Covid 19 coronavirus: The Air NZ flight with no passengers- IATA says airlines burning cash faster than they can cut costs

Airlines will burn through $102 billion in cash this quarter as passenger revenues plummet by $422b for the year.

An industry group says one of the biggest threats to airline survival are massive liabilities for refunds and is urging widespread adoption of a voucher system for travel at a later date.

And it comes as Air New Zealand faces its annual revenue falling from $6 billion to $500 million.

Chief revenue officer Cam Wallace updated the dire demand picture on Twitter today - one domestic flight in the air, with no passengers.

Six had been booked for the Nelson-Auckland flight, none showed up.

The International Air Transport Association says that on top of unavoidable costs, airlines are faced with refunding sold but unused tickets as a result of massive cancellations resulting from government-imposed restrictions on travel.

Liability for these over the next three months alone stands at $60b across the industry.

Air New Zealand started the year with close to $1.4b revenue in advance, although part of those obligations to provide travel will have been met. The airline has been offering credits if passengers don't take refunds and, while now only offering domestic travel to essential workers, says that those who booked for travel before June 30 can arrange a 12-month credit for the ticket.

It says it can't give refund on a non-refundable ticket.

The Commerce Commission has told Travel Today the situation would differ between airlines.

"Where the cancellation is because of a Government travel ban, consumers are unlikely to be entitled to a refund under the Consumer Guarantees Act," a commission spokeswoman said.

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She said consumers should check the terms and conditions of their contract with an
airline or operator to describe the remedies available.

"The remedies provided by terms and conditions may include a full or partial refund, credit note or voucher."

She told Travel Today that those with travel insurance should check whether their policy entitles them to a refund but warned some policies also exclude coverage where the losses are due to Government intervention.

Air NZ's new schedule

Air New Zealand has parked up more than half of its fleet of 114 planes and is operating a thin schedule on domestic routes and limited international services for freight and a trickle of passengers returning to New Zealand.

The normally dense main routes between Auckland, Wellington, Christchurch and Queenstown have between four and six return direct flights over the next week, according to the airline's booking site. Some regional routes are down to one flight a day and the overall schedule is set to be further pruned over the coming days.

Revenue at the airline is forecast to plunge to $500m and it is starting the process of making up to a third of its 12,500 staff redundant.

Wallace said the airline had already made some ''very tough and painful'' decisions on staff in the Americas and Australia regions.

''I want to thank the hugely committed staff for the passion and service to our company. I am very sorry that this has happened,'' he said.

The airline's chief executive Greg Foran said it now had $960m in cash reserve but with very little revenue coming in the cash balance will fall by tens of millions of dollars each week, meaning within months it would need to draw into the Government's $900m loan facility.

Grim analysis

Forsyth Barr analysts say Covid 19 will impact the airline more than any other listed company.

Air NZ's revenue has fallen by 90 per cent and it had a monthly cash burn of around $150m as passenger traffic had fallen to ''unthinkable'' levels.

''A debt facility from the government provides near term operating certainty but a debt for equity swap will be necessary at some stage. With New Zealand looking physically isolated for passenger travel for the foreseeable future, the outlook for Air NZ appears extremely challenging,'' Forsyth Barr says.

With New Zealand's border closed to non-residents, and Air New Zealand and Qantas ceasing virtually all services, the aviation industry here was in hibernation.

Despite the prospect of government support both the airline and Auckland Airport, they are currently generating losses currently, given limited revenue and fixed costs to service.

The analysts say Air New Zealand was now largely an air freight company, given little passenger travel and with the government support package helping key air freight routes to support exporters.

While higher airfreight rates would help the airline in recovering the variable cost of flying and contribute to the group's fixed costs, the overall impact would be negligible on the company's on-going cash burn.

The airline's shares have plunged in value by more than two-thirds from the start of January and were trading at 90c today.

Demand destruction

IATA's director general and chief executive, Alexandre de Juniac, said cash burn across the industry was severe.

"Airlines cannot cut costs fast enough to stay ahead of the impact of this crisis. We are looking at a devastating net loss of US$39 billion in the second quarter. The impact of that on cash burn will be amplified by a US$35 billion liability for potential ticket refunds.''

The association expects demand destruction would be the deepest in the second quarter, with a 71 per cent drop on the same time last year.

• Covid19.govt.nz: The Government's official Covid-19 advisory website

Variable costs are expected to drop by some 70 per cent in the second quarter—largely in line with the reduction of less flying. However, although fuel prices have plunged to around US$30 a barrel, airlines are not getting the full benefit, with many hedged at higher prices than that for their limited flying.

That will limit the benefit to a 31 per cent decline.

Fixed and semi-fixed costs, including labour, amount to nearly half an airline's cost and the association expected them to be cut by a third.

"Travel and tourism is essentially shut down in an extraordinary and unprecedented situation. Airlines need working capital to sustain their businesses through the extreme volatility.''

Airlines worldwide raised more than US$17b in bank loans in March to shore up their finances amid the coronavirus outbreak.