COMMENT: From one crisis to another

Contributor Chris Tarry is in a thoughtful mood as tries to look into the future of air travel.

Whilst it is impossible to understate the impact of the invasion of Ukraine on its citizens, I need to consider the wider economic and, in this respect, the related consequences for airlines and the travel industry.

It is worthwhile taking a view on how things were developing and what the challenges were before the 24 February 2022 and what has changed with what likely effects and consequences.

These fall into two broad categories; operational and economic and where the economic factors for some airlines arise on both the revenue and cost side of the equation and whilst for others it will predominantly be a cost effect particularly through higher fuel prices (at the time of writing oil was trading at $139 a barrel with an expectation that it will at least stay high and at times move higher on the basis of negative news and as buyers seek alternative supplies to those from Russia but where the shortfall is unlikely to be completely made up).

Longer routings, avoiding Russian, Belarussian, Ukraine as well as Afghanistan airspace will also of course have an impact.  Beyond this higher oil prices and indeed other commodity prices will have an impact on overall economic growth, through inflation, and act as a brake. Furthermore, there are a number of these impacts that will remain even if, as must be hoped, the fighting stops soon.

If I had been writing this in mid-February rather than the first week in March the focus would have been on the likelihood of the recovery momentum from not only the Omicron variant but more widely from Covid.

As suggested many times before, certainly in the case of leisure and visiting friends and relatives travel, nothing has changed in respect of intending passengers’ desire to travel, it has been a case of not being able to exercise preferences.

In the case of business travel, whilst recognising that it will take longer to recover, one can have no doubt that it will recover – indeed American’s management stated at the time of the FY21 results that whilst the number of business travellers covered by travel agreements was at some 40% of 2019 levels, in the case of business travellers not covered by such arrangements, the figure was closer to 80% of pre-pandemic totals.

Against the background where vaccine producer Moderna’s management noted that it expected the pandemic to end in 2022 but where it will need seasonal boosters for what it calls “breakthrough infections” there are good grounds for the conclusion that at the very least we are learning to live with it and where at least in this respect new normal in terms of the determinants and characteristics on the demand side will be reasonably close to what was recognised as normal before although it will not be as if it is like a rising tide lifting all boats equally.

Although I continue to believe that, apart from the obvious exceptions, this demand momentum will continue to build as more countries re-open their borders to international travel, at an airline and airport level, the nature and pace of the recovery to previous levels will continue to be determined by the operating airlines, their networks and the traffic mix.

As a result, there will be a wide range of experiences and different durations for the recovery phase; beyond this traffic growth will tend to reflect some function of economic activity where some countries, even before the impact of the Ukrainian invasion were structurally weaker emerging from Covid and where growth will be lower and slower than previously forecast with the concomitant effects on some traffic volumes.  I do not expect to be back at pre-pandemic levels until 2025-2026.

Conversely at Dubai, where passenger numbers in 2021 were some 29.1m (2020: 25.9m), management has published a forecast of 55.1m passengers for this year, the pre-invasion expectation was that it would beat this by “a significant margin”. This suggests that passengers are now (rightly) unconcerned about connection hubs – something that should be immediately apparent as there appears to be no difference in the rush to get on an aircraft and stand in a tightly packed line to both board and place luggage in the overhead lockers compared with the pre-pandemic days.

The extent to which individual airlines will be able to accommodate the actual demand of course varies. There is a range of management views from those which believe that the extent of excess demand will result in higher fares, to those where the strategy is to maximise the load factor through lower fares if necessary and to take market share. It is important to look behind the headline figures in a number of cases, lack of suitably trained employees across a wide range of activities is acting to constrain the return of capacity but where, given the way in which economics works, this is likely to result in higher fares and reduced consumer choice. The need is to solve what appears to be a structural reduction in the number of employees in a number of areas who left the industry, not as a result of their own decisions, but have found more secure jobs in less exacting environments. The need is not only to ensure those who are still there to get them quickly and safely “up to speed”, to retrain those who are returning and to train new entrants to the industry.  For the purposes of disclosure I am working with one company that has innovative approaches to solving these issues.

Elsewhere in a number of markets, the changed slot regulations in respect of the “use it or lose it” rule during the pandemic have also had an impact on passenger choice and in a number of cases it has been anti-competitive with a resulting impact on consumers and a consequent loss of economic benefit. In simple terms “might is not always right” and I am sure that these experiences will form the basis of a number of academic theses.

At the risk of being repetitive, the conclusion here is broadly similar to a number that have been reached over the last couple of years, where cash remains important and where a number of managements have indicated that they are going to the market to raise more.

On the one hand the issue of “affordable capital” will perhaps be more important than it has ever been as it is this that will determine the winners whereas with everything else not everybody can be a winner; on the other a number of governments still need to adopt new approaches to providing the connectivity that post-pandemic is even more important than before but where it remains to be seen whether Covid has acted as a sufficient catalyst for change.  Only time will tell.

This article has also appeared, revised, in Airline Business from the Flight Global Group.

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Richard Phillips, Hampshire, UK

A thoughtful article indeed. The 'longer routings' particularly caught my eye. When tracking a flight to the Maldives on FlightRadar24 recently, I noticed an incredibly busy Turkey/Persian Gulf; like threading an eye of the needle. It will not take much to close one of these areas and the routing to the Indian Ocean & beyond becomes problematical. Via West Africa, or even Lax?