Warren Buffett’s famous critique of airlines — that they make poor investments and are little more than “bottomless pits” in which to throw money — has never seemed more apposite. Carriers are facing one of their greatest challenges as the rapidly spreading coronavirus has caused a slump in passenger demand. The International Air Transport Association estimates airlines could lose a stunning $113bn in revenue this year alone if the virus continues to spread. That is about four times the previous estimate published last month.
Big US carriers have announced sharp cuts to capacity. Across Europe there are fears that passenger numbers could plunge by as much as 24 per cent this year. Lufthansa on Friday said it would slash capacity by half in coming weeks. Investors have voted with their feet, sending airline shares down nearly 25 per cent since the outbreak began — some 21 percentage points greater than the decline at a similar point during the 2003 Sars crisis.
Despite the turbulence, government bailouts are not the right answer to economic contraction or to help underwrite failing business models. In the UK, the government was right last week not to intervene to save regional airline Flybe. The carrier was already on a perilous financial footing. Nor is the industry alone in suffering the damaging consequences of the crisis. Italy’s decision to lock down the region of Lombardy will have significant repercussions, not just for travel industries but for the wider economy.