Displaced Optimism

Displaced Optimism

The first of these columns to report on COVID-19 was published in February 2020. Sixteen months later the nightmare isn’t showing any signs of ending soon.

In February of last year China was a country in a harsh lockdown, one that most of the world were quick to criticize as too extreme. Today, life in China is almost back to ‘normal’, and the wisdom of those severe measures has been proved. Much of the ‘free world’, however, refused to take such severe steps, and consequently paid a terrible price.

Worldwide mortality from COVID-19 is officially quoted as 3.7 million at the time of writing. But with many uncounted deaths in the ‘Global South’, the actual toll is likely to be much higher. As happened during the 1918 Influenza epidemic, deaths have come in two waves, with the second being worse than the first. If history is a guide there will be a third wave too, though vaccinations may make this a lot less severe.

The mythical V-shaped recovery

Some airline managers were ridiculously optimistic a year ago, foreseeing a ‘V-shaped’ recovery with demand springing back in a few months. The more thoughtful disagreed and took drastic steps: grounding aircraft; downsizing their companies; hoarding cash; and raising capital. In the latter examples, the pessimists were proved correct, with the airline industry showing no signs of an early recovery.

This column forecast that domestic traffic in countries that handled the pandemic well, would be the first to recover. That prediction has been vindicated, as Chinese domestic traffic recovered quickly, reflecting that nation’s handling of the pandemic. Spring Airlines, a predominantly domestic carrier based in Shanghai, has performed well, even generating profits (at EBIT level) in the last two quarters of 2019, only to see another sharp fall in Q1/2021 as COVID infections rose and travel was restricted by the government over the busy Lunar New Year period. With China’s international borders practically closed, the Big Three (Air China, China Eastern and China Southern) have all reported losses for the financial year according to aviation finance consultancy Ishka.

Traffic in the USA went into free fall during the worst days of the pandemic but has been slowly recovering as vaccinations continue to blunt the spread of the virus. Most US airlines expect that traffic over the summer peak season will be around 90% of 2019 levels, though international travel is still badly affected.

Interestingly, travel between the USA and its southern neighbours has been healthy, with US–Mexico passenger numbers even showing a 10% increase as of May 2021 (Ishka). However, the US Federal Aviation Administration (FAA) has downgraded the safety rating of Mexico’s airline regulator, which may complicate this nascent recovery while preventing Mexican carriers from adding frequencies to the USA.

Whither Asia’s dinosaurs?

Asia is home to many ‘dinosaurs’: huge, bloated national airlines that haven’t been profitable for decades, saddled with legacy costs, inappropriate fleets, venal unions and corrupt managers. The pandemic has brought them to their knees, but they seem to be struggling on despite worsening finances. How their respective national governments can keep funding these perennial loss-makers is a mystery that seemingly lacks an answer.

Air India, the granddaddy of the dinosaurs though once a proud, profitable flag-carrier, was on the cusp of privatization a year ago. Whether India’s crippling second wave of infections has delayed this further is not easy to verify. Both Indigo and SpiceJet, privately owned, largely domestic carriers based in India, have reported significant cutbacks as COVID’s second wave continues to dent confidence in the sub-continent.

Thai Airways has filed for bankruptcy and halved its workforce, as Thailand too reels from a resurgent pandemic. Malaysia Airlines, already in trouble prior to the pandemic despite a USD 1 billion rescue attempt by the government (its sole owner), has cut flights by 90% and does not see any change in the immediate future. Interestingly though, the airline has prevailed in a court battle in London against aircraft lessors, allowing the company to apply UK bankruptcy laws to restructure its aircraft leases although based in Malaysia. With almost all aircraft lease contracts subject to British law, this could be an interesting precedent for the entire industry

Singapore Airlines, reliably profitable for decades and the poster boy of the island state’s vaunted business acumen, reported a 98% drop in passengers carried in the 12-months to March 2021. The airline has relied on cargo, mostly transported in the belly holds of its empty passenger aircraft (cabin load factors were reported at a lowly 13%), and a massive equity infusion by the government, to remain in business. SIA’s fleet of A380s, second in number only to Emirates, remains in storage (see main picture) and the airline has not set a firm date for their return to regular service.

