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Asian airlines feel pain of coronavirus on top of price war

ANA latest to report plunge in China flight bookings

An ANA plane chartered by the Japanese government, carrying evacuated Japanese nationals from Wuhan, arrives at Tokyo's Haneda Airport on Jan. 30. (Photo by Kai Fujii)

TOKYO/SINGAPORE -- Asian airlines, already fighting stiff competition, now face more turbulence as the spreading coronavirus triggers fears of a repeat of the SARS-induced industry slump of 2003.

Singapore Airlines on Friday said it will reduce capacity on services to seven Chinese cities, including Beijing and Shanghai. CEO Goh Ghoon Phong, who was in Tokyo, declined to elaborate but stressed that "issues and situations that will influence the travel market on a more temporary basis [are] not going to be a key concern."

On Thursday, Japan's ANA Holdings became the latest Asian airline to warn of a fallout from the coronavirus outbreak, which has spread to at least 15 countries from China in the past month, infecting more than 7,700 people and killing 170.

"Bookings for flights from China have fallen by half" from a year earlier for the month of February, ANA Executive Vice President Ichiro Fukuzawa told a news conference. On Friday, CEO Yuji Hirako said ANA will prepare for a temporary reduction in services to China.

Bookings for flights to China from Japan have also dropped 40%, he added. The company, however, kept its earnings outlook unchanged for now, saying that it would keep an eye on the situation.

Analysts have been predicting a drop in passenger traffic, as people stayed home and avoid business trips for fear of catching the virus on flights and in crowded airports.

China's "Big Three" -- Air China, China Eastern Airlines and China Southern Airlines -- are the hardest hit by the outbreak, according to Paul Yong, analyst at Singapore's DBS Group Holdings.

Data from flight tracking website Flightradar24 show almost 20% of domestic flights are being canceled as Beijing imposes a lockdown on some cities, a Nikkei analysis finds.

Hong Kong's Cathay Pacific Airways as well as carriers from South Korea, Japan and Thailand, where the tourism industry is reliant on Chinese arrivals, will also be hit, he said. Carriers from Singapore, Malaysia, the Philippines, Indonesia and Australia will feel the impact too, but to a lesser extent, Yong said.

If an airline's load factor falls below 50% for more than two months, it will likely face a quarterly loss, according to Yong. Typically, a healthy airline's load factor should be around 80%.

The outbreak of severe acute respiratory syndrome, or SARS, which started in southern China in late 2002, rapidly spread to Hong Kong, then North America, Europe and Australia through air travel.

Passenger air traffic fell as much as 25% at one point during the SARS outbreak for airlines in the Asia-Pacific region, resulting in a 8% fall in annual revenue, or $6 billion, in 2003 as a whole, according to ratings agency S&P Global. "We see the potential for a similar effect from the coronavirus outbreak," S&P said in a note.

Health authorities have moved quickly this time to close airports and shut down travel services from and to Wuhan and other Chinese cities.

Since 2003, Asia has witnessed a tourism boom, as a raft of low-cost airlines entered the industry, such as Malaysia's AirAsia, Indonesia's Lion Air and India's IndiGo. These airlines have all grown to become among the world's largest. Other full-service airlines have struggled to compete and to differentiate themselves to price-sensitive customers.

Now, the coronavirus outbreak will further test these airlines. For ANA which depends on business travel, geopolitical tensions, such as the trade war between the U.S. and China, and diplomatic disputes between Japan and South Korea have already caused concerns.

Its shares are down 7% over January. ANA had accelerated its diversification of revenue sources, reducing China's share in its international passenger business to about 10% from 20% in 2003, while building up its reserves from a steady profit stream.

"There are various geopolitical risks globally," ANA president Hirako said at the news conference with Singapore Airlines on Friday. "We've learned from our experience that when one region gets affected, that other regions tend to do better. We believe that we need to pursue a balanced allocation of resources."

Other airline shares have suffered bigger drops. China Southern Airlines shares have fallen 21% in the past month, while those of Thai Airways International and Korean Air Lines, both of which were losing money even before the crisis, have lost about 15% each. AirAsia stock is also down 13%.

The coronavirus has also shone a light on what an important source of income Chinese tourists are to regional airlines and tourism industries. In Thailand, for instance, total Chinese arrivals quadrupled to 11 million between 2012 and 2019, according to IHS Markit. Tourism contributes to around 22% of gross domestic product for Thailand.

Analysts said airlines are responding to the unfolding crisis by doing what they can -- cutting costs. "Airlines are not just going to sit and just watch earnings plunge or revenue plunge, but they're going to take measures to cut costs," said K Ajith, transport analyst at Singapore's brokerage UOB Kay Hian.

Cathay Pacific, for instance, is offering employees unpaid leave for up to 12 months. The airline was already suffering from a fall in tourist arrivals due to political protests that had plagued Hong Kong since June.

Cathay shares are down 15% so far this year, after staying flat in the last six months of 2019. During the 2003 SARS crisis, its shares plunged over 20% before recouping losses subsequently.

British Airways on Wednesday suspended all direct flights to and from mainland China. Lion Air, Indonesia's biggest budget airline group, said it would suspend flights to mainland China from February, becoming the first Southeast Asian airline to do so.

ANA voiced confidence in its ability to ride out the crisis, saying that the company had a buffer from rounds of cost-cutting in recent years.

But analysts said things could yet get worse.

"A decline in cash flow is probably already hitting airlines with meaningful exposure to China and the wider Asia-Pacific region," S&P said in the note. Such a decline will continue "until the virus is contained and normal travel volumes resume."

Additional reporting by Eri Sugiura, Apornrath Phoonphongphiphat and Mayuko Tani.

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