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Chinese airlines' coronavirus woes pile pressure on airports

Government efforts to save carriers add to pressure on the ground

A man in a protective suit disinfects the cabin of a Hainan Airlines flight at Haikou Meilan International Airport in China's Hainan Province on Feb. 7.   © Reuters

TOKYO -- China's state-owned airlines have all reported sharp falls in passenger numbers and aircraft movements, hurting both their own operations and those of airport operators, as fallout from the coronavirus outbreak continues to batter the aviation industry.

The big three airlines -- China Eastern Airlines, Air China and China Southern Airlines -- have been hit almost equally by the virus, as indicated in passenger load factors. In February, the key industry metric fell to around 50%, from around 85% a year ago.

This figure is unlikely to recover in the short term. Jin Junhao, an official at the Civil Aviation Administration of China, or CAAC, told reporters on Monday that the regulator is "demanding all airlines landing and departing our country to take strict contagion prevention measures and keep the passenger load factor below 75%."

Air China in its annual earnings report on Tuesday acknowledged that a "loss may be incurred inevitably in the short term," without elaborating further. China Eastern also on Tuesday said, "The general impact on the operation and financial condition of the group for the year cannot be precisely predicted currently," as global travel restrictions are expanding as more countries and regions grapple with worsening outbreaks.

Jin at CAAC added that the number of overall scheduled international flights is expected to drop to 108 this week, just 1.2% compared to the pre-pandemic period. The daily average inbound passengers is set to be around 4,000, a sharp drop from 25,000 last week.

Given the drastic shift in its operational environment, China Southern reviewed its cash flow forecast for the next 18 months. While the company concluded that "adequate funding will be available for the working capital and capital expenditure requirements" during the period, the board on Monday decided not to recommend a final cash dividend "after comprehensive consideration," according to its latest disclosure.

The Guangzhou-based carrier's decision to control cash outflow is underpinned by the latest analysis published by International Air Transport Association on Tuesday. IATA said the airline sector as a whole may burn $61 billion of their cash reserves during the second quarter of this year, while posting a quarterly net loss of $39 billion.

"Airlines cannot cut costs fast enough to stay ahead of the impact of this crisis," said Alexandre de Juniac, director general and CEO of the Geneva-based organization. On top of the $39 billion net loss, there will be $35 billion liability for potential ticket refunds. "Without relief, the industry's cash position could deteriorate by $61 billion in the second quarter," he warned.

The Chinese government has been aggressively rolling out relief measures for airlines, including reductions in landing, parking and air navigation charges, as well as subsidies to keep them flying while also maintaining restrictions to fight the spread of the virus. De Juniac endorses Beijing's move as an exemplary case of government support for the industry.

These government measures, however, are shouldered -- at least partially -- by publicly traded airports in China. Hong Kong-listed Beijing Capital International Airport, the largest in the country by passengers, revealed in its annual results announcement on Thursday that the company slashed aircraft movement fees by 10% and waived aircraft parking fees from Jan 23 "until the end of the COVID-19 outbreak," whenever that may be, in accordance with "the requirements of the supporting policies of the relevant authorities."

The company had already seen aircraft movement drop 39% and passenger throughput cut in half during the first two months compared to a year ago.

Its non-aeronautical revenue is also at stake, as lower traffic "may affect the new signing and renewal of concession and lease contracts." The company is now studying fee deductions for existing tenants, again in order to meet "the requirement from the relevant authorities." CAAC is both its regulator and the indirect majority shareholder of the airport operator.

The airport has already been losing flights to Daxing Airport, built to be a second Beijing hub and opened last September. It is expected that "more flight capacity will be allocated to Daxing Airport gradually," which will put further pressure on its revenue, BCIA said.

Shanghai International Airport, the operator of Pudong Airport, the second largest in the country, similarly saw its passenger numbers drop by 42.8% to 7.12 million during the first two month of the year, while shouldering a similar burden as its Beijing counterpart. The airport, which is both Shanghai-listed and state-controlled, said its "key metrics will be negative in 2020 due to the virus impact" in its annual earnings report on Saturday.

Shenzhen Airport, the fifth-largest airport, estimates the series of relief measures for airlines and tenants will cost them about 81 million yuan in lost revenue this year, according to its annual report released on Saturday. The Shenzhen-listed, government-controlled airport operator has little room to reject policies promulgated by its indirect major shareholder.

Ivan Zhou and Rachel Guo, transport analysts at BOCI Research, point out in their note on Monday, "Airports are required by the government to offer discount on take-off/landing fee and other fees to airlines during the virus outbreak."

The crisis is even deeper for a smaller airport on the tropical island of Hainan. Hainan Meilan International Airport, known as Regal International Airport Group until last November and an affiliate of cash-strapped HNA group, disclosed in its annual results report on Monday "the existence of a material uncertainty which may cast significant doubt over the Group's ability to continue as a going concern."

For the airport operator in Haikou, the island province's capital, the virus comes as an additional blow. The revenue from its aeronautical and nonaeronautical businesses during the first two months dropped by 40% and 22%, respectively, compared to a year ago, while the company was already mired in a debt crisis.

According to its latest disclosure, the Hong Kong-listed company's parent -- called Haikou Meilan International Airport in English -- failed to make an interest payment on a syndicated loan jointly borrowed for the airport expansion project. The incident constituted a "default event" as defined in the agreement of the loan, which has a total facility of 7.8 billion yuan and a maturity of 20 years.

The company could be liable for repaying a total of 5.17 billion yuan that had been drawn down as of the end of last year, if the banks on the syndicate exercise their rights to collect. The company's current assets were 2.033 billion yuan, which is more than 3 billion yuan short of its current liabilities of 5.147 billion yuan as of last December.

Hainan Meilan International Airport and its parent are now scrambling to avoid something worse. According to its Monday disclosure, they are "in negotiation with the loan syndicate for written wavier of the default events," while talking to "relevant banks or lenders to renew or extend loan contracts" and seeking "other external funding such as bond issuance and constantly seek new financing resources." In the meantime, the company is in touch with the provincial government for possible assistance and is pursuing approval from the securities regulator to issue new shares for private placement.

The airport operator acknowledges the risk it faces. "Notwithstanding, significant uncertainty exists as to whether the Group is able to achieve its plans and measures."

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