The impact of COVID-19 (“Coronavirus”) on aviation is becoming more pronounced by the day, with the International Air Transport Association (“IATA”) yesterday asking that airport slot allocation rules be suspended to prevent airlines from losing their take-off and landing slots on the basis of failure to meet the required 80% usage rates, as flights continue to be cancelled globally. About 54 countries, including the US, have now introduced travel restrictions to China and the wider Asia/Pacific (“APAC”) region.
IATA estimates that APAC carriers will be the worst hit, with a 13% drop in passenger demand – with the majority of the downturn suffered by Chinese operators, where $12.8 billion stands to be lost. The impact has, however, already been felt deeply across the breadth of the aviation industry, and it is thought that it could cause the seemingly irreversible demand for aviation to fall for the first time since the global financial crisis of 2009.
If the trends follow those of the 2003 SARS outbreak, demand could be down globally by nearly 5% on IATA’s previous 2020 outlook – with figures now suggesting a 0.6% net contraction rather than the originally anticipated 4.1% climb. That might not sound big, but it would mean a drop in global airline revenue by more than $29 billion.
Of course, no one knows how long this situation will last, whether widespread travel restrictions will be enforced, and whether the travelling public will opt out of flying. It is entirely possible that – given last year we saw 23 airlines cease service – this could lead to more airline bankruptcies. Fitch Ratings has indicated that in their view “There should not be an immediate threat to lessor utilization rates and cash flows for aircraft lessors and ABS transactions, as airlines are locked into long-term leases…”. However, they also concluded that
“a pandemic will start affecting lessors if there are elevated airline bankruptcies
if air travel is suspended for a prolonged period of time, if a ban of air traffic to a specific country creates a problem for aircraft lessors to repossess and redeploy aircraft to other regions or if airlines start refusing new aircraft deliveries”.
It’s not the first time the aviation industry has had to deal with a pandemic disease, with previous examples including, SARS, bird and swine flu, and Ebola, among others. Fear (or prudent health precautions, depending on your outlook) can negatively affect passenger demand for air travel. When the SARS outbreak was at its most severe, 12.4% of narrow-body aircraft globally were stored. Fitch has noted that “[t]he strength of airlines’ financial profiles and their exposure to the APAC region are key to their ability to absorb the shock”, but that “[t]he scale of the outbreak would have to increase substantially to have a significant impact on global air passenger travel”. Four Hong Kong carriers, including Cathay Pacific, will reduce their services to and from mainland China by at least 50%, and the impact of the virus outbreak in Australia comes as they try to catch-up on cancellations following the bushfires. Cathay Pacific in particular now has 120 aircraft on the tarmac. However, whilst U.S. and EMEA airlines have sufficient liquidity to enable them to absorb a temporary drop in demand, they have also temporarily reduced their Asian offerings. British Airways has cancelled all flights to mainland China, and Air Canada and United Airlines (which have the largest exposures to APAC among the North American carriers) have suspended some flights as well. Now that the U.S. Centers for Disease Control have issued a non-essential travel risk warning to South Korea and Italy, the suspensions have increased. Delta Air Lines has now grounded all Milan flights until May, and has delayed the launch of its Venice service. American Airlines also said that due to the decline in demand, it has suspended all services to Milan from Miami and New York. United Airlines has also suspended some services to Tokyo and Osaka, in Japan, amongst others.
Airlines’ response concerning routes, rates
Interestingly, the affected airlines with moderate exposure to China and APAC are likely to be able to re-deploy capacity to alternative routes to mitigate the effect on traffic, but it is thought that this could increase competition on those routes and reduce airfares. In this context, airlines are already feeling the pinch, and leaving aside the contractual niceties, the simple fact remains that airlines make their revenue from selling seats and in turn use the cash generated to pay their lease rentals.
If fewer people are flying, it becomes harder to make lease payments – it’s all very well for a lessor to want to play “hardball” but clearly it is in no one’s interest for lessors to look to drive their airline clients to the wall at this challenging time.
To that end, airlines worried about ensuring they do not suffer softening ticket sales are taking the unusual step of waiving ticket change and cancellation fees in a bid to maintain customer confidence. American Airlines has been amongst the first to take this step, since JetBlue started the trend last week. Alaska Airlines quickly followed suit, describing it as a “peace of mind” waiver. American Airlines announcing that it would do likewise marked the first of the “big three” U.S. carriers to make this move – making it likely that Delta Air Lines and United Airlines will do likewise.Our entertainment and media partner
Jason Gordon has been busy helping American Airlines in developing its policies
advertising copy, press releases and internal messaging in communicating this waiver, which is a system-wide change (not only in countries identified by the U.S. Government) for a limited time – meaning that travellers who buy tickets can change or cancel them without paying fees that normally start at $200 per person.