The manufacturer’s dilemma

Aircraft manufacturers face a different dilemma. Sales of their ‘bread and butter’ the single-aisle or narrow body have recovered reasonably well. Boeing produces just one type, the 737 MAX, which has had its share on controversy. But with the most regulators clearing the aircraft for passenger flights, the backlog has been cleared. Many ‘white tail’ aircraft (those without a firm user and painted white, rather than in the intended airline’s livery) that were languishing at remote airports have been sold, with United and Alaska Airlines ordering large numbers of the MAX. This is in addition to the huge orders by International Airlines Group (IAG, of which British Airways is a part) and Ryanair which were announced during the pandemic.

Boeing’s other products, the venerable 747 and the 777 have not been selling well. The 747 is only produced in the cargo version and production is due to end early next year. The 777 freighter is in high demand, but the passenger version is not selling at all and the 777X advanced model may now be delayed for many years.

Airbus has continued selling their main product, the A320 series, with the XLR (Extra Long Range) version being the hottest seller and the first production models due off the assembly line very soon. Airbus has the advantage of having the A220 (formerly the Bombardier C-Series), a smaller aircraft optimized for regional routes in its stable. But Airbus’s flagship, the mighty A380, is due to end production soon, with the last unit (for Emirates) readying completion. The A330 Neo has had tepid sales (to put it generously) and the A350, the most capable and efficient of the ‘big twins’, has not received any recent orders.

The problem the manufacturers face is that the margin was usually on the bigger aircraft. Without selling many of the expensive Boeing 777s, 747s and Airbus A350s, they will struggle to be profitable. The margins on the single-aisle models are thin, and likely to erode further as international airline traffic continues to suffer.

What will Summer 2021 bring?

Any hope of a partial recovery by the summer travel season of 2021, outside of the USA and China, now appears futile. With the unpredictable border closures, continuing spread of mutant versions of COVID-19 and widespread fear of these overcoming the current vaccines, especially as the pandemic takes a terrible toll in the Global South even winter 2021 is unlikely to bring a reprieve. Not just India, but Thailand, Malaysia, Vietnam, Indonesia and many other countries are facing a terrible surge of the virus. While most of Asia remains unvaccinated, the virus will continue evolving and a devastating third wave is extremely likely. Until Asian governments snap out of their lethargy and conduct mass vaccinations, with booster shots as required, confidence in travel is unlikely to return for a long time.

Melbourne’s recent two-week lockdown, its fourth since March 2020, has been traced to an inbound passenger from Sri Lanka who was carrying the ‘beta’ version of the virus and infected others. The UK was on the path to complete reopening, but the spread of the same beta version means this may well be delayed. This type of cross-border contamination will only increase as large portions of the world’s population remain unvaccinated and major impediments to travel are very likely.

Whether mass vaccinations will be sufficient to achieve ‘herd immunity’, which is estimated to occur when around 70-80% of the population has been infected or vaccinated, is hard to say. Without the confidence that they will not be exposed to yet another unknown strain of COVID-19, even fully vaccinated travelers will be hesitant to head for locations known to harbor the virus.

My friend Malcolm Gladwell, author of the non-fiction bestseller Outliers: The Story of Success and other titles that make equally compelling reading, is one of the few optimists around these days. He saw the impact of COVID-19 firsthand, from New York, through the worst of the pandemic. But Malcolm remains hopeful, and also believes our recent experiences might have given us the tools we need to survive climate change. “It’s restored our faith in science,” he says. “It’s restored our faith in collective action. It’s reminded us that good government really matters, and lousy government screws you up. We’re going to need all these three.”

A shorter version of this article appears in my column in the Daily FT of Colombo. https://www.ft.lk/opinion/Displaced-optimism/14-719171

 

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