Where is the Airline Industry headed?

The Centre for Asia Pacific Aviation held its annual summit (virtually) in Sydney, Australia last week. This writer spoke at the 2018 conference and was a panellist in 2019. By comparison, the 2020 affair was a shadow of its former glory. Despite the organisers’ best efforts to foster online chat rooms and virtual networking events, the buzz and engagement was markedly absent.

Which is understandable, given that the airline industry has never seen a downturn of this magnitude in its 100-year history. The primary reason why this column has been silent is that there is nothing to write about. Most airlines have grounded almost their entire fleets, and even those aircraft that are flying only operate a tiny fraction of their pre-COVID capacity.

Did we see this coming?

The depth and duration of the downturn has surprised even the most cynical veterans of the industry. While this writer did predict a prolonged hiatus, the severity of the cutbacks as experienced by some Gulf carriers, and the extent of government aid to airlines that hitherto maintained a tradition of being funded by private capital, has astonished everyone.

China, where the COVID-19 virus originated, has been the best performer among the world’s major economies in dealing with the resulting pandemic. While international travel in and out of China is effectively at a standstill, domestic traffic has recovered strongly. It is forecast to be at 90% of pre-COVID levels in September, which traditionally includes the busiest travel week in China. Whether it can be maintained after that peak, remains to be seen.

Meanwhile in the USA, previously the world’s biggest domestic market, capacity is at less than 50% and likely to remain that way until the end of the year at least. Canada and Australia, which had robust domestic traffic but have ‘hard’ internal borders created between states, have experienced much more severe downturns, with recovery a distant dream.

Europe has seen a resurgence of LCC (low-cost carrier) leisure traffic on some routes during the peak summer travel season, but business traffic is well below 50%. Europe’s giant full-service carriers such as British Airways, Lufthansa, Air France and KLM are struggling, with many accepting state funding in return for equity and other concessions.

A financial nightmare

Airlines all over the world have been conserving cash, raising debt instruments, and trying to diversify income from other sources. US airlines that enjoyed interest rates on their corporate debt at an annual percentage rate (APR) of around 3% pre-COVID, are paying in excess of 12% today. Airlines with poor credit ratings are likely to pay significantly more, further gouging their balance sheets.

Even the world’s leading airlines are facing a crisis of confidence. Over 60% of major airlines now have credit ratings of ‘highly speculative’ (B+, B and B-) or extremely speculative (CCC+ and CCC). Many are even worse off, being in the ‘default likely’ category already, only six months into the crisis.

A seasonal business 

Airline travel, particularly the leisure sector which many Asian carriers are overly dependent on, has always been a seasonal business. A few weeks of peak traffic in the (Northern) summer, the Christmas/New Year rush, and some regional holidays such as Eid, Easter, China’s ‘Golden Week’, the Hajj pilgrimage, etc., are interspersed with long ‘shoulder’ weeks when passengers are scarce and fixed costs remain high.

The last six months have seen an almost complete shutdown, and none of the speakers at the summit, which included the CEOs of Qantas, Virgin Australia and Qatar Airways, offered much hope of a substantial recovery until Summer 2022 at the earliest.

Survival

Until then, it is a matter of survival. Alan Joyce, CEO of Qantas, spoke of his efforts to conserve cash and prepare Australia’s premier airline group for a new paradigm when the pandemic recedes. Al Baker, CEO of Qatar Airways, the carrier that has maintained the largest international schedule of any airline since the onset of the COVID-19 crisis, highlighted the need for new thinking and rewriting the rulebook to reflect a post-2020 reality. This column spoke about the need for such an initiative six months ago.

“Never waste a good crisis” is an axiom business leaders have long held dear. COVID-19 should be seen as an opportunity for the airlines to effect fundamental changes to a business model that was already under threat prior to the pandemic. Myopic short-term thinking must not be allowed to get in the way of real change.


(You can follow me on Twitter @SurenRatwatte. I also write about airlines and historically important airliners on Medium.)


 

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