08.07.2021 – 13:08
The pandemic, with its blockages and travel bans, blocked the world’s airlines. Revenue per passenger kilometer, the usual measure of industry performance, fell by 66% in 2020, compared to 2019. The International Air Transport Association (IATA), an industry body, expects them to remain 57% below pre- pandemic this year. Although the world-listed airlines have collectively recovered nearly $ 200 billion from the stock market caused by covid, forecasters think air travel will return to levels from 2019 alone in 2024. Total annual losses of companies could reach $ 48 billion in 2021, over $ 126 billion in 2020. Many have burned money as fast as their planes burn aircraft fuel. Many survived only thanks to government rescues.
However, photography across the industry hides inequalities. Some airlines are struggling despite cutting costs, lowering fleets and removing trade credit balances. Others are full of self-confidence. Those big American and Chinese with big markets, increasingly virus-free, will return to profit first. The low-cost carriers that entered the pandemic in black are far behind. In contrast, airlines that depend on lucrative long-distance airlines can struggle if, as it seems almost inevitable, business travelers replace Zoom for at least a few flights. Regional companies in countries still devastated by covid-19, such as India or Latin America, look insecure. And the airspace between those losers and winners of the industry is expanding.
Various assets are nothing new in the airline business. Most carriers make a hefty investment. IATA accounts for only about 30 of the 70 or more airlines for which data are earned more than their cost of capital between 2008 and 2018. To continue flying, airlines need “Strong balance or a parent with deep pockets”, says Rob Morris of Cirium, an aviation data firm.
Despite a degree of deregulation in the last 50 years, by the end of 2019 governments still controlled or held large minority stakes in 29 of the 100 strangest airlines listed in the world, according to the OECD, a club of industrialized countries. States support lost national carriers, including privatized ones, which they regard as vital infrastructure and a source of patriotic pride. In announcing Japan’s recent rescue, authorities spoke of 240,000 jobs at risk and highlighted the role airlines play in connecting remote parts of the archipelago country.
Paternalistic governments have dug deep into their pants during the pandemic. Between its launch and March of this year, public aviation distributions exceeded $ 225 billion worldwide, IATA estimates. This helps explain why fewer carriers went bankrupt worldwide in the 2020 disaster (43 of them) than in 2018 (56) or 2019 (46), according to Cirium.
Even if salvage bills go beyond a few airlines, however, they are not a cure-all. On the contrary, they can be poisonous. As Mr. Morris of Cirium politely puts it, state support leads to “Inadequate cost bases”. A careful observer notes that Air France-KLM, a Franco-Dutch unit, is “Paid by the government not to restructure”. France wants to save as much work as possible and the Netherlands to ensure that Schiphol in Amsterdam remains a major connecting airport. None of the objectives have much to do with returns.
Moreover, saving the conditions does not guarantee long-term success even in combination with a healthy pre-pandemic balance. The Emirates of Dubai enjoyed years of profits as well as generous support from its owner (a sheikhdom). So did Singapore Airlines (which is listed but controlled by the city-state government) and Cathay Pacific (Hong Kong’s publicly traded flag). Like many of their less profitable counterparts with major international networks, including Air France-KLM, British Airways or Lufthansa of Germany, they all “Rely on the opening of the whole world”, notes John Grant of OAG, another aviation data firm. This will not happen until many more globes are vaccinated. And as much as executives dislike endless video calling, most despise continuous flights even more.
Amid uncertainty, two categories of carriers can expect to prosper. The first is the full-service airline network, which, like beaten rivals, offers long and short flights but which also, substantially, complements a large domestic market. The second group includes agile carriers and low-cost cash generators flying on a variety of regional routes.
The response to domestic flights favors American and Chinese airlines. Last year China, where covid-19 appeared but was suppressed more successfully than in the West, surpassed America as the world’s largest domestic market in terms of capacity. Flights within China have returned to levels in 2019, estimates Citigroup, a bank.
Domestic flights account for 60% of US air travel, compared with about 10% in Europe, the Middle East and Africa, estimates Oliver Wyman, a consultant. America still lags far behind China, but air travel on the eve of the fourth weekend of July exceeded pre-pandemic levels. In Europe, by contrast, as the continent is fragmented by national borders, the number of short-haul flights is still falling by 55% from pre-pandemic levels.
