The Airline Industry’s Collision with Covid-19

By Luca Poeschl, Rayan Singh and Constantin Wells (University of St. Gallen)

 

Airlines have been able to overcome a wide variety of challenges over the past decade: cut-throat pricing in a highly competitive environment, hefty pressure on the industry for reductions in carbon-dioxide emissions, and fast-changing government regulation. Commercial airlines demonstrated their resilience by generating an approximated $838bn in revenue, up 11% in comparison to 2017, with profitability and constantly growing passenger numbers.


In the 21st century, the airline industry has proven to always bounce back sharply and drive economic recovery, demonstrated by the V-shaped returns after 9/11 and the second Gulf War. The ongoing pandemic, however, has caused an almost entire wipe-out of all commercial flights for months instead of days or weeks, leaving aviation in a state of crisis unseen before. The unprecedented nature of the circumstances suggests that a rapid bounce-back that we have historically experienced may not occur. The aviation sector plays a crucial role in the global economy, as seen in Europe, wherein 2019 it was responsible for the largest portion of its high-tech exports, a staggering $94bn. The effect on the rest of the economy, beyond the fuel industry which has been drastically affected by potential long-term drops of oil demand, remains to be seen.


The crisis may prove to have accelerated a potential paradigm shift in travel. Communication platforms like Zoom, which has a market cap of $48bn and is now worth more than the world’s 7 biggest airlines combined, have had time to establish their offerings in the global environment and are predicted to cause long-term disruption among air travel. Airlines may never reach the potential and heights they were predicted to reach in the pre-Covid-19 era.



Present Situation


Global travel restrictions have played an important part in the containment of the pandemic so far; many borders have been closed and government measures implemented have restrained people from traveling between countries. The government actions, which secured the well-being of its citizens have, however, had severely adverse effects on international travel. The measures have led to daily international flights plummeting 87% since January, leaving 60% of the world’s commercial aircraft grounded.


While many sectors are in the state of recovery, attributable to better control of the pandemic and further relaxation of safety measures being discussed, the airline industry’s situation has worsened in the past weeks, showing no clear signs of a recovery whatsoever. The S&P 500 Airlines Index has dropped 67% from its 2020 high in February. Compared to the S&P 500’s current 14% decrease from its all-time high in mid-February, the state of crisis many American airlines currently find themselves in is contextualised, with no substantial improvement in sight as long as the cash drought airlines are currently facing endures. The world’s largest carrier, Delta Airlines, is currently losing roughly $60m a day, attributable to 600 of its fleet’s aircraft not being able to depart. This cash drain prompted Berkshire Hathaway to sell all of its $6bn worth of airline-related stock, including Delta, with Warren Buffett directly criticising the airline fleet size.


Although governments are trying to rescue endangered airlines, the ongoing crisis has already seen various airlines fall such as Flybe, Virgin Australia and Avianca, South America’s second-largest carrier. With the Trump administration trying to prevent further bankruptcies in the U.S., the airlines Delta, Southwest, United and American Airlines have taken generous loan offers from the U.S. treasury, exchanging equity in return for grants and low-interest debt. However, this has come at the price of being forced to fly unprofitable routes whilst also not being able to lay off employees until October, a measure to prevent further unemployment filings in the U.S., which have risen to more than 36 million in the last eight weeks.


Meanwhile, European airlines have no such constraints, with British Airways laying off nearly 30% of its workforce and Ryanair dismissing 3000 employees in order to cut costs preparing for months of stasis. This doesn’t mean they are not involved in government bailouts however, with the German airline Lufthansa being in negotiations over a rescue deal worth up to $9.9bn.


“Out of the world’s nearly 1,000 airlines a lot are just bubbles of debt with wings.”

- Brian Burridge, Chief Executive of the Royal Aeronautical Society



Future Implications


When shifting focus from the U.S. and Europe towards China, it is safe to say, that the air travel situation has its worst behind it. Weekly airline seat capacity on domestic routes, which was at almost 15 million seats pre-Covid-19, has climbed back to roughly 13 million, meaning a mere 10% downfall from the same period last year. This is extremely remarkable, especially compared to the current 73% drop in the U.S., highlighted by the CAPA Centre for Aviation. Revenues at the three largest Chinese carriers, Air China, China Southern, and China Eastern, plummeted 46% year-on-year to $7.7bn in Q1, whilst facing a combined net loss of $2bn. Their financial situation compared to American Airlines Q1 net loss of $2.2bn is again remarkable. These numbers, however, must be viewed with caution, as they were self-reported by the named airlines. In contrast to those figures, McKinsey forecasted a 48% fall in air traffic, implying no continuation of the seven years of constant global passenger growth rates of 4-8%. A recovery similar to China for Europe and the United States assumes travel-bans are lifted soon, Covid-19 cases decrease and strong economic interventions, like tax and regulation waivers, are successfully implemented.


In the short-term, due to remaining ground operations and cut profits by higher airfares, many airlines will remain struggling financially, being heavily dependent on government aid. Ground maintenance and parking are significant cost factors, which could prove fatal to some airlines. While the operation of ghost flights in the U.S. was carried out to keep supply chains stable, the E.U. has adopted s