Home Smart Analysis The Covid-19 Threat: Which Industry Will Be Impacted? 

The Covid-19 Threat: Which Industry Will Be Impacted? 

The number of Covid-19 cases reported around the world has skyrocketed over the past two weeks — and it is showing no signs of abating. 

Countries around the world, including Singapore, have restricted travel in and out of the Middle Kingdom. 

The impact could be significant for certain industries.

According to the Singapore Tourism Board (STB), Chinese tourists accounted for 20% of Singapore’s total international visitor arrivals or 3.6 million arrivals to the Lion City in 2019. 

Shutting off the inflow of China tourists is bound to hit the tourism industry, including hotels, airlines, cruises, and travel agents. And likely more. 

The SARS Epidemic and Singapore Airlines

The spread of the virus may remind veteran investors of the Severe Acute Respiratory Syndrome (SARS) outbreak in late 2002. But times were different back then.

Back then, the airline industry was reeling from the horrific 9-11 attack on the World Trade Centre in New York. 

In the months that followed, industry recovery was fragile, and suffered further setbacks from the October 2002 Bali bombings. Then, a US-Iran war broke out in March 2003 just as the SARS outbreak took hold.       

According to Singapore Airlines Ltd’s (SGX: C6L) 2003 annual report, the airline’s load factor (a measure of seat percentage filled) which stood at 72 percent in February 2003, fell below 66% the next month, followed by a plunge to 49.2% in April.  

The rapid decline shows how fast the situation can change within the airline industry. 

For context, at the end of December 2019, SIA’s passenger load factor stood at 87.5% with East Asia’s (which includes China) at 89%. 

Turbulence ahead

Since the end of January, Singapore has barred travellers who have been in Mainland China in the past 14 days. 

The move is necessary but will leave an impact on the airline industry. 

According to the Singapore Tourism Board (STB), Chinese tourists accounted for 20% of Singapore’s total international visitor arrivals or 3.6 million arrivals to the Lion City in 2019. 

As a result, the STB expects visitor arrivals to fall by 25% to 30% in 2020. 

The situation continues to evolve. As I write, Kuwait, Qatar, Israel, and South Korea have issued travel advisories against Singapore, asking travelers to defer all non-essential travel. 

History rhymes

In 2003, then-Chairman of SIA Koh Boon Hwee said that not every airline will survive due to the immense impact of SARS. 

Indeed, in August 2002, US Airways filed for Chapter 11, followed by United Airlines in December 2002. At the same time, Singapore Airlines suffered its first-ever loss in the first quarter of the financial year ended 31 March 2004 (FY 03/04). 

We are seeing similar financial stress in the industry today. 

A few days ago, Cathay Pacific asked its entire workforce of 27,000 to take unpaid leave for a period of three weeks. 

Analysts have noted that Hong Kong-based carrier has moved to cut over 50% of its flights in February and March.  

Get Smart: Not exactly the same

As it turns out, Singapore Airlines experienced a quick recovery in the second quarter of FY 03/04. Pent-up demand for flight led to an immediate and robust recovery.

To sum it up in Koh’s own words, the crisis passed more quickly than the airline carrier dared to hope. 

Although SARS acts as a guide of what could happen, we shouldn’t expect the impact to be similar. Just yesterday, STB Chief Executive Keith Tan warned that the situation today would probably be worse compared to the SARS episode. 

As investors, we will have to keep observing the developments and have our eyes wide open for possible impacts that the Wuhan virus can bring. 

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Disclosure: Chin Hui Leong does not own any of the shares mentioned.