FB Magazine JUN 2020
Dr Achim I. Czerny
Department of Logistics and Maritime Studies
The Department of Logistics and Maritime Studies (LMS), in cooperation with the German Aviation Research Society (GARS) and the Bremen University of Applied Sciences, hosted the 1st GARS Online Panel Discussion regarding the effects of the coronavirus outbreak on the future of aviation.
The discussion, entitled “The Coronavirus Outbreak: An Unprecedented Shock for Aviation - What Now?”, was held on 14 April 2020 with panellists in Australia, Canada, Hong Kong, and Switzerland and Dr Achim I. Czerny in LMS as the moderator.
The meeting began with a presentation delivered by Brian Pearce, Chief Economist of the International Air Transport Association (IATA), on the impact of the coronavirus outbreak on air travel and the airline industry.
For previous pandemics, including SARS, avian flu and MERS, the aviation industry had a V-shaped recovery because there was no recession, but government responses to COVID-19 have made this very different. Markets with severe restrictions cover 98% of global passenger revenues. Worldwide, flights were down almost 80% by early April. The industry has been virtually grounded outside the US and Asian domestic markets.
Although, at the macro level, economists expect a deep recession but a strong recovery and expect GDP to regain pre-crisis levels by early 2021, air travel recovery depends critically on health measures. The IATA estimated that traffic during the second quarter will be more than 70% lower than last year. Domestic markets may open during the third quarter, but international opening is likely to be slower. The latter is crucially important to the airline industry because international traffic represents 67% of the total revenue from passenger-kilometres flown.
When much of an airline’s capacity has been grounded and fuel prices collapse, variable costs can be reduced sharply; however, some costs cannot be avoided. For instance, airlines have significant fixed costs including depreciation and insurance and semi-fixed costs in relation to station expenses and administration. In addition to these unavoidable costs, ticket refunds may burn cash. It is estimated that airlines may lose cash at the rate of US$61 billion in the second quarter of this year.
Pearce commented that the airline industry was fragile even before the COVID outbreak because of a long tail of weak, unprofitable airlines. Over the past few years, improvements in the industry’s financial results were driven by about 30 airlines. Outside the top-30 balance sheets, debt levels are high, so many airlines have fixed obligations of debt to service and repay. The typical airline had only two months’ worth of cash at the beginning of this year, so they are quickly running out.
Looking to the future, the prospects for the aviation industry will depend on a variety of factors, including phased opening of markets, government participation, airline consolidation, other parts of the air transport supply chain, barriers to entering the industry, demand for business travel, product changes, cash flow and capital expenditures.
During the discussion, panellists expressed considerable concerns, especially about the current situation endangering, or even reversing, the progress made in the liberalization of aviation markets.
A few countries, such as the US and China, have large domestic networks. Others with a large territorial mass, such as Australia and Canada, maintain a viable domestic air transport system. In Europe, traffic is mainly between member states of the European Union, so the evolution of traffic depends largely on the individual states’ willingness to open their borders. There is a fear that to protect their national carriers, some states may roll back the progress of liberalizing the air transport sector made in the past 25 years.
With new measures and practices related to issues such as social distancing and virtual meetings during the pandemic, the question arises as to the changes airlines may see in traditional markets. There may be a reduction in the lucrative business travel segment in favour of the less remunerative market involving tourism or visiting relatives and friends.
The large number of aeroplanes grounded for a relatively long period still require maintenance, and airlines will need to recertify their pilots after the recovery.
Furthermore, about half of the global aircraft fleet is owned by banks or leasing companies. With aircraft decreasing in value, these institutions will begin to feel the effects of the economic downturn.
One important metric for airports is the number of passengers embarking and disembarking. Domestic passenger traffic, which represents around 58% of the total, will begin to recover first. International passenger traffic will recover at a pace that depends on countries opening their borders. Another challenge for smaller airports will be the need to invest in passenger screening technology and to redesign boarding and security areas with more space.
Despite serious concerns, the panellists mostly agreed that the current situation could force the aviation industry to restructure and consolidate, which could benefit the industry in the years to come.
To guarantee continuity of the supply chain, some states in Europe may nationalize their national carriers. Others may not have the ability to financially support their national carriers, so more liberal rules on air carrier ownership and control rules may be adopted. Without the necessary financial assistance, weaker airlines may fail, leading to a consolidation of the industry in the long run.
Governments will need to make funds available to air navigation service providers whose income has been greatly reduced due to the significant drop in flights. Advances in technology may lead the European states to merge flight information regions and share air navigation services with their neighbours.
The discussion concluded with panellists responding to issues raised by the participants.