COVID-19: Getting Back In The Air After The Lockdown
As the spread of the Covid-19 virus in Europe slows down, confinement measures are gradually being lifted. As soon as it will be allowed to travel again, this will bring some relief to all those for whom these long weeks of confinement have been the most demanding. It will also give those who have been on the front lines dealing with the pandemic a change of air and a chance to finally enjoy some well-deserved days of rest.
How did the air transport industry adapt to the context of the confinement?
Most airlines have drastically reduced their operations since the beginning of the Coronavirus pandemic. In Europe, the United States and in a vast majority of countries around the world, major airlines have virtually suspended all flights by putting nearly their entire aircraft fleet on hibernation and imposing partial unemployment for most of their crew and operational personnel.
As a result, at the end of April there was an average reduction of 94% in the number of available seats offered by scheduled airlines. Both traditional network airlines and low-cost carriers were affected. Some major airports have been completely closed to commercial traffic, such as the second busiest hub in France, Paris-Orly airport.
Some air transport professionals are hoping to take advantage of this period during which assets are idle and infrastructures are empty to carry out maintenance tasks. This is effectively made easier by their perfect accessibility. However, this effect remains limited by the confinement measures that disrupt the mobility and gathering of people. The same applies to maintaining the qualifications of the technical teams, especially the pilots. The related travel, training and simulator sessions are made impossible by these same restrictions.
As a result, not only is the usual activity disrupted, but it also accumulates a delay which will ultimately affect the resumption of normal operations.
What can be expected when air transport operations resume?
- Preventive health measures
A wide range of measures are emerging to reassure travellers about the perceived risk of using public transport. The implementation of appropriate preventive health measures is therefore planned. Initially, the aim is to limit the risk of contamination while travelling. This ranges from prohibiting certain citizens from crossing borders, to the frequent disinfection of aircraft cabins, to the de-densification of aircraft in order to comply with social distancing requirements.
Then, as traffic picks up again, new habits and methods of systematic protection of passengers and staff in contact with them will be introduced.
“…their challenge will be to adapt their offer and their capacity to a demand determined by new customer expectations which are still unknown at this stage.”
- How fast will operations resume?
The operations recovery and resumption will take a lot of time. Firstly, because the overall demand for air travel will only very gradually return. For next summer, programs of flights will not exceed 30% of what they should have been. It is estimated it will take until 2023 for traffic levels to return what they were in 2019.
Beyond the quantitative aspect, the new nature of transport needs will profoundly disrupt the services provided by airlines. Their challenge will be to match their offer and their capacity to a demand determined by new customer preferences, which are still unknown at this stage. Which markets will take off again? At what pace? On the other hand, which will remain deeply disrupted? Ticket reservations, which are generally a fair indicator of medium-term travel trends, do not play their role in the face of uncertainties about the resumption of normal services.
On the supply side of the market, airlines will find it all the more complicated to get back up and running as many of the key elements of their usual operations have been profoundly disrupted: aircraft maintenance phases, maintaining current qualifications or medicals for their pilots, disruption of supplies of spare-parts… It should not be forgotten that every area of the industry has been affected by this phenomenon: airports, aircraft manufacturers and their subcontractors whose production lines are idling.
- Capacity reduction
This overall drop in demand, accentuated by the lack of recovery in some markets where health measures discourage travel, will lead to a reassignment of the mobilized resources. Since the decline of certain traffic flows will dry up the number of connecting passengers, capacity and frequencies will be mechanically reduced in other markets. Airlines must at all costs avoid overcapacity, which is extremely destructive of value.
Lufthansa Group’s recent announcements concerning the shutdown of one large subsidiary or the permanent withdrawal of some forty aircraft (mostly long-haul aircraft, in fact) is an anticipation of this trend. All airlines have thus triggered the well-known safety valve of disposing of the oldest aircraft because they are written off and are fairly expensive to operate and in terms of maintenance. For example, American Airlines, which at the beginning of 2020 was still operating about twenty Boeing 767 wide-body aircraft, suddenly stopped operating them and remove them from the fleet permanently. This decision to shut down a fleet of aircraft is not a minor one, since it is irrevocable. It means the discontinuation of the aircraft’s maintenance, the qualification to other types of aircraft of pilots and mechanics and the sale of spare parts and tools.
The number, the size and abruptness of such decisions are particularly revealing of the intensity of the crisis.
- Rising ticket prices
Several indicators suggest an overall increase of the price of air travel:
- Declining competition due to corporate failures
First, how many airlines will survive this unprecedented crisis? Which are the ones that will be able to demonstrate to have enough cash to continue to pay their bills despite the lack of any revenues for several months. Some of them will not survive. We are currently already seeing several them go into receivership while most are applying for various forms of aid and especially state-guaranteed loans.
- Decline in competition due to a drop in demand
A drop in overall demand normally leads to a drop in unit revenue. In the post-Covid-19 period, it would be suicidal for the market to address the over-capacity by engaging in a price war that would certainly stimulate traffic but will destroy value.
It is therefore very probable that the airlines’ first decision will be to withdraw from the markets that were the least profitable before the crisis and will be even less successful in the medium run. As a result, a growing number of routes will have insufficient players to ensure a proper level of competition.
“…with the implementation of ‘social distancing’ measures on board the aircraft, these former profitability targets will be unachievable.”
- Paying the bill for the new health measures
In addition to the health surveillance and passenger screening measures that will be put in place at airports, the real change will come from what happens on board.
Prior to the pandemic, the break-even load factors that airlines were budgeting for in their business models were rarely below 82-85%. Today, with the implementation of “social distancing” measures on board aircraft, these former profitability thresholds will be technically impossible to reach.
Using the example of the “narrow-body” aircraft such as the Airbus 320 series and the Boeing 737 series, they account for 60% of the airliners in service in the world. The neutralization of the “middle seat” on each row of three seats means that the maximum load factor is capped at 67%. With pre-crisis price levels, this is totally unthinkable.
The two passengers in a three-seat row will therefore have to share the cost of the empty seat. In conclusion, this effect will lead to a mechanical increase in the price of the ticket of 30 to 40% of all medium-haul flights.
- Paying back the period of inactivity
The airlines are struggling and need fresh cash to survive. Any loans or state aid granted to them will have to be reimbursed in one way or another. Indeed, in order to preserve healthy competition, even in these times, it will be necessary to ensure that fair aid is given to all. A loan to the industry could be granted, which would imply very precise and regulated repayment terms. This could take the form of an additional tax on airline tickets or a price increase imposed by the regulatory authority.