The impact of COVID-19 outbreak has hit global airlines businesses - Photo by Travel Office

JAKARTA (TheInsiderStories) – The impact of COVID-19 outbreak has hit global airlines businesses. Recently, state-run flag-carrier PT Garuda Indonesia Tbk (IDX: GIAA) and United States’ firm Boeing Co., (NYSE: BA) has lay off their employees to survive during the pandemic.

CEO of Garuda, Irfan Setiaputra has announced that the firm will layoff 700 employees starting Nov. 1 to ensure the company’ businesses continuity amidst the spread of the virus and the low flight demands. While, Boeing announced it will cut an additional 7,000 jobs as its losses continue to mount following a plunge in revenue after reducing staff by 19,000 jobs earlier this year.

Seeing the development of the aviation industry, KPMG rated, the significant decline in passenger numbers of global airlines. A revenue loss worth of US$252 billion has been anticipated in 2020. To prevent the industry from collapsing, government assistance worth $200 billion is being looked at.

It said, airlines are in need to appropriately assess how fleet groundings, travel bans, economic uncertainties and market volatility may affect accounting conclusions. Such considerations may include change in depreciation methods, revision of future salary assumptions in existing liabilities, impact of extension in loyalty points expiration dates, re-assessment of forecasted fuel consumption and volumes of fuel hedged, re-assessment of existing operating leases, revision of aircraft maintenance and overhaul cost.

While, Fitch Ratings expects continued downward pressure on passenger airplane deliveries and production rates from Airbus SE, Boeing, and other original equipment manufacturers (OEMs) because of a slow recovery to pre-pandemic traffic levels, damaged airline financial profiles, travel restrictions, and uncertainty about traveler behavior.

The agency estimates demand for aircraft deliveries will most likely be lower than those suggested by OEM production rates. However, in most scenarios downside production rate risk is lower than the magnitude of the already announced cuts.

Fitch believes production will need to decline or OEMs will need to build up aircraft inventory for the market to reach equilibrium. Either path will create additional cash flow headwind for OEMs. Its forecast is derived by comparing pre-pandemic global seats capacity with projected until 2023, which base case estimate for return to 2019 traffic levels.

The analysis is highly sensitive to assumptions about traffic recovery and aircraft retirements. Fitch estimates more than 4,700 passenger aircraft (those with more than 100 seats) would be produced through 2023 based on announced production rates and possible rate increases. This compares with the top end of Fitch’ delivery base case range of approximately 4,300 passenger aircraft, with downside risk based on a variety of factors.

“We believe production is unlikely to return to pre-pandemic levels until 2025 or 2026,” said the report.

Fitch expects 3,000 – 4,200 passenger aircraft could be retired or remain in long-term storage through 2023. More than 25 percent of the retirements are likely to be wide-bodies. The rater believes the trend toward shorter aircraft life spans will be confirmed by the pandemic.

Environmental concerns could also support accelerated retirements. Fitch expects narrow-body capacity could rise and wide-body capacity could fall compared with 2019.

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