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Article from BTNews 20 SEPTEMBER 2021

COMMENT: Chris Tarry “don’t waste a good crisis”

Chris Tarry, BTN’s resident analytical guru looks forward in terms of airlines.  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.

Notwithstanding what has happened over the last 18 months or so, in terms of actual numbers, the demand for air travel looking forward, is not likely to change.  What will alter is the mix.  

What this period has also shown is that at times of dislocation, given all of the unknowns and moving parts, forecasts are more wrong than they usually might be.

Not surprisingly it is almost impossible to predict, with any accuracy, which markets are likely to not only open and when but also remain open – even if we believe that we have an understanding of the assessment criteria and track the published covid data.  Indeed, there is a strong suspicion that recent relaxations in the UK criteria have had more to do with politics.  The UK was falling behind the EU in terms of tourist arrivals rather than the supposed “science” that was regularly cited as being followed.

Notwithstanding this and other “exogenous factors” the reality is that for the next 6-9 months, at least, we will continue to see restrictions both removed, most recently for example in respect of Abu Dhabi where the UAE has one of the highest vaccination rates.

The underlying proviso in the plan announced by Qantas management for the restart of its long-haul operations is that it’s implementation is dependent on the Australian government’s decisions “in the coming months,” including “future quarantine requirements'' and where the focus would be on destinations with high vaccination rates inter alia North America, UK, Singapore and Japan with flights from December 2021.

By the same token, start dates for destinations with low vaccination and high infection rates would be pushed back five months to April 2022. Whilst this would appear to be entirely consistent and logical, we are now seeing, in the case of Israel, the combination of a high vaccination rate with, in early September, the most cases per capita globally – although differences here will also reflect variances in the testing regimes; similarly, whilst both the US and UK have high vaccination rates, they too are considered to be Covid “hot spots” at the present time.  

In this respect we have seen that once markets have been opened, and there is confidence that they will at least remain open for a reasonable period, traffic – leisure and VFR – has come back strongly. Inevitably this reflects the market/model focus of individual airlines and where in Europe in August Ryanair was at some 75% of 2019 traffic levels and Wizz close to 89% but where in both cases the airlines had larger fleets.  More broadly the latest data from Airlines for America shows that domestic and Latin American traffic is back to c85% of the levels in 2019 but where traffic on routes to Mexico since the end of July has ranged from being 10% to 25% above 2019 levels where the most recent data shows that it is some 15% up on 2019.

Whilst there is an ongoing debate and divergence of view regarding how quickly travel for the purpose of business will recover. Our view remains, notwithstanding some of the comments made by at least some corporates, that within a reasonable period of time it will reach previous levels but where the geographic mix will be different. Of course, the need is not only to look at volume but also value; simply put, and despite the “budgetary benefit” of restricting corporate travel, any hint that it is placing a business at a competitive disadvantage, which is quite possible, will result in the brakes being taken off and rapid restoration in terms of volume. However at least in the near-term travel is likely to involve downgrading of the class of travel and hotels used.

The days are long gone from where a staffer told his boss that he would have to continue to travel first class given the risk that one of his clients would see him emerging from another cabin on the aircraft and consider that this was a sign that the bank was in financial difficulty.

Looking across the next few months it is reasonable to expect not only a lack of follow through in those markets which have opened to various degrees in the summer season, but also that rate of new market opening, is likely to be “pedestrian” at best. Against such a background it is no surprise that we are seeing both comments over already evident winter weakness from the booking curve and resulting actions to reduce capacity including where JetBlue, new on New York to Heathrow, currently operate only four times a week, the same frequency as the soon to be inaugurated New York – Gatwick flight.  However, at the same time the CEO of Ryanair has stated that he expects the airline to be back to previous traffic levels during the November to March period where the recovery here, and also at Wizz, is, to some reasonable degree, due to taking advantage of the dislocation through opening new routes – something that is facilitated by their decision making and operating processes.

One of the more overworked phrases from some managements is that they “shouldn’t waste a good crisis” to make the necessary changes.

Inevitably despite the best intentions, my fear is that too little will be done too slowly on one hand, whilst on the other we will see the implementation, even of business changing, ideas and the associated plans only partially achieved and where it is the bit that has failed to be implemented that makes the real difference.

Against a background where there is yet again, for many airlines, a need for new equity, the gap between those for which public markets will be open and those for which they will be closed, has already widened and will widen further.

In order to complete a successful equity raise, airlines need to be able to demonstrate a more than reasonable expectation of achieving earnings momentum which are underpinned by fundamentally low enough sustainable “appropriate costs” where the maximum possible amount is variable.

It is difficult to see, where the story is a variation of more is needed to underwrite losses and/or where there is a management team with a record of falling short of expectations, (CTAIRA has a list) almost irrespective of the strategy, that there will an appetite for new equity for companies in this group. In this respect for at least a group of airlines the rendezvous with reality has yet to fully play out.


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