7 DECEMBER 2020
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BTN’s resident analytical guru completes the year with a positive forward looking view. He writes a monthly column for Airline Business Magazine, and is a visiting professor at Coventry University as well as lecturing and commenting on industry issues.
Whilst it might be of some interest to learn that the most recent IATA forecasts suggest a loss for 2020 of some $118bn and €37bn in 2021, the reality is that it is of far greater interest to take a view at a company and market level. It is the differences here that will determine the nature and pace of the recovery and in aggregate, the shape, size and structure of the industry, as well as its financial performance.
We have established a framework which we use for detailed analysis and which includes the six constraints and four “business states” which will impact initially on the restart phase and also determine the speed of the recovery of the industry towards pre-Covid levels of activity and the re-establishment of growth beyond that. The constraints fall into three broad categories.
In the first category are: Closed markets both in terms of international and intra-national borders; other travel restrictions, chiefly around quarantine but particularly around short notice changes and the resulting uncertainty where there should be no doubt that the outcomes from putting in place quarantine regimes are effectively identical to those of formal market closures. To this end the absence of an internationally agreed set of testing standards remains a major impediment to early return of international air travel and the associated economic and societal benefits and where testing will also be required in conjunction with mass vaccination programmes.
In the second category are those which relate to behaviours and the economy in particular; passenger confidence which will be positively correlated with at least the perception that the “freedom to travel” has been restored. Once the freedom to travel has been restored it will be the particular circumstances of individuals and businesses and chiefly their incomes that will determine the speed of the recovery and the level of demand.
In the third category the constraints are on the supply side and relate to cash and available capacity. The ongoing state of hibernation for much of the industry and materially weaker than expected northern hemisphere summer followed by a far more difficult winter, mean even more cash than had been previously anticipated will be required. Access to affordable capital will determine whether particular airlines survive and more broadly the pace and breadth of the recovery.
The four current identified activity states are: Effective or actual hibernation which is a state that is widespread in international markets for passenger airlines/activities but where a number of airlines are operating services to carry freight; restart then loss of momentum where there has initially been both a recovery in passenger confidence coinciding with a relaxation in restrictions and opening of markets which then reverses resulting in a second phase of effective hibernation; restart followed by a period of steady state/modest recovery and where the US market provides a good example of this; restart and then accelerating recovery which is a state that is evident for a number of airlines operating in large domestic markets, but by no means all given the presence of restrictions on internal travel in some markets. This pattern has also been observed internationally in the US – Mexico and US – rest of Latin America markets.
There is no doubting the multiplier effects of the airline industry not only through the aviation sector but also more generally to the wider economy. Despite our earlier comments, it is sometimes important to quantify outcomes at an industry or global level. Here we estimate that over the period 2020-2024 compared with previous forecasts, aggregate airline revenues will be some $1.7 trillion lower. To put this into context in nominal dollar terms this is equivalent to the GDP of Canada. This loss is before the wider benefit calculations are made.
In this respect it is particularly instructive to look at the impacts in some tourist destinations. In Majorca for example, the data suggests that hoteliers there had no revenue between March and June. Between July and September, perhaps the most important period financially, they received no more than 13% of what they had in the corresponding period in 2019. For countries that have closed their borders, the position is even more stark. In a normal year international tourists account for some 73% of the visitors and 88% of the expenditure in Phuket as well as providing some 55% of the passengers at the airport. Despite domestic tourists returning to the resort in June, total tourist expenditure for the year to date is just 3% of what it was in 2019. There are many more examples of similar and in some cases worse outcomes than this.
Numerous observers have suggested that the airline industry, and by implication the support and supply industries together face an existential threat. The more accurate assessment however is that although this may well be the case for a number of those currently operating in the industry and indeed the shakeout has yet to run its course, it is not the case for the industry. Demand will in the first instance recover, albeit at different rates, and then grow beyond that. Whilst we have a list of those that we consider most likely to fail it would be invidious to publish it.
Our current view of the near and medium term is based on a reasonable assumption that the necessary, and indeed at least some of the sufficient conditions, for a broader restart and sustainable recovery (vaccination, testing and removal of restrictions) may at least begin to be in place by the start of the IATA Summer 2021 season. It will be the structure of traffic at a market and airline level which will determine the pace of recovery. To this end that VFR and leisure traffic will be key components but where business traffic may well only reach some 30% of previous levels over the first 12 months of the recovery. Taken together these will have significant consequences for revenues. The time taken for individual economies to bounce back, and then grow again, will have a material and differentiated impact on pace of recovery and the associated revenue. In this respect we expect the Asian economies to both bounce back the quickest and then grow beyond 2019 levels of activity.
In terms of the structure of the supply side, there are clearly opportunities for new market entrants with new models particularly in dislocated markets with a low cost of entry. There is also a need for a number of small countries to consider “virtual airlines” as the only affordable way to provide required connectivity and economic and societal benefit. Elsewhere we also expect a greater share of point-to-point traffic, a more concentrated industry and a move back towards (sustainably profitable) demand side economics and away from supply side determination.
By definition we are moving closer to the time when the industry can begin to function again. However the issue, for perhaps more airlines than we would like to think, is still how they survive against a background of very little revenue but retaining the ability to restart when the opportunity arises. Against this background there will be a need for additional government support; without it the traditional capital markets are unlikely to be willing or able to provide the support required for the size of the industry necessary to deliver the quantum of economic and societal benefit that it has in the past, even allowing for the contribution of new entrants – something else for policymakers to contemplate where collectively their focus must move from in effect preventing the industry from functioning to supporting what are workable solutions and also meet their public health objectives.
A version of this article is in the current edition of Airline Business and a much more detailed version containing a selection of the analysis “Beyond the Bleak mid-winter” is available on request from Chris Tarry
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