The last time I wrote about the airline industry, in February, I complained that the A-350 and the B-787 aircraft are nothing more than cattle carts in the air. Extremely low seat pitch between rows, razor-thin seatbacks that hardly recline, and a lack of sufficient toilets were at the top of my mind as I charged that airlines were being greedy, at the cost of passenger comfort.
Today, I feel petty that I complained about such mundane inconveniences. In fewer than four months after Covid hit, the industry has fallen so far into the abyss that it will probably not recover for years to come.
In a recent video report, The Economist summed up grim statistics of the global aviation sector. In April 2020, fewer than 31 million passengers took to the air. This volume was similar to traffic from the late 1970s. London’s Heathrow handled 200,000 passengers in the entire month of April (its average daily volume pre-Covid was slightly more than this number). In May, US air travel was 57 per cent below normal; in Europe, 75 per cent below.
Desert parking
Half the American commercial airline fleet — nearly 3,200 planes — is now parked in a desert. The big domestic carriers — Delta, United, and American — have accelerated the retirement of venerable models such as the Boeing-777, the MD-90, and the Boeing-757. No American carrier has been operating the B-747 since United took it out of service a couple of years ago.
Down under, Virgin Australia, the second-largest airline, declared bankruptcy after it failed to get a $1.4-billion government bailout. Qantas, along with its discount carrier, Jetstar, is now practically the only player in Australia — and with its monopoly position now, can dictate prices for years.
Airlines are among the most capital-intensive industries in the world. The list price of a new wide-body aircraft, such as the B-787-9 is over $200 million, although most airlines negotiate much lower prices when they buy in bulk. This investment has to be recovered over an aircraft’s lifespan of 20-25 years.
Capital intensive
Aeroplanes are expensive to maintain with a full overhaul, required at least once during its service life, running into tens of millions of dollars. Periodic maintenance is not cheap either. And there are numerous ancillary vehicles — passenger buses, scissor lifts, baggage tractors, passenger staircases, and other equipment to support normal operations. Airlines also have to invest to build and maintain terminals at large airports. They pay fees to airports to rent gates and slots, often binding them to long-term contracts with operators.
Cash-flows from operations are simply not sufficient to fund these myriad capital items, and so, airlines borrow heavily for working capital. Most airlines don’t even own the aircraft that they fly. They simply lease their planes from large companies like AerCap or GECAS. Servicing debt, lease payments, and insurance costs are huge ongoing expenses for the world’s airlines.
Airlines also require a large organisation of people to keep planes flying. There are strict government rules and regulations about how many hours a pilot can work, so airlines have to hire many pilots to fill both seats in the cockpit. The flight attendants and the ground staff make up a large portion of an airline’s human capital. Plus there are call centres to house reservations staff, not to mention traditional back-office types (management, HR, IT, and legal) in the corporate building.
And there is fuel. A wide-body, such as the B-767, burns about 3,000 gallons of fuel each hour in flight. Modern models are more fuel-efficient but fuel remains a large variable cost of an airline’s operations.
Heavy taxes
Because of their prestige and the perceptions that they are cash cows, airlines are often burdened with heavy taxes by governments, for landing fees, airport improvements, and to pay for passenger and baggage security.
The only way airlines can recover all these costs is when planes fly and passengers buy tickets and pay fees, from baggage to meals. The passenger load factor — the proportion of seats on a plane that carries paying passengers — is a critical metric in the aviation industry. Load factor swings of just a few percentage points can mean a profit or a loss. According to IATA, the average passenger load factor in 2015 was about 80 per cent.
With Covid, load factors initially dropped to zero when governments the world over simply shut down commercial airspace and airports. With no revenue coming in, airlines had to dig deep into their pockets and credit lines to continue paying off their obligations. Bleeding cash, the airlines were forced to dramatically cut whatever variable costs they could. Millions of people lost their jobs. Airline supply chains — vendors, baggage handlers, cab companies who ferry passengers to airports, airport restaurant operators, hotels, parking garages — instantly began to crumble.
Passenger load factors in June at most airlines were 50 per cent — 75 per cent worse than what they were a year ago. Such low load factors are not sustainable. Chile’s LATAM, South America’s second-largest airline Avianca, Britain’s regional airline Flybe, Air Mauritius, and South African Airlines have all joined Virgin Australia in declaring bankruptcy in the last few months. A career as a pilot, something that sounded so promising just six months ago, now appears to be a losing proposition.
Propping up employment
In America, a generous government aid package of $25 billion was quickly grabbed by the airlines, which employ nearly 750,000 people. The condition of the aid is that the airlines must not furlough or cut the pay rates of employees through September 30. In effect, the government is artificially propping up employment in the hope that the sector will recover sufficiently to sustain pre-Covid levels of staffing — a highly ambitious expectation.
On the demand side, and in a nightmare-scenario for the airlines, businesses have figured out how to get their employees to work from home without engaging in corporate travel. Many business meetings are no longer conducted in-person. Apple even hosted its developer conference with over 15,000 participants fully online.
With business travel expected to never recover to pre-Covid days, airlines will face an extraordinarily difficult time to return to normal operations. Business travellers pay a lot more per airline seat subsidising the cost for price-sensitive leisure travellers, who contributed nearly $1.6 trillion to the worldwide tourism sector last year. If airlines raise leisure traveller ticket prices to compensate for the lack of business traveller revenue, they run the risk of turning off leisure travellers altogether — or forcing them to choose alternative means of transportation, such as driving — kicking off a death spiral for the entire global tourism sector.
Collateral blow
The spiral will also extend to the many industries that support the airline sector — such as aircraft manufacturers Airbus and Boeing, the big leasing companies, and the tens of thousands of companies that make parts and service aircraft worldwide — dealing a collateral blow never seen in history.
No one knows when governments will lift all restrictions in the air and on land, and bring flying conditions back to pre-Covid days. If anything, governments are imposing new restrictions as the virus spreads. Australia this week announced a $3,000 fee for each incoming international passenger to house them in quarantine at a hotel for 14 days. India's international airspace, shut down on March 15, is still not open. Such moves are decimating the already-fragile airline industry.
So, expect the aviation sector to struggle for years and fall significantly short of returning to the healthy state it was in at the beginning of this year.