Scott Kirby, chief executive of United Airlines Holdings, has warned that US carriers need about 65% of pre-pandemic demand for business and long-haul international travel simply to disconnect. Still, this seems achievable to United and its domestic rivals like American Airlines, Delta Air Lines and Southwest (which pioneered no-fly in the 1960s but have become something of a domestic network airline, minus international transport) .
Americans, for example, earn about 70% of their revenue from domestic passengers, while full-service carriers elsewhere can rely on large countries in front of intercontinental flights for half their revenue (and up to 75% of profits). It helps that years of consolidation rocked by US regulators have created an oligopoly where four major airlines transport 80% of passengers.
The Chinese market is similarly engraved between several major carriers, Air China, China Southern and China Eastern. As a result, their revenue per passenger-kilometer is double what it is in nearby Southeast Asia, where competition is fiercer. With Chinese domestic travel more or less back to normal, and their costly geopolitical obligations to widen the lost international icy roads due to covid-19, the trio are in better shape than ever before.
Internal reaction and growing confidence have helped American and Chinese airlines raise money and avoid prolonged state support. Of the great Chinese ones only China Eastern sought considerable salvation. American firms got a big rescue, but are coming out of it quickly. In March American Airlines exploited the market for $ 10 billion in debt, most of which went to repaying government loans. One month later United raised $ 9 billion for a similar purpose.
Importantly, American companies have avoided the need to sell shares of Uncle Sam’s capital. Combined with strong domestic cash flows, an early exit from government programs gives American and Chinese carriers a competitive edge, says Andrew Charlton of Aviation Advocacy, a consultant. In Europe, meanwhile, France has increased its stake in Air France-KLM to almost 30%, Germany has taken a 20% stake in Lufthansa and the always hopeless Alitalia is now fully state-owned. Even as the three European firms continue to pull in as they deal with the state’s growing involvement, United Airlines has just placed an order for 270 new aircraft, its largest ever. Delta and Southwest have also purchased aircraft.
The return of international short-haul travel will revive the fate of the winner of the second type: low-cost carriers in highly vaccinated countries, where borders are being opened and quarantine rules are being eased. European firms in particular should benefit from the closed demand for vacations and visits to family and friends. More than eight in ten passengers flying with Ryanair, an Irish airline, and Wizz Air, a Hungarian, are leisure seekers compared to no more than seven for Lufthansa and Air France-KLM.
The lack of a European oligopoly and the deep cuts caused by the pandemic in the networks of inherited carriers, have left room for expansion for frugal challengers. Bernstein, a broker, expects Ryanair and Wizz Air, which have little debt and a lot of money to spend on new planes, to switch to European rivals in the coming years. So do investors. Both Ryanair and Wizz Air are worth more than before the pandemic.
Some of the potential winners may stumble. Delta and United have some way to go before resuming their pre-pandemic market capitalizations. Several other winners may appear. An incredible candidate, according to Bernstein, is the unwelcome British Airways. Its parent company, IAG, moved quickly to cut costs, retire older and more eager aircraft, delay deliveries of new aircraft, and return leased aircraft with many unwanted premium seats. It is possible that network companies with acceptable finances and a good record, like Singapore Airlines, could eventually fly up again after resuming international travel. On July 5, a consortium of investors bet long-haul flights would be revived in time, offering to pay $ 17 billion for Sydney Airport, Australia’s gateway to the world, not far below its market value at the end of year 2019.
Challenger carriers may come as a surprise in America, where the three most played, Allegiant, Frontier and Spirit, have doubled their market share to 10% in the last five years and together have lost less than $ 1 billion in 2020, compared to $ 45 billion for American carriers were all said, according to Aviation Strategy Keith McMullan, a consultant. JetBlue, another low-cost US airline, plans to make its debut on transatlantic flights with narrow-body, long-range aircraft that are much cheaper to operate than the wide bodies that usually set up such routes.
Despite the fog of uncertainty, some beginners are rolling out of the hangar. The breeze, which flies between smaller U.S. cities neglected by other carriers, and the Avelo, which brings tourists to California, are taking advantage of cheap airplanes, multiple pilots, and at the same time crowded airports . Reaching high-flying American and Chinese oligopolists, or cheap and cheerful European firms, is not impossible. But skilled piloting will be needed.
Translated and adapted for Konica.al by The Economist