Airline industry in hot water

The very premise and essence of 21^st century globalization hinged on the smooth communication and ease of travel across the world. Well, I won’t be wrong to say that corona has broken off the neck of airline industry by halting the global air travel, the core of the globalization.

According to International Air Transport Association, global airlines are going to lose estimated $314 billion(down 55% vs 2019) Revenue Passenger Kilometers(RPK) due to global pandemics.

On the other hand, global airline share prices were also seen in hot waters, declining by 35% in March’20. Though some recovery was observed later, on accounts of government stimulus.

As far as the comparison of the number of flights in 2020 is concerned, they have registered a steep decline as compared to the same period last year(2019). The decline is astonishing! As the corona cases grew exponentially, the number of flights per day started to fell sharply amid the travel restrictions and impositions of lockdowns.

Furthermore, this graph shows the year-over-year % change in flights overall and for top air traffic countries. As of 13^th-April-20, decline in flights in major European countries was above the staggering 90% mark.  This hints on the intensity of the losses that the airline industry is accruing due the global pandemics.

In the last 90 days, the global number of flights per day has shrank by 78% from 111,541 on 27^th- Jan-20 to 24,583 on 25^th-April-20.

How profound are the wounds?

For most of the industries, COVID-19 shock will be temporary in nature and as soon as the virus subsides the industries will revive, but for airline industry its different. The wounds inflicted on the airline industry by COVID-19 cannot be categorized as temporary because it will take at least 2-3 years for them to catch back to their original levels. It took airline industries several years after Post 9-11 to regain the consumer confidence, and COVID-19 isn’t any different because COVID-19 has ingrained a fear in consumers, changing their perception about travel.

At the moment, nearly two-third of the world’s 26,000 passenger aircraft are grounded while approx. 25 million jobs are at risk. Passenger airlines are facing financial stress and several of them only have just 2-3 month of cash to cover their operations. It’s chaos in the industry and some airlines are even headed towards bankruptcy unless government bails them out.

Airline industry was fragile even before the coronavirus shock. There was a long tail of weaker airlines and only 30 airlines were driving improvement. Balance sheets debt levels were very high and quick ratios were not that great.

The crises in the airline industry is also reflected in the falling passenger yields. According to IATA Economics, global average passenger yield(US$ terms) fell by 6% Y/Y in Feb-20. Though, its been 2 months to that fall and we are expecting further fall, given the new wave of restrictions, increased traveler anxiety and travel bans in March and April.

How global pandemics will redefine the airline industry?

The most important part of the discussion is the future and how is the global pandemics going to change the way the airline industry functions. According to media reports, higher fares, fewer routes, pre-flight health checks and less free food will become the new normal in the airline industry. More broadly speaking, we can expect a new order in the airline industry.

The most important factors are how long will it take before the consumers gain confidence back. According to the association survey 45% of the recent travelers anticipated waiting at least a month or two after the virus is contained before flying again. While the business travel might recover quickly, leisure travel will still take time to return to normal. Consumer confidence holds the key for the revival of airline industry. To regain consumer confidence, the budget carriers are planning to keep the middle seats empty, at least initially, to reassure customers about personal spacing.

Apart from that, as a result of global pandemics airline configurations might change too as carriers will try to squeeze more money from customers to cover up their losses. This might come through the ancillary charges or direct flight charges. In Europe, ancillary charges are already rising. Moreover, according to Boston Consultancy Group,  as we saw after the 9-11 terrorist attacks, security was tightened in the U.S, we can expect travelers being subject to temperature checks, or requiring health certificates to fly.

We are living in unprecedented times. Times which have reset the clock on a decades-long aviation boom that’s been one of the great cultural and economic phenomena of the postwar world. While, it is really hard to predict the future while the crises is still unfolding, but the future of airline industry is gloomy for at least next few years. I would like to end this note with the quote on airline industry:

              “You can't have a mid-life crisis in the airline industry because every day is a crisis”.

Disclaimer: Please note that most of the data was obtained through IATA Economics.