Aviation: the harsh reality of COVID-19

With COVID-19 infection and death rates beginning to gradually decline across the globe, it might be tempting to think that perhaps light is starting to emerge from the gloom at the end of the tunnel for the beleaguered travel industry. If only it was that simple.

Left: The airline industry is in the midst of a storm not of its own making (Kevan James)

On April 14, The International Air Transport Association (IATA) revealed the COVID-19 crisis is likely to result in global airline passenger revenues dropping by $314bn this year, a decline of 55% year-on-year. The drop was more than $60bn greater than the -$252bn figure the trade body had forecast only three weeks early, and if nothing else these figures reveal how deep a hole the industry is in and that it is still digging.

Today, just two weeks after IATA's grim numbers were revealed, the revelation that British Airways (BA) is seeking as many as 12,000 redundancies among its 42,000 strong workforce undoubtedly came as devastating news to its employees. The carrier has already put 22,600 staff on the government furlough program but the chief exec admitted it “cannot expect the taxpayer to offset salaries indefinitely.” IAG, the group that BA is part of alongside Aer Lingus (Ireland) and Iberia (Spain), lost €535m (£465m) in the first quarter of 2020 compared to a profit of €135m during the same period in 2019, with almost all of the losses incurred in March. The second quarter will be far worse for IAG financially as the full effect of the COVID-19 shutdown bites. So clearly Cruz feels the need to slim down BA. However airline staff, especially air crew and engineers, cannot be recruited overnight if business rebounds and it is obvious that BA does not expect that to happen - it is right-sizing for the future, and that entails a headcount almost 30% less than pre-virus.

Above - British Airways has parked much of its fleet and has proposed as many as 12,000 job losses (Heathrow Airport)

Added to the potential job losses at BA are 10,000 or so more at risk at Virgin Atlantic should it fail to find a funding injection of around £500m before the end of May, and the massive cuts at Norwegian Air which has a significant UK crew base. They come on top of the collapse of Thomas Cook late last year and Flybe earlier this year. Other carriers across the globe are not immune from the tremendous adverse impact of COVID-19, with Lufthansa looking to shed 10,000 positions and Scandinavian Airlines halving its workforce. Summer 2020 and beyond is looking extremely bleak for the whole industry, and especially for those with aviation skills who find themselves out of work. Even the aircraft manufacturers are facing major challenges - Boeing is cutting its workforce by 10% while Airbus is furloughing 3,200 staff and has postponed plans to introduce another assembly line for the A321. The head of the European firm, Guillaume Faury, warned it might be “three to five years” before passengers are as willing to fly as they have done and added that we are now "in the midst of the gravest crisis the aerospace industry has ever known.”

Left: Lufthansa are also losing jobs and, like all airlines, the USA's United is facing huge losses

(Kevan James).

Setting aside for just one moment the immediate ramifications of an almost total shut down in passenger air travel (not that this impact is unimportant), it is obvious things aren’t going to rebound quickly once restrictions are limited. Governments are likely to open their borders in an uncoordinated fashion, meaning that airports at one end of many air routes could be accessible while those at opposite ends are still be locked down, preventing flights from resuming. Furthermore, almost all of the 'network' carriers depend on connecting traffic to fill departures from their hubs – without long-haul routes (which are likely to be the most difficult to reestablish due to almost inevitable staggered lifting of restrictions), some short-haul routes will be non-viable, and vice versa. Additionally, with social distancing having become embedded in the public psyche now, it will be some time before many travellers are prepared to subject themselves to the cramped conditions of aircraft cabins. It will be necessary to consider how passengers are spread out in an aircraft and maybe even impose limits on occupancy to ensure every traveller gets breathing space, which will cut load factors and put pressure on revenue. Finally, the potential resumption of as near to normal as possible isn't just about what aviation does - even if they are prepared to get on an aeroplane, leisure travellers will not do so until the resorts, hotels, bars, restaurants, beaches and theme parks are open too.

Meanwhile, while the lock down continues the costs continue to rack up. Aircraft still have to be maintained when they are on the ground, as some of these activities are based on calendar periods rather than flying hours. Staff that are working still have to be paid, even though little or no revenue is coming in. Even incredibly cheap oil will be of little benefit when activity picks up again. Most airlines “hedge” fuel purchases (buy in advance at an agreed price), meaning many will be paying $60 or more per barrel while the spot market is down in the $10 range. British Airways’ hedge – the price it paid just for the privilege of securing its summer 2020 fuel purchases at five or six times the going rate – reputedly cost it more than £1bn, and it has to buy the fuel on top of that fee too.

