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ANALYSIS: Hurricane Irma Could Cost the US Airline Industry $2.5 Billion

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ANALYSIS: Hurricane Irma Could Cost the US Airline Industry $2.5 Billion

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ANALYSIS: Hurricane Irma Could Cost the US Airline Industry $2.5 Billion
September 08
09:03 2017

MIAMI — As the most powerful hurricane ever recorded in the Atlantic bears down on Miami (and Airways world headquarters), the impact that this superstorm will have on aviation is perhaps the last thing on the mind of the more than 20 million Americans that call the state of Florida home.

Hurricane Irma is currently battering the Caribbean, causing billions of dollars of damage, destroying buildings, and claiming lives on islands like Av-Geek paradise St. Maarten, Barbuda, and Puerto Rico. But the massive danger will come over the course of this weekend when Irma is projected to batter the South Florida metropolis spanning Miami, Fort Lauderdale, and West Palm Beach, as well as other coastal towns like Fort Myers as a Category 4 hurricane.

The damage will not be limited to just the Miami area, however, as the storm is projected to remain a Category 3 hurricane until it gets north of Orlando and Tampa. Wind speed will be heavier over Orlando, but Tampa is a coastal city which carries with it the danger of storm surge and flooding. All throughout the state, mandatory evacuations are taking place, and several million people are leaving or have left the Miami area alone.

However, the silver lining, in so far as there is one, is that Florida is somewhat better prepared to deal with the effects of hurricanes because its buildings are constructed in a more hurricane-aware manner than those in Houston. Between that, the fact that Harvey will dump less rain on Miami than Houston (allowing for a quicker pace of recovery), and the unique role that Houston plays as a logistics and oil hub for the United States, the overall dollar impact of Hurricane Irma in the United States will likely be smaller than that of Hurricane Harvey.

Aviation will be more affected

However, the impact on aviation will be much more severe. The first order problem is the flights that are canceled and the planes that are stranded, which alone will cost the US airline industry at least a couple hundred million dollars. The operational impact from Irma will likely be a touch smaller than that of Harvey because Miami (the main hub affected by Irma), Orlando, Fort Lauderdale, and Tampa are less important interchange points for intricate legacy airline operations (they tend to have more of a based aircraft model than a hub interchange one). But in the end, Irma will affect airports serving more than 150 million annual passengers while Harvey affected airports serving close to 60 million passengers. So more flights will be canceled.

But the bigger problem comes from the second order effects of the high winds and storm surges that are set to pummel Florida’s coasts, and that have already impacted the Caribbean. At these levels of wind speed and resultant damage, all kinds of infrastructure on the ground that supports inbound travel demand to Florida and Caribbean islands could be choked off. Airports can be brought back to operational status relatively quickly, but buildings like hotels, vacation homes, beachfront motels, and boardwalks can take months to rebuild. Not to mention any destruction of tourist attractions like theme parks, shopping malls, and beaches.

And that’s in wealthy Florida. The impact in the Caribbean, where each individual island is more self-contained and has fewer nearby alternatives for travel, may take years to offset. Hurricanes in the 1990s caused years of slowdowns in Caribbean tourist travel due to the slow pace of rebuilding hotel rooms and other supporting infrastructure. Florida’s metro areas should see a faster recovery but in some coastal towns like Daytona Beach, Fort Myers, and Sarasota it could still take months to rebuild.

The destruction on the ground in tourist cities has the second order effects of decreasing inbound air travel demand, whether because the city is a less appealing place to visit, or because the shortage of hotel rooms makes it harder to stay in the city by raising prices. Meanwhile, in a city like Houston, where so much of the air travel in the city is business oriented or outbound, the air service will be more resilient.

Impact on US airlines could cross $2.5 billion 

*Note this is speculative math

With that in mind, let’s take a look at some back of the envelope math for maybe a 25th percentile scenario (where the 1st percentile is the worst possible scenario). Start with the fact that close to 10 million Americans travel to the Caribbean by air each year. While some of those passengers mainly travel to islands that were spared from Harvey, big tourist areas like the Dominican Republic, US Virgin Islands, Cuba, and the Bahamas have been slammed. It’s not inconceivable that in a worst case scenario the loss of hotel rooms and required rebuilding could drive a 20% annualized decline over the next 12 months. That’s 2 million passengers at ~$500 per roundtrip flight to and from the US, or $1 billion.

The direct impact on all of the airlines in terms of cancellations could easily cross $500 million by itself. And let’s say that Florida loses 4% of inbound passengers that would have flown to the state otherwise. That’s closing in on 3.5 million passengers and at an average price point for round trip tickets of $300, that amounts to another ~$1 billion. Add it all up (and mind you these aren’t even worst case scenarios), and you get to the north of $2.5 billion in total economic damage to US airlines. And that figure is based on relatively conservative assumptions. Annual passenger traffic to New Orleans dropped a third in the wake of Katrina – this is based on a 4% drop.

Airline Responses and Updates Regarding Harvey

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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