In a similar vein, our aviation partner
Richard Hakes is seeing a significant number of requests for advice on aviation contracts
of various kinds, particularly in relation to “force majeure” clauses, as parties look for ways to minimise, waive or redistribute the payments they are required to make in the face of significant reductions in income. The China Council for the Promotion of International Trade is able to certify the occurrence of events of force majeure, and it has been reported that more than 1,600 of these certificates have already been issued to Chinese companies to prevent them from breaching their contractual obligations. These requests most frequently relate to deferment of lease rental payments, as well as the suspension of payments to crew and suppliers. However, it is usually wrong – at least contractually – to suggest that Coronavirus constitutes an event of force majeure under an aircraft lease.
If there is a force majeure clause in an aircraft lease – which in itself is reasonably rare – then the COVID-19 outbreak could eventually qualify as a force majeure event under an aircraft lease. You can read the Reed Smith note on Coronavirus and force majeure more generally here. The term “force majeure” has no established meaning in common law, and so absent such a provision, it is highly unlikely that a court in a common law jurisdiction such as England or New York would ever infer the inclusion of a force majeure provision in a contract where the parties had not specifically provided for one.
Aircraft leases are typically “hell or high water” agreements (which means that the lessee’s obligations must be performed no matter what happens and regardless of any difficulties it has in doing so)
making the imposition of such a force majeure regime on the parties even less likely.
In the alternative, a lessee may instead seek to invoke the common law doctrine of frustration. Frustration means that a contract may be discharged because of circumstances that either make it physically or commercially impossible to fulfil the contract, or that mean the obligations thereunder are radically different from those undertaken when the contract was entered into. In these circumstances, the parties would no longer be bound to perform their contractual obligations. However, generally speaking mere hardship, inconvenience or material loss will not frustrate a contract – an event of frustration must be so fundamental as to strike at the root of the contract, rendering further performance impossible, illegal or radically different. As things stand, this could be a difficult argument for an airline to make.
Concerns also exist as to the liability implications for airlines in the event that passengers are infected
and our aviation partner Oliver Beiersdorf added that he has received requests from major US carriers for advice on their possible liability for the spread of Coronavirus on an aircraft.
To establish liability under the Montreal Convention, which will apply to most international flights, a passenger must allege and prove that (1) an “accident” occurred; (2) the passenger suffered bodily injury; and (3) the accident took place on board the aircraft or in the course of operations of embarking or disembarking.
A passenger must overcome at least two obstacles in order to establish liability for a claim regarding contracting a communicable disease under the Montreal Convention: (1) that the communicable disease was contracted during the carriage by air; and (2) that the transmission of the communicable disease constituted an “accident” within the meaning of Article 17 of the Montreal Convention.
As to the first obstacle, it may be difficult as an evidentiary matter for a passenger to prove that they contracted a communicable disease onboard the aircraft or during embarkation or disembarkation. Contraction of a disease is not an obvious event and an airline could argue that the passenger contracted the disease at a place before or after the air carriage at issue, including at security checkpoints or otherwise.
As for the second obstacle – the definition of an “accident”, the United States Supreme Court declared that its intent in framing the definition of “accident” was to encompass the cause of an injury, rather than solely the injury or occurrence by itself. Second, the injury must not be the product of the passenger’s own “internal reaction” to the normal operations inside the airplane cabin, such as loss of hearing caused by an aircraft’s normal pressurization system. A passenger must demonstrate that “some link in the chain [of causes relating to an injury] was an unusual or unexpected event external to the passenger.”
It may be difficult to claim that the simple transmission of a communicable disease from one passenger to another is sufficiently “unusual” or “unexpected” as to constitute an “accident”. Although there is limited case law on this issue, by analogy, the transmission of a cold or the flu should not be considered “unusual” or “unexpected”.
We know that a number of airlines are disinfecting aircraft and their lounges with greater regularity, and the World Health Organization has said that
“there is very little risk of any communicable disease being transmitted on board an aircraft”
and that cleaning surfaces with disinfectant should be sufficient to kill the Coronavirus. It will, of course, be important for airlines to be guided by industry standards and internal operating procedures in determining their response to the virus. Although departure from internal policies or an industry standard of care does not, by itself, demonstrate an “accident”, some departures from an “industry standard” and from internal operating procedures may inform an analysis of whether an event qualifies as an “accident.”
There is evidently much for airlines and the wider aviation industry to consider, and although air travel will recover in the long-term, this year will be extremely challenging – particularly for an industry that has not historically carried large cash reserves. As with any adversity, there are always some opportunists. One client proudly told us recently that he had finally been able to get a table at much sought-after restaurant in Milan, as other diners have stayed away! Similarly, opportunistic aircraft lessors may of course see this as an advantage, looking to win new business by offering Coronavirus concessions and accommodations to struggling airlines, including payment holidays – and they should be recognised for doing so, because of course the reverberations of falling seat sales is felt not just in the airlines but in the lessors and ultimately the financiers as well.
The decision to suspend change and cancellation fees is both the right thing to do for consumers, and also a prudent move in a challenging period for airlines.
On the upside, fuel prices are falling, interest rates are still low and doubtless there will be international and national government intervention and support for this key sector of the globally economy. But, in an environment when there are now airfares to be had in China for less than $12, the simple fact remains that if people don’t want to fly and an airline isn’t generating any money from its aircraft, then
it will remain to be seen whether the smaller carriers in particular can come through this current crisis unscathed.