law as to whether the virus will fall under the ”extraordinary circumstances”  defence to air carrier liability for delayed or cancelled flights.  The European Commissioner Valean has stated that 

“There is a discussion that the Corona situation might fall under this [extraordinary circumstances] case. 

The outbreak of the coronavirus could fall generally under this exemption. Yet the assessment is made on a case by case basis and ultimately under the authority of the European Court of Justice. The EU legislation does not cover the situation when passengers decide voluntarily to renounce to fly.”

[1] https://www.iata.org/en/pressroom/pr/2020-03-02-01/

[2] https://www.iata.org/en/pressroom/pr/2020-03-02-01/

[3] https://www.iba.aero/insight/how-will-the-coronavirus-outbreak-impact-the-aviation-industry-february-2020

[4] https://www.iba.aero/insight/how-will-the-coronavirus-outbreak-impact-the-aviation-industry-february-2020

[5] https://www.aviationnews-online.com/finance/fitch-report-says-low-long-term-impact-of-coronavirus-on-lessors/

Article authors:

Gillie Belsham