COVID-19: Should the Aviation Industry brace up for the new normal?

Source: AirTeamImages

Introduction

In December 2019, The International Air Transport Association (IATA) released the 2020 outlook for the aviation industry. IATA projected that the global aviation industry will generate a net profit of $29.3 billion relying on strong economic growth to fuel passenger traffic. Passenger numbers were expected to reach 4.72 billion up 4% from 4.54 billion passengers in 2019. Global spend by individuals and businesses on air transport was expected to reach $908 billion. This will ensure the global aviation industry generates profit for the 11^th consecutive year.

The 2020 outlook did not envisage the Covid-19 global pandemic that will literally ground a large part of the world economy and the aviation industry. Travel data provider – Official Aviation Guide (OAG) estimates that the number of scheduled flights globally is now down approximately 70% year on year as at 4^th May 2020.

In April 2020, IATA issued a post-covid-19 outlook for the aviation industry where it estimates revenue to drop by $314 billion down 55% year on year. Demand by passengers is expected to see a 48% decline year on year mainly due to the economic slowdown and travel restrictions caused by Covid-19.

The Impact of COVID-19 Crisis

The crisis started in Wuhan, China in December 2019 but didn’t impact the airline industry until late January 2020. The industry witnessed a drastic fall in the number of bookings and scheduled flights. The year on year 2.4% increase in air travel demand in January 2020 is the lowest increase since April 2010.

 Airlines still had to fly empty planes to mainly European airports to comply with flight slot regulations by the EU. The EU maintains a “use it or lose it” policy towards airport landing slots which means airlines have to use at least 80% of their landing slots or risk losing out the slot to other airlines. The EU announced on March 10 2020 that it would suspend the policy to prevent airlines from wasting resources flying empty planes just to comply with their landing slots obligations.

The ban of flights from Europe to the United States by President Trump effective March 14^th 2020 was the final nail in the coffin of the aviation industry. The Europe to America route is one of the most lucrative routes in the aviation industry. The London (LHR) – New York (JFK) route is the most lucrative in the industry accounting for around $1.5bn in revenue for British Airways based on OAG estimates.

The fear of a second wave of the virus or another pandemic in the nearest future that can cripple the industry like COVID-19 is one of the threats that will be factored into decisions and investments about the aviation industry in future years.

The chart below shows the impact of the crisis on airline revenue by region:

From the chart, Asia Pacific region will face the highest impact posing a threat to airline giants like Cathay Pacific. The airline has already announced plans to close its cabin bases in the US and lay off about 300 workers.

The European and North America region will also face a combined decline in revenue of $153billion affecting major airlines like United Airlines. The airline has started a process that could lead to the sack of at least a third of its 12,250 pilots by October 1 except summer air travel demand is higher than expected.

The crippling of economic activities due to the lockdown which has reduced flights drastically has led to airlines like Virgin Atlantic and Virgin Australia to seek government bailout to protect the airlines. JetSuite airline has filed for Chapter 11 bankruptcy protection in the United States. German regional airline LGW has also filed for bankruptcy. According to Reuters, South African Airways could start shedding its 5,000 staff by May 12 if workers do not accept a proposed severance deal leading to an increasing number of airlines struggling to cope with a crisis the industry has never seen before.

Post COVID-19: The New Normal

After the crisis is over, the airline industry and life generally will never be the same. The fear of a second wave means the world could witness another round of lockdown leading to an unprecedented crisis the industry is not prepared for. Also, the fear of another pandemic in the nearest future means the airline industry is not immune from another crisis that could again cripple the industry in similar or worse magnitude years down the line.

The crisis has led to significant changes in the life of individuals and businesses. Individuals are catching up virtually. Most businesses had to trigger their business continuity plans at the start of the crisis which led to most people working from home, relying on applications like Zoom and Microsoft Teams to continue to operate efficiently. The pandemic has made businesses realise they can operate digitally from home and achieve the same or better results than the traditional means of working before the pandemic. Meetings that made executives travel across continents can be done virtually within the comfort of their homes achieving the same result, saving time and reducing air travel expenses by the business.

Before the pandemic, the typical peak season for airlines used to be between Easter and Mid-September mainly due to the increased travel to and fro summer vacations. Due to the pandemic, most individuals have cancelled or postponed their summer and future travel plans. In a survey conducted by Harris Poll, 51% of Americans have cancelled or postponed their upcoming travel plans because of coronavirus. 70% of respondents stated they will not get on a plane right now.

The new normal after the crisis is over will most likely lead to reduced demand for air travel with individuals and businesses relying on digital means of communication and only travelling by air when it is necessary. The global economic slowdown also means that individuals who have lost their jobs during the lockdown period will most likely not travel until their financial situation stabilizes. In an IATA-commissioned survey, 69% of respondents indicated they could delay a return to air travel until their situation stabilizes.

This expected slowdown in the airline industry could put over 25 million jobs at risk. The IATA estimates that airlines could burn $61 billion in cash reserves in Q2 2020. The association expects a U-shaped recovery and not V-shaped recovery with domestic travel recovering faster than international travel.

Airlines Preparation for the New Normal

In order to survive, airlines must prepare for the new normal and develop measures to withstand the crisis and come out stronger as an industry.

Airlines should change focus from passenger flights to cargo flights due to the decline in scheduled passenger flights. Cargo rates have gone up 10% in recent weeks based on Bloomberg’s estimates.

Cargo operations based on the reopening of factories in China and the demand for medical supplies and kits will help airlines make up for some of the losses being incurred due to the decline in the passenger segment. The world’s biggest plane manufacturer - Airbus has proposed to help airlines with cargo conversion for A330 and A350 planes. China Eastern airline and Air China recently removed seats from their A330 and 777 planes respectively to make room for cargo. Lufthansa has also announced plans to remove seats from four widebody aircrafts to make room for cargo. Cathay Pacific is also evaluating removing seats from its 777 planes to carry cargo in the passenger cabin although the plan is yet to be finalised according to a company spokesperson.

Distressed airlines who do not have enough resources and reserves to see the crisis through should seek fresh financing like bailout from government or private equity infusion. Airlines executives in the United States met with President Trump to discuss the impact of the crisis on the industry. United Airlines confirmed they received a bailout proposal from the Treasury Department. Airplane manufacture – Boeing is also in discussion with the Trump administration about the crisis.

Synergy effects of mergers and acquisitions in the airline industry could help some airlines weather the storm the crisis has caused. A HSBC report on the Chinese airline industry expects the top three airlines in China (Air China, China Southern Airlines & China Eastern Airlines) to lead efforts to acquire other smaller players like financially troubled Hainan Airlines. The top 3 Chinese airlines have a great M&A track record. They acquired different airlines in line with the Chinese govt consolidation plan in the early 2000s after the 9/11 attack.

As the whole world looks forward to the end of the crisis, airlines must position themselves to navigate the Post COVID-19 era and come out stronger. They must restructure, utilize limited resources effectively and understand that the new normal will be different from the pre-crisis era.

Only the airlines that position themselves now to take advantage of the new normal will still be flying in the sky long after the pandemic is over.