Aviation in the Time of Coronavirus

Before I even start, let me explain the title a little bit. I wanted to call out a really good book Love in the Time of Cholera by G.G.Marquez, one of my favourite authors. Given the ammount of time we all are spending now at home, I hope people will start reading again! Now, back to Aviation.

Despite some minor hiccups, last decade has been very generous for airlines globally, with capacity growing faster than ever and multiple new businesses emerging in all parts of the world. Nevertheless, some evident symptoms of future being less favourable appeared with spectacular bankruptcies of Air Berlin, Thomas Cook, WOW, Jet Airways. And then Corona happened...

Is it serious?

Yes. It is the biggest crisis the Global Aviation has ever experienced in its history. It is affecting every single airline (and other types of businesses) in any country worldwide, from both supply and demand sides.

Production is being affected by multiple travel bans imposed by numerous states, making it impossible for carriers to even intend to keep their business going and, as an effect, leads them to ground hundreds, thousands of airplanes. And these won't make any money if they are not airborne, which pushes airlines to seek cost reductions, putting hundreds of jobs worldwide in jeopardy.

Demand side is being impacted even more, as people propensity to fly has dramatically reduced due to fear to travel, impacting mostly leisure travellers. We are also facing a likely global recession, that will cut business travel spend moving forward. It feels the Corona-crisis will be much greater than September 11 and its effects more difficult to mitigate. In this case, the enemy is everywhere, we don´t have a clear way to neutralize it and we can't even see him very well...

So what does it mean for airlines globally?

Many airline professionals agree that not everyone will go through this crisis, which honestly, does not have to be such a bad thing for the industry long term overall, although it will mean jobs will be lost. Why?

Airlines, both full-service and LCCs, have been mushrooming over last years putting a strain on the existing businesses and pushing them for change and improvement. While the growth itself is not a bad thing at all, it feels that recently there has been more capacity than demand and that, to an extent, some part of the demand has been artificially created by cheap, often substituted capacity.

Moreover, multiple airline businesses did not prove to be successful and were struggling to make ends meet even before the virus outbreak. Logically, these airlines should not have existed already and their survival is even more questionable given the current market conditions, with Norwegian and Alitalia, two very different cases, being mentioned most frequently.

The first one, has grown outside of its home markets and has entered the highly competitive North Atlantic market. Being a LCC carrier, it targets leisure passengers, while at this very moment demand for leisure travel between Europe and North America does not exist. The latter has been doing a very poor job in multiple attempts to restructure while the Italian government has been unsuccessfully trying to sell Alitalia to an industry investor. What is common for these two, and multiple other cases, is that they are very unlikely to be able to survive the ongoing crisis without some sort of state help. This leads to another question.

What is right and what is not for governments to do?

Several government officials have already claimed that they will be stimulating economy with public spend so as to save jobs. They will also take measures to help the airline industry that was the first to take the hit. This seems reasonable, as otherwise most of the airlines globally would face bankrupty within a few months. And that is not what we need. At some point the virus will be under control and then people will start travel again. This will not be possible without a robust airline industry.

There are 195 countries worldwide and it would be quite naive of anyone to assume they all will apply same policy to all airlines (which would be ideal and fair). No, they will not do this. Their approach will depend on various factors including: how much money can they actually spend on helping aviation; how protectionist their policies tend to be; how populist their governments are; how much of the airline business they control; what laws are they bound by, etc.

And so, the scope of policies is quite inmense. You could imagine a policy that all airlines, regardless of their origin and ownership structure, would benefit from, like reduced taxes that Norway has already announced. Not having a so called flag carrier probably helps the Norwegians taking transparent and fair decisions. Other countries, recognizing their home carriers struggle, are looking into more targetted fiscal policy, injecting large sums of money into their domestic businesses. For instance, US government is considering a striking USD 50 bn incentive in forms of loans, grants and tax relief for US based airlines. Other, more extreme cases, could also include a full or partial nationalization, something that Italian politics are mulling over with regards to forever-troubled Alitalia, potentially giving this carrier yet another life.

What is right to do though seems hard to answer. Sometimes the so-called national interest stands in direct opposition with logics. Is it logical to do all possible to save jobs but on the other hand it does not feel particularly logical to bail out carriers that have been already doing a very poor job in making money. What is the guarantee they will actually survive through the crisis aftermath? If they don´t, funds they would have received will be lost, and so would be the "saved" jobs, while carriers who are well placed for success will not be able to maximize their potential because inefficient ones are still up in the air...

How does the future look like?

There seems to be a consensus that once the pandemic is over, the world will be a very different place, hopefully a better one than today. Many things will change: the way we travel, the way we provide for health care, the way we work, etc. Bare in mind the world is going through the biggest social experiment of working from home. Companies worldwide will likely conclude working from home can be efficient, and also quite cheaper, so huge office spaces are likely to be less necessary. Demand for business travel might diminish too for instance, as businesses could realize they don´t really need to travel as much since remote meetings are effective. Or at least these within same time zone.

Aviation too, will change. The survivors will need to become more cost efficient. Many airlines have already announced retiring their fuel inefficient fleets, amongst them American Airlines and KLM that will discontinue flying B757/B767s and respectively, B747s, earlier than planned. Willie Walsh has said International Airlines Group carriers will accelerate the phase out of their A340s and B747s fleets too. Surely other airlines will follow and so, sadly, the era of 4-engine passenger jets could soon be over. This also means, that temporarily, set aside some bankrupcies, seat capacity will likely decrease while airlines will be awaiting deliveries of new, fuel-efficient jets.

Further consolidation might happen as well, as airlines will be looking for further scaling up while governments and their antitrust administration will be under a strong pression not to let the carriers sink, even if letting consolidation happen was not on their agenda earlier. While USA has a couple of carriers, such as Alaska and jetBlue that could tie up with one of the Big 3, most of the consolidation will likely happen in Europe, where multiple carriers will not be able to make it through alone. Personally, I do hope consolidation will finally happen in Eastern Europe as solo-survival of numerous small and medium carriers, such as TAROM, Czech Airlines, Air Baltic or LOT Polish Airlines becomes questionable. Also, I would not be too surprized if some North American and European groups unite...

Regardless of how good or bad the perspectives are, I wish us all Corona is down soon and we can all start working on a better future. As always, looking forward to your comments.

Stay safe!