Coronavirus Aviation sector update - March 2020

Since its discovery in December 2019, the novel coronavirus that causes the disease COVID-19 has disrupted global business activity and public life on a massive and growing scale. And no one knows how long these disruptions will last, or how many people will ultimately contract COVID-19.

The effects of these developments on the aviation sector have been particularly acute. According to an analysis released by the International Air Transport Association (IATA) on 5 March 2020, airlines around the world could see their revenues fall between $63 billion and $113 billion in 2020, depending on the extent of the coronavirus outbreak. These numbers were a sharp adjustment of the organization's 20 February figures, which projected a $29.3 billion fall in airline revenue. If the outbreak worsens and demand for travel is impacted on an even wider scale, revenues could fall significantly farther.

Airlines, lessors, airports, manufacturers, and suppliers are confronting myriad issues as a result of this crisis. All must consider workforce issues and policies, fleet and personnel safety risks and strategies, supply chain management problems, capacity, fleet and route management, and in most instances, liquidity problems, among many other issues. Some businesses may have difficulty weathering forecast losses of this magnitude, particularly in the wake of the still unresolved grounding of the Boeing 737 MAX, which is now certain to extend past one year, and this could create insolvencies and related disruptions to business activity. To mitigate some of these effects, IATA is publicly calling for stimulus measures, including tax relief, reduction in airport and other charges, and changes to slot allocation rules.

Businesses in the sector should consider the following issues:

  • Workplace and fleet safety. Modifying aircraft, airport, and office cleaning protocols is critical both to reducing the spread of coronavirus and helping restore passenger confidence in air travel. It may also be important to reduce potential liabilities for airports, airlines, and other businesses. Legal advice may be needed to understand and mitigate the liability risks industry members may face as a result of the coronavirus outbreak.
  • Employment issues. The reductions in demand and disruption in daily life are affecting employees’ ability to come to work in many regions, and are also affecting employers’ staffing needs. Businesses should carefully consider their policies on remote working, paid and unpaid leave, and benefits, and should seek legal advice on applicable laws and regulations as they formulate adjustments to their employment policies and procedures.
  • Slot management. Many airlines are reducing flights as a result of the coronavirus outbreak and reductions in passenger demand. At the more than 200 slot-coordinated airports from which more than 40 percent of passengers depart, this carries special risks. Current slot allocation rules provide that airlines must operate at least 80 percent of their allocated slots or risk losing slots in the following season. IATA is actively lobbying regulators and other parties to relax these rules. The U.S. Federal Aviation Administration (FAA) announced on 11 March a limited waiver of the minimum usage requirement that applies to Operating Authorizations or “slots” at John F. Kennedy International Airport (JFK), New York LaGuardia Airport (LGA), and Ronald Reagan Washington National Airport (DCA), in light of the current impacts on air travel demand related to the outbreak of the coronavirus. In granting this relief, the FAA noted that it expected that U.S. carriers will be accommodated with reciprocal relief by foreign coordinators, and that, to the extent that U.S. carriers fly to a foreign carrier’s home jurisdiction and that home jurisdiction does not offer reciprocal relief to U.S. carriers, the FAA may determine not to grant a waiver to that foreign carrier. The European Commission has confirmed that similar arrangements will be put into place in the European Union, albeit the scope of the changes is not yet confirmed.

    Even absent changes to the slot rules, reducing routes will affect networks of other parties, from food and other vendors to crews based in cancelled regions to passengers that purchased tickets for affected flights. A careful assessment of applicable contracts and related rights and remedies may be needed to identify and address risks associated with large-scale flight and route cancellations.
  • Ticket cancellation policies. Airlines around the world have come under pressure from passengers and governments to modify their cancellation and rebooking policies and waive fees.
  • Aircraft financing and leasing. Airlines have been looking to their stakeholders to shelter some of their fixed costs relating to aircraft leases. Whilst a core principle of the industry is "hell or high water" leasing, the open communication and partnership between airlines and their lessors may prove more important at this time than any other.

Companies and businesses should understand that there is no one approach that is best, and addressing issues related to the Coronavirus will require considering circumstances specific to the industry, the location(s) where the company operates, the nature of its workforce, any contractual obligations, and the company’s own risk/benefit analysis, among other considerations.

The issues raised in this alert are not exhaustive. This is a novel and constantly evolving event that requires vigilance and flexibility. The Hogan Lovells global aviation team is available to advise on all aspects of the coronavirus response, from crafting company or office-wide policies, to assessing and managing the risks of planned changes to business practices, to handling concerns involving individual employees and to addressing solvency issues. Please contact one of the authors of this alert or other Hogan Lovells attorneys with whom you regularly work for additional information related to the coronavirus.

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