Is Zika Virus Putting Airlines at Risk?
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The Zika virus has certainly made headlines in recent weeks. The mosquito-borne disease is not as severe as dengue fever or malaria for most people, however it can cause birth defects when contracted by a pregnant woman. The wall-to-wall media coverage and the fact that the virus is spreading faster than it can be controlled have created worries for travel industries in the Caribbean and Latin America.
Most airlines are not affected
Airlines who fly regularly to these regions have insisted that the spread of the disease has not affected flight bookings. One of the first statements that soon-to-be Delta CEO Ed Bastian made after being tagged of take the top spot with the airline had to do with the virus. He said that it was difficult to tell if Zika was affecting business: "it would be hard to see much change… We have not seen it in terms of passenger refund or change requests.”
Delta, like other carriers, has offered free cancelations or ticket changes for people traveling to affected areas. The airline has also offered to transfer employees who work in the affected areas if they are pregnant or could become pregnant. All this has, apparently, not led to anything more than an unnoticeable change in the number of passengers.
Reason for worry?
Other airlines, however, have more reason for concern. Moody’s has issued a report saying that two South American carriers are at a greater risk than other airlines when it comes to long-term effects of a Zika-related travel slump. According to the respected ratings firm, Brazilian low cost carrier Gol and LATAM’s Brazilian wing, TAM, are the most susceptible to falling passenger numbers due to the spread of the virus.
The danger for the airline sector as a whole is not as bad as the media coverage of the virus would suggest. According to Moody’s, the potential impact, as far as credit is concerned, is quite limited. This is because Zika is only dangerous to a small segment of the traveling public (pregnant women). Other than that, the symptoms of the disease are very mild. Furthermore, there is no airborne transmission, so, unlike recent flu scares, there is no danger of passengers contracting the disease from other passengers while in flight.
What could the damage be to the two at risk airlines?
For LATAM and Gol, the timing of the Zika scare could not have been worse. LATAM was recently formed by the merger of Chile’s LAN and Brazil’s TAM. This new carrier is trying aggressively to expand internationally by making alliances in both Europe and North America. Part of this strategy involves getting extra traffic for domestic and regional flights from British Airways and American Airlines flights. This strategy is already in jeopardy as fewer people travel to Brazil because of its recent economic struggles. If Zika further lowers the number of fliers, even by a little bit, the strategy could backfire altogether.
Gol, meanwhile, has just shown signs of life after several years of struggle. The airline saw modest gains in its revenue per passenger numbers at the end of 2015. More importantly, Brazil’s government may lift a cap on the amount of foreign ownership of domestic airlines. Rumors are already swirling that Delta could take a majority stake in Gol. These whispers were strong enough to cause a significant spike in the price of Gol’s stock.
An extended Zika scare could cancel out 2015’s gains and put Gol on its heels when it should be getting in position to gain passengers from the 2016 Olympics in Rio.
It it hard to separate the facts from the media hype when it comes to Zika. The warning from Moody's, however, is significant enough that the industry and investors will be keeping an eye of Gol and LATAM to see how they perform going forward.
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