Skift Take

There's no getting around it: The first half of 2020 has been grim for airlines. Hopes for a quick recovery have fizzled. Until the virus is contained or an effective vaccine or therapeutic is found, airlines will continue to struggle.

It started innocently enough. The first two months of 2020, it seemed, had the world’s airlines on track to deliver their eleventh straight year of profitability. Fuel prices were pretty low. Demand was more or less strong. Businesses were traveling. Tourists were traveling. And the headline headaches of 2019—Brexit, cargo distress, aircraft shortages, etc.—looked set to ease. Then came … well, you know. A disease called Covid-19 turned the world upside down.

The nightmare started in Wuhan, China, all but shutting down the country’s airline sector during its Spring Festival. That happens to be the busiest and most lucrative period of the year for airlines like Air China, China Eastern, and China Southern, which would report a combined $2 billion in first-quarter operating losses. The outbreak then spread to other parts of Asia, then Italy and Iran, then elsewhere in Europe. New York would become a subsequent epicenter, setting the U.S. on a course to become the worst-hit nation in terms of victims. As the first half of 2020 ended, the virus had killed more than half a million people and was still spreading rapidly through the U.S. sun belt, through Latin America, through the Indian subcontinent, through Russia, and through Africa.

Airlines experienced hints of how damaging a health pandemic could be. The SARS shock in the early 2000s was an alarm bell, hitting airlines in East Asia and Canada most. H1N1 in 2009 caused significant revenue losses. Covid-19 was something entirely different however, all but shutting down the entire global airline industry. If banks were the chief victims of the world’s last economic crisis (in 2008-09), then airlines—together with other leisure and hospitality businesses—were the chief victims of this one.

The final days of March, followed by April, would become an airline dystopia of closed borders, shattered economies, grounded aircraft, and near-zero revenues. Only in China’s domestic market was some semblance of recovery—a weak one to be sure—underway. Carriers everywhere slashed costs, suspended investments, sold assets, and raised cash where and when they could. It wasn’t enough to stem the hemorrhaging though, not with many of their costs fixed and customers clamoring for refunds. The conditions set the whole sector on a path to bankruptcy, which is where several airlines in fact wound up: Virgin Australia, Thai Airways, and nearly every major airline in Latin America, for example.

Most carriers, however, didn’t need to take so drastic a step, thanks to some $120 billion in government aid, roughly equivalent to the entire GDP of Morocco. Aid came in varying forms. The U.S., for one, provided a mix of grants, loans, and money allocated specifically to pay workers. Uncle Sam is now positioned to own part of its airlines. Some governments completely re-nationalized their airlines. Others like Norway conditioned loan guarantees on promises to raise more equity. Some governments were notably generous in their airline assistance: The U.S., China, Singapore, France, Germany, Sweden, and Hong Kong come to mind, and of course Italy, compelled to save Alitalia for the 999th time. The U.K. was among the stingier governments, along with Canada, Australia, India, Thailand, and most of Latin America, hence all the bankruptcies there.

Even the bankrupt airlines though, won’t go away. Aside from Flybe and a few smaller exceptions, no airline has yet died from the Covid shock. It helps that the industry entered the crisis with a long profit streak. It helps that airline input costs, including fuel, have suddenly plummeted. It helps that private-sector capital markets remain largely open, and in fact flush with cash thanks in part to ample government monetary stimulus. When even the long-troubled Virgin Australia filed for bankruptcy, a long line of investors was ready to help. U.S. carriers have raised tens of billions of dollars through private-sector borrowing and share issuance, ensuring their near-term survival even without any meaningful revenues.

Fortunately, revenues are slowly coming back. May, as IATA described it, “was not quite as terrible as April.” June was better still, for carriers with large domestic markets anyway. But international borders remain largely closed, notwithstanding some easing within Europe. As the recovery begins to take shape, there’s a universal consensus that leisure and short-haul travel will revive faster than business and long-haul travel. For a domestic-only leisure airline like Allegiant, that’s positive news. For an intercontinental premium giant like Singapore Airlines, it’s worrisome. Geography matters though, and Asia-Pacific countries like Singapore have controlled the virus relatively well, creating potential for so-called travel bubbles. Australia and New Zealand, for example, might soon allow reciprocal tourism, perhaps including countries like Singapore.

There’s risk in opening borders though, given how difficult this particular virus is to detect and contain—many people infected feel or show no symptoms. Encouragingly, vaccines appear likely, but probably not before sometime next year. For the rest of this awful year, airlines must convince travelers that it’s safe to fly, even if that means taking costly temporary steps like blocking middle seats. Cleaning protocols, meanwhile, add a permanent new layer of cost and complexity to airline operations, though far outweighed for now by the savings born from a sudden lack of airport and airspace congestion. IndiGo sounded downright giddy when talking about Mumbai airport free of delays.

The industry thinks demand might not fully recover until 2023. Strong cargo yields are providing some modest support in the present. The future though, is filled with immense uncertainty. For workers, more pain is coming —layoffs, pay cuts, more onerous work rules… The impact is no less wrenching for aircraft builders and other key suppliers. One thing seems certain following a half-year of horrors: The world’s airline industry will be significantly smaller for at least the next two or three years.

This article first appeared in the July 6 issue of Skift Airline Weekly. Jay Shabat is a Skift Airline Weekly senior analyst and co-founder. To read more on this issue, go to airlineweekly.skift.com.

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Tags: airlines, coronavirus, labor, recovery

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