COVID’s effect on the airlines

Happy New Year to all my readers. As 2022 dawns we look back on what has been possibly the worst two years the world’s airline industry has suffered in its relatively short existence.

As readers are aware, the airline industry only began in the 1920s, as in the aftermath of the First World war saw several capable aircraft types and many trained pilots come out of military service. Private entrepreneurs had already started small companies by 1919, when the Dutch government, the Netherlands remained neutral in the war and was relatively unscathed by the carnage, set up KLM to connect the nations far-flung colonies to Amsterdam. The other European colonial powers such as France, Belgium and Britain also began government owned air services to their colonies soon after. For a more detailed look at the birth of the airlines please go my Medium column here.

Meanwhile in America, now the greatest economic power in the world as Britain was laden with war-debt, airlines were purely commercial entities. Government subsidies were an anathema to the entrepreneurial spirit of the land and private enterprise took the lead. Initially the US Postal service provided financial support by establishing airmail contracts, but entrepreneurs such as Juan Trippe, Charles Lindbergh and Howard Hughes set out to lay the foundations for what would soon become the world’s biggest airline industry. For a more detailed account on the emergence of the US airline scene please read here on Medium.

Post- World War 2

The real surge of national airlines being setup occurred after the second World War concluded. With thousands of military surplus Douglas DC-3s becoming available for civil use, practically every country seemed to be establishing a national airline. Many of these were government owned and existed as state-subsidized ventures managed by bureaucrats, not as commercial businesses.

This state of affairs was to exist for many years, through the oil crisis of the 1970s, many recessions and the unprecedented boom in air travel that began sometime in the late 1980s. Most state-owned airlines continued to lose money, but were propped up by their respective government, who saw them as necessary to maintain connectivity.

Like many provocative questions, this one should be more specific. A more perceptive query would be: “Does a country need a state-owned national airline?”

The trend finally began to die sometime in the 1980s, when British Airways (once Imperial Airways, later BOAC) was successfully privatized under Margaret Thatcher’s free-market regime.

The USA, the world’s biggest aviation market, in keeping with its economic philosophy has never had a state-owned airline. Pan American Airways, founded by the legendary Juan Trippe, and Trans World Airlines (TWA), owned by Howard Hughes, were the primary international airlines based in the USA, but neither was ever state-owned. The USA’s mega airlines, American, United and Delta, are primarily domestic carriers. Between them they absorbed both Pan Am and TWA several years ago and continue to be privately-owned. Other well-known airlines such as Qantas (of Australia), Japan Airlines, Air Canada, and Lufthansa (Germany) were also privatized many years ago.

Ironically, many of the airlines that were not privatized have continued to bleed money for years, proving to be a burden to their country’s taxpayers. Alitalia (Italy) is a case in point, as are South African Airways, Thai, Garuda Indonesia, Malaysia Airlines, etc. Only a small handful of carriers have been majority state-owned while remaining profitable. These are usually in countries with a tradition of good management and are free of political interference. Singapore is the perfect example of this exception. Flag-carrier Singapore Airlines has long been one of the world’s most admired (and profitable) carriers, but its one-time partner Malaysia Airlines, formerly known as Malaysian Airways (from 1965 to 1972 the two were one entity, named Malaysia-Singapore Airlines), has been a basket case for many years.

Along came COVID

COVID-19 has been the biggest shock to the aviation industry since its inception. A host of airlines have filed for bankruptcy, unable to deal with the precipitous fall in traffic that occurred in March 2020 and shows little sign of ending. The list of airlines entering bankruptcy proceedings or else ceasing operations altogether is a frighteningly long one. Wikipedia has an entire page on the topic (access is here). All the airlines on the cover picture such as Alitalia, Avianca, Air Mauritius, Dragonair, FlyBe, LATAM, Virgin (Australia and Atlantic), South African and Thai International are in the process of emerging from bankruptcy. Many more will probably never take to the skies again, including perennial money losing national flag carriers to whom COVID has dealt the final, fatal blow.

Are there countries without a flag-carrier?

The answer is yes. One is Greece (population 10 million; GDP $339 billion) – largely an island nation heavily dependent on tourism. The former Greek national carrier Olympic Airlines (originally Olympic Airways), once owned by shipping magnate Aristotle Onassis, was a successful company. Onassis sold the airline to the state after the death of his son Alexander in the crash of an amphibious airplane in 1973. Olympic then went into a spiral of mismanagement and debt which persisted for decades despite significant capital injections. Finally, in the aftermath of the 2008 global financial crisis, the airline ceased operations in September 2009.

Possibly the largest country without a national airline is Brazil. This vast nation, the fifth largest country in the world and home to more than 210 million people, not only has a GDP in excess of a trillion USD but also a burgeoning aviation industry. Brazil’s first airline, Varig, founded in 1927, was for many years was the country’s only international flag-carrier. After many decades of losses and attempts at reorganization, Varig finally ceased operating in 2009.

Nigeria, home to more than 211 million people and with a GDP of $1 trillion, is Africa’s largest economy by far. Its flag-carrier Nigeria Airways was founded in 1958, and ran successfully for some time, with a significant network and a large fleet. Corruption and mismanagement soon took over though, and losses mounted. After a spate of accidents, and saddled with a crushing debt burden, the airline was shut down in 2003

Cyprus Airways is another small island nation (population 1.2 million, GDP $38 billion) that no longer has a flag-carrier. State-owned Cyprus Airways, once a successful airline, closed in 2015. Despite this, air connectivity to the island increased in 2016 as other companies added services, and tourist arrivals were not affected.

Markets tend to fill a void

Which brings us to the topic of SriLankan Airlines, another airline that is mired in debt and defies efforts to restructure. Sri Lanka (Population 22 million; GDP $306 billion) enjoys a geographically strategic location. As far as aviation goes though, this has proved to be more of a hindrance than an asset. India is home to some of the region’s most successful Low Cost Carriers (LCCs) with IndiGo (274 aircraft in service, 500+ on order) dominating the market, and SpiceJet (102 aircraft with 200+ orders) vying for market share. Air India, which will be privatized at the end of the year after decades of losses under state ownership has a fleet exceeding 140 aircraft and will probably announce a huge order for more, once the transition to Tata’s ownership is completed in early 2022. Go First (founded as Go Air in 2005) is a smaller LCC owned by the Wadia Group, with big ambitions. Currently Go has a fleet of 51 aircraft and orders for another 93. Air Asia India and Vistara (both part of the Tata Group) are joined by a start-up Akasa Air, making the sub-continent’s skies rather crowded.

Outside the immediate region, to the west are the Gulf carriers, with Emirates and Qatar Airways alone capable of dominating the market. Etihad Airways, Gulf Air, Oman Air, Kuwait Airways and Saudia, all with deep-pocketed states behind them, will provide sufficient spill-over capacity. To the east are Singapore Airlines, Cathay Pacific and mainland China’s ‘Big Three’, all with enormous fleets, excellent service and globe-spanning networks.

There is no shortage of capacity in the region, and with so many rival airlines vying for market share, even the danger of a sudden price escalation on travel to Sri Lanka is unlikely.

Since 1947 the government of Sri Lanka has proved its inability to run an airline on a profitable and efficient basis. Once, there may have been a case for a state-subsidized carrier to ensure connectivity. But this is no longer a valid argument for squandering taxpayer funds at this perilous juncture in the nation’s history. Perhaps now is the time to allow the ‘invisible hand of the marketplace’ free rein in Lanka’s skies?

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