COVID-19 & the Aviation Industry

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The outbreak of COVID-19 at the end of 2019 has undoubtedly impacted global trade and has created concerns for the year ahead. The aviation sector has largely been affected as a result, since it is also the main method of transport via which the virus has spread.

The European Union Aviation Safety Agency (EASA) has added recommendations for aircraft operators and aerodrome staff for affected countries (People's Republic of China and countries where human-to-human transmission of the virus has been confirmed). 

One of the major issues and threats posed by the COVID-19 on the aviation sector, is that the traveling public may stay off air travel for a prolonged time. This has increasingly been the case in recent weeks.

Though we are still in the early stages, there are concerns that a prolonged disruption - following the decline of the sector on several levels - could cause severe economic distress and - eventually - bankruptcy for operators and businesses in the sector, especially the ones that were already financially stressed. Commercial aviation and air travel form parts of the connective tissue of the global economy's web.
It seems that the effects of the disruption in the short to medium term are going to be significant.

In recent weeks, the spread of COVID-19 on a global scale has not only affected players in the industry in the areas flying in or out of the Asia-Pacific region, but also in the rest of the world in places like Italy, Iran etc.

Several airlines have suffered a considerable loss of their value and according to the Independent:

The organisation (International Air Transport Association) said one large airline has seen no new flight bookings to Italy, only cancellations – resulting in an astonishing 108 per cent drop in business to and from that country of wonders.
Late on Tuesday, Turkey announced it was banning flights from Italy – which has grounded around 20 flights a day to Istanbul. And refusing entry to any traveller who has been to Italy, the European nation worst affected by the coronavirus, in the past two weeks. That is exactly the sort of government action that erodes confidence still further in the airline business.
“Many carriers [are] reporting 50 per cent ‘no-shows’ across several markets,” says the International Air Transport Association (IATA).

Aircraft Lessors and Lessees:

In the light of the above future aircraft charter and  lease agreements will have to deal with the new circumstances and challenges presented by the outbreak of COVID-19 and adapt to the new reality.  It is apparent that the lessees facing cancellations and/or restrictions on flying in or out of affected regions may face serious problems with payments to the lessors who may, in turn, demand payment of the full rent.

Future agreements shall have to deal with the the issue of who shall undertake the financial risk and corresponding burdens of non-operation of aircrafts during the lease term.

Lessees facing problems on existing agreements may claim a force majeure event as discussed here.

Revisiting Agreements:

Alternatively, the aviation industry and companies within the sector anticipating difficulties (at the aftermath of COVID-19's worldwide spread), should consider engaging in negotiations with creditors ensuring that - at least - even distressed businesses do not cease trading altogether.

New Regulations:

Furthermore, the situation calls upon legislatures to make swift decisions and regulate so that losses are kept to a minimum and affected businesses and sectors or businesses anticipating difficulties are assisted in the short to medium term.

For advice on how such events may affect your relationships, or on how to safeguard against such risks when entering into new agreements, please get in touch with Valmas Associates.