PARIS--The coronavirus will accelerate a Darwinian shakeout in Europe's overcrowded airline industry that ultimately benefits Ryanair and British Airways owner IAG, industry experts predict.
Nobody is exempt from the short-term pain that has already seen Flybe collapse and Norwegian Air stock lose about 70% of its value in a month, with no end to the crisis in sight. But the extreme stress-test already promises to increase the power of a handful of key players, when the epidemic eventually recedes and passengers return en masse.
"It's inevitable in the next couple of weeks we'll see more failures," Ryanair Chief Executive Michael O'Leary said in a recent interview, citing Flybe and Norwegian as vulnerable.
Within days, the British regional carrier had ceased operations, blaming the virus outbreak for a sudden cash drain, and Norwegian scrapped 2020 guidance. Norwegian did not respond to O'Leary's comments. However, the company - which raised cash from shareholders in November for the third time in less than two years - has been cutting costs and unprofitable routes, as well as selling assets, to bolster its finances.
Whereas four airlines now control 80% of the U.S. market, Europe remains fragmented, with governments, unions and bilateral agreements impeding tie-ups. Consolidation happens when airlines grab routes and traffic from bankrupt rivals.
Flybe's demise reduces price competition on routes it shared with Ryanair and easyJet, just as a Norwegian exit would support competitors' fares and traffic. "This virus will expedite the thesis of consolidation, possibly to extreme levels," Citi analyst Mark Manduca said, adding that 35% of Europe's short-haul market was loss-making in 2019.
For investors who still want airlines, Manduca added, "we recommend sticking with the well-capitalized names who in 2021 should be able to consolidate the market: Ryanair and IAG."
The virus's spread is hitting more routes - prompting a 50% Lufthansa capacity cut and similar moves by others - while the full traffic impact is yet to show up in published data.
I nternational bookings to Europe plunged 79% as the outbreak mushroomed in Italy, leaving no doubt that the slump will be worse than the 2003 SARS epidemic. It may wipe $113 billion off airlines' revenues, according to IATA, their global association.
Airline executives still cling to the hope of a "V-shaped" rebound, mirroring SARS. Those with robust balance sheets can plan for the time when demand comes roaring back. A three-month shutdown would inflate Air France-KLM's net debt to 7.7 times earnings, Citi calculates, and swell Lufthansa's multiple to 12.4.
But Ryanair's leverage would remain at a relatively manageable 1.2, easyJet's at 1.9 and IAG's at 3.5.