In the UK, the squabble between the long-haul rivals is far from played out. Sir Richard Branson is seeking outside investors to support “his” airline (the carrier is actually 51% owned by Virgin Group) after the government turned down a request for a £500m loan guarantee. Lets remember that in the UK at least state assistance is not charity - the support will only be granted on the basis loans are repaid, which is reputedly why easyJet was assisted with a £600m cash boost while Virgin's initial plea for help was rejected. British Airways is not yet seeking such assistance, but its redundancies are a portent for the long-term decline in air travel with the board not expecting a return to normality for at least three years. Branson previously urged the government not to back BA when it was losing money in 2009 but now the boot is on the other foot with BA being stronger - its owners are downsizing to secure the business while its arch-enemy struggles to define its future. If Virgin collapses, higher fares are almost inevitable on routes where the two currently compete, especially as cut-fare rival Norwegian looks to be out of the picture in terms of long-haul flying until well into 2021.

Above: In deep trouble - Virgin Atlantic (Kevan James)

Ryanair's Michael O'Leary, often seeking to be controversial and different from the norm, has already said once flights can be resumed the airline will operate them at a loss to get the public travelling again. The reality is that carrier’s fares don’t cover its costs anyway – the following is an excerpt from the forthcoming book, So You Want to Start an Airline:“Europe’s largest low-fare airline, Ryanair, had a cost per booked passenger of €42.08 during 2018 but an average fare of only €39.40. The carrier really made its money from an average of €15.48 ancillary revenue it took from each passenger.” So while Ryanair may try to kick-start cheap air travel again, many other carriers working to business models that don't rely on earnings from "hidden" extras will have to look to higher fares as a means of starting to cover their costs and plug the massive holes in their balance sheets.

Above: Ryanair's fares do not cover the cost of its flights (Tyler McDowell)

More expensive tickets though mean less demand for impulse / leisure travel, even assuming anyone wants to fly again after restrictions are lifted. And business travel – which has traditionally attracted premium fares – is also likely to continue to be down substantially, at least during the first few months of a resumption of air routes, as many firms have adjusted to home working and video conferencing. No doubt some airlines, including Ryanair, will relaunch with sales and discounts in an attempt to kick-start demand, aiming for ancillary revenue (bag fees, seat assignments, buy-on-board etc.) to plug some of the gap. But the government-backed loans have to be repaid and the massive losses almost every carrier is incurring at the moment will have to be addressed – in many cases sooner rather than later. So those businesses that receive aid now will face more pressure in the future (unless of course the support comes in the form of non-repayable government cash injections). And the only way for airlines to recover and repay commercial loans, government backed or not, will be to take more money from the customers who are willing and able to travel.

Unfortunately, high-profile announcements of redundancies are just the tip of the iceberg; they are merely the most noticeable impact of a virus that has changed the way we travel and has already had a massive long-term effect on the industry. Yes, its not just airlines but the whole travel industry, because fewer flights require less airport workers, result in lower hotel occupancy rates and reduced business for bars, restaurants and leisure facilities across the globe. Travel is going to be in the doldrums for years and those who are put out of work now will either suffer with long term unemployment or will have to seek out opportunities in other industries in which they have little or no experience. The future is going to be very challenging, given that economic activity is down almost across the board.

Left: although obvious job losses are perceived as being pilots and flight attendants, ground crews and terminal staff face losing their livelihoods

(Michelle Pauty-Austrian Airlines)

I wish it would be possible to see a bright short- to mid-term future for the aviation industry right now, but to do so is difficult. Even the really strong carriers – and those that receive substantial state aid – are likely to emerge with reduced work forces and lower overheads. The weaker will collapse, especially where governments fail to offer support in an equitable manner. The survivors will begin to back bounce, rid of marginal competition and assisted through significant fare increases, especially in markets where travel is non-discretionary. But some carriers will disappear, overburdened by the costly shutdown.

The short- to mid-term prognosis then is higher fares, less choice (of airlines and routes) and far fewer job opportunities for workers, all allied to an ongoing decline in demand for travel. And that’s the rub. Almost everyone, our politicians included, has focused on the immediate impact of COVID-19. Yes, mitigation measures had to be put into place to restrict the spread of the virus. But the harsh reality is that its long-term effects will be adversely impacting people’s lives, inside and outside the industry, long after restrictions are lifted.

© The Aviation Oracle / KJM Today 2020

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