All-cargo carriers eye surge in business as coronavirus pressures airline finances

Big cargo plane touches down on runway

Uncertainty continued to grip the passenger and cargo aviation markets this week as the coronavirus’ swift spread to South Korea, Italy, the U.K. and Iran raised fears of a global pandemic that could significantly curtail trade and travel.

The removal of passenger aircraft from the China market is pressuring airlines’ bottom lines and removing cargo capacity for shippers, with all-cargo carriers poised to benefit when factories in China return to full production.

On Monday, United Airlines (NASDQ: UAL) said it will withdraw full-year financial guidance for 2020 because it is too difficult to predict when business will bounce back. The Chicago-based carrier said the flights it has suspended through April 24 between U.S. hubs and Beijing, Chengdu, Shanghai and Hong Kong represent about 5% of its planned capacity this year, while the rest of Asia-Pacific counts for another 10% of capacity. Travel demand to Asia outside China has plunged 75%, it said in a regulatory filing.

The carrier said it expects the reduced revenue on trans-Pacific routes to be partially offset by related declines in fuel prices, other cost savings and higher earnings from recently extended credit card partnerships. As of February 21, jet fuel prices are down 19% from a year ago, to about $67 a barrel, according to data compiled by Platts and shared on the International Air Transport Association’s website.

“If COVID-19 were to run its course by mid-May, and normal travel patterns on trans-Pacific routes resume gradually over five months, we would expect to be tracking to deliver 2020 adjusted earnings per share within our previously provided guidance range of $11.00 to $13.00,” the filing said.

On Tuesday, Hong Kong’s Cathay Pacific suspended passenger flights to Tel Aviv, Israel; Seoul, South Korea; and Barcelona, Spain, through March 28. 

And Qatar Airways said it will temporarily operate with a smaller Airbus A350-900 instead of the Boeing 777-300 on flights between South Korea and Doha and reduce frequencies to Iran because certain travel restrictions on recent visitors to those countries is making it logistically difficult to schedule adequate crews on certain routes. The airline is instituting a two-week hold on flights to Mashad, Shiraz and Isfahan, Iran, and reducing daily Tehran-related frequencies to seven from 20 while it evaluates the situation. The schedule adjustments do not apply to Qatar’s all-cargo operations.

There have been more than 78,000 confirmed cases of the disease and 2,663 deaths in China alone, according to authorities.

The spike in new cases in Italy sent European airline stocks tumbling 10% to 17% on Feb. 24, while U.S. airlines declined between 4% to 9%. 

Some airlines are repositioning aircraft back to the domestic and trans-Atlantic market, with an eye toward the peak summer travel season. Air Canada officials said during last week’s earnings report that they are redeploying some widebody aircraft from Asia to the Atlantic, dismissing concern that copycat behavior would saturate the market.  

But airline analysts say there is a danger the extra capacity will hurt pricing. Helane Becker at Cowan investment bank said in a research note that Americans and Canadians will travel closer to home this summer, benefitting domestic carriers, and that if the virus metastasizes in Europe the reallocation of capacity there could backfire as bookings dry up.

All-cargo carriers in demand

Freighter operators have also scaled back scheduled flights from China. With the slow reopening of factories and low output due to government transportation and sanitation restrictions there is little export cargo at the moment. Many people still can’t get to job sites or are playing it safe and staying home.

Production has slowed across China, especially in sectors such as auto parts, LCD panels and pharmaceuticals. The manufacturing of these items are concentrated in Hubei province and Wuhan, the epicenter of the outbreak. 

Foxconn, the Taiwan electronics firm that produces smartphones for Apple, doesn’t expect to open its Wuhan plant until early March and analysts have warned Apple’s shipments from China could be down as much as 10% this quarter.

All-cargo carriers are making up some of the lost revenue with dedicated charters, for which there is high demand to ferry medical and sanitary supplies to China.

Once manufacturing plants are running at full tilt again, logistics professionals and airline analysts expect severe scarcity for cargo capacity because widebody passenger planes, which are a popular mode for many shippers, will be out of action and there will be rush to replenish depleted inventories around the world. And with ocean carriers canceling voyages from China to North America and Europe and delays in getting empty containers back to China, some shippers could be stuck without critical components to run factories unless they utilize air transport. 

“In our second quarter [guidance], we’ve included about $40 million of cost for expedited freight to make sure that we’re able to have that availability to get parts into the operations,” Ryan Campbell, chief financial officer for equipment manufacturer Deere & Co., told analysts Feb. 20.

All-cargo carriers, such as Atlas Air (NASDAQ: AAWW), UPS (NYSE: UPS), FedEx (NYSE: FDX), Lufthansa, Cathay Pacific and others are likely to experience a boom in business for several months – more than making up for temporary flight cancellations now, experts say. Atlas Air officials said last week while reporting fourth quarter results that they are talking to customers about locking up capacity now ahead of the looming capacity crunch. 

For customers, however, that means much higher prices. In the past month, air freight rates have increased from about $3.65 to about $6.65 per kilogram. 

Meanwhile, a report last week by the Congressional Research Service said the coronavirus crisis could impact China’s ability to implement the partial trade deal signed in January with the U.S. 

“Transportation constraints and a slowdown in demand could affect China’s import levels. The agreement has a force majeure provision that could give China flexibility in implementing its  commitments,” the CRS analysis said. 

Force majeure clauses in contracts remove liability from parties unable to meet obligations due to natural or unforeseen catastrophes. China agreed to purchase $200 billion of U.S. goods and services over the next two years.

“The deal was finalized in December 2019, when Chinese officials reportedly knew about the outbreak, which raises questions about the rationale and timing of the decision to include the force majeure provision,” CRS said.

As part of the limited trade deal, China and the United States on Feb. 14 cut by 50% the tariffs they imposed in September 2019. China also announced a tariff exemption process for 700 tariff lines that include some agriculture, medical supplies, raw materials and industrial inputs.