Following Japan and Southeast Asia, the U.S. also contracts... Increasing crisis intensity in the aviation industry

[Asia Economy Reporter Yu Je-hoon] Due to the impact of the novel coronavirus infection (COVID-19), the airline industry is reducing supply on routes to the Americas and Europe following Japan, China, and Southeast Asia. This measure comes as major countries such as the United States continue to raise travel alerts amid shrinking demand. Since long-haul routes account for nearly 40-50% of revenue for major airlines, the overall intensity of the industry's crisis is deepening.

According to the industry on the 1st, Korean Air will reduce supply this month by changing aircraft or cutting flights on some U.S. routes. This is the first time Korean Air has cut flights on its major revenue-generating transpacific routes since the COVID-19 outbreak.

The routes subject to cuts are three routes: Incheon~San Francisco, Honolulu, and Boston. Routes where supply is reduced by aircraft changes include seven routes: Incheon~Los Angeles (LA), New York, San Francisco, Seattle, Atlanta, Chicago, and Washington.

For example, on the high-demand Incheon~LA route in the Americas, Korean Air will replace the existing superjumbo A380 (407 seats) with B747-8i (368 seats) and B777-300ER (277 seats/291 seats). This results in a reduction in supply proportional to the difference in the number of seats.

Asiana Airlines is adjusting supply on European routes. The Incheon~Venice route will be suspended from the 4th of next month, and the Incheon~Rome and Barcelona routes will operate with reduced flights.

Until now, major airlines have suffered profitability deterioration while fiercely competing with low-cost carriers (LCCs) on short-haul routes, but the situation was different for their exclusive mid- to long-haul routes. This is because LCCs' aircraft such as B737-800, A320, and A321 cannot operate in those regions.

Cho Won-tae, Chairman of Hanjin Group, also stated at a press conference held in New York last year, "Korean Air is profitable on long-haul routes but runs at a loss on short-haul routes," adding, "Thanks to the support from the Americas and Europe routes, we barely maintained a profit in the third quarter of last year."

However, as even long-haul routes are being cut, the prevailing view is that major airlines will find it difficult to avoid performance deterioration. A Korean Air official said, "Major countries are imposing entry restrictions on Korea, which is expected to directly affect 4 demand (overseas→Korea) and 6 demand (overseas→Korea→third country) in the Gumi region soon," adding, "March is the peak season when demand should be increased, so concerns are not small."

With major airlines following LCCs into difficulties, the intensity of the crisis in the airline industry appears to be gradually increasing. An industry official said, "The management environment is becoming difficult with the Hanjin Group management dispute, HDC Hyundai Development Company's acquisition of Asiana Airlines, and Jeju Air's attempt to acquire Eastar Jet, all happening alongside structural reforms," adding, "Depending on the development of the COVID-19 situation, these structural reform trends may also be affected."