Within eight weeks everything has changed. When the crisis ends, the industry will be a different one. The majority of airlines now don’t expect demand to normalize before 2022. Aviation is experiencing the biggest crisis in its history with the outbreak of the Covid 19 pandemic. It is now also clear that this is not a short, difficult phase, but a turning point.
Even though airlines around the world were carrying record numbers of passengers before the crisis, only a minority were doing really well.
The rapid growth of the industry in recent years – driven by cheap capital and low kerosene prices – has only been profitable for very few. Everyone else had to struggle. This was also reflected in the increasing number of bankruptcies in recent years. Air Berlin, Germania, Small Plant, Wow Air … all of them could not survive in an environment of low prices and strong competition. This was also due to the fact that prices continued to fall – to such an extent that even airline bosses said: “That’s enough. Lufthansa CEO Carsten Spohr, for example, has repeatedly condemned ultra-cheap offers such as 10-euro tickets in recent years. He argued that this was economically and ecologically senseless.
In such an environment, the large providers could afford to keep up – albeit grudgingly. Smaller ones, however, could no longer fly at cost-covering prices. Time and again, the industry talked about the fact that a correction in prices was just as inevitable as increasing consolidation, i.e. insolvencies and mergers. Such fundamental changes now receive maximum impetus from the crisis.
More bankruptcies after the end of the crisis than during the current grounding
Even in the first few months of the crisis it became clear that those who had previously struggled financially are now in acute danger. A few airlines have therefore already had to give up. The British regional airline Flybe was one of the first to go bankrupt. It was followed by the Swedish Braathens, and LGW in Germany. South African is on the brink, Air Mauritius, Virgin Australia and four subsidiaries of Norwegian are insolvent and face an uncertain future. But it will not stay that way. It is quite possible that there will be more bankruptcies after the end of the crisis than during the current grounding. Because even if some airlines manage to obtain liquidity to get through the dry phase, the new start will be tough and requires staying power. And those who were well positioned before the crisis and had built up reserves will emerge as winners.
It also will be a Lufthansa Group with fewer aircraft
It also will be a smaller Lufthansa Group, Lufthansa CEO Carsten Spohr announced in March. All airlines in the group are shrinking as a result of the crisis. Lufthansa itself, among other things, is phasing out a number of aircraft earlier – some six Airbus A380s and five Boeing 747-400’s. It is unclear whether and when the Airbus A340s currently parked in Spain will rejoin the fleet. Austrian, Swiss and Brussels will also have to make adjustments – among other things, through later deliveries or earlier phasing out of the fleet. The Group will have around 100 fewer aircraft after the crisis. Like the Lufthansa Group, almost all other airlines worldwide will keep it. Aircraft that will have to retire in the coming years anyway are now leaving the fleets earlier, deliveries of new aircraft are being renegotiated to postpone them to a later date or orders are being reduced. Ryanair, which is in a comparatively good financial position, has also announced similar measures and the closure of various bases.
New airline fleet policy will lead to the departure of certain aircraft types
The airlines’ new fleet policy will mean that fans will have to say goodbye to some of their favourite airlines earlier than expected. The number of Boeing 747s or Airbus A380s, for example, is likely to decrease faster than expected. KLM, for example, brought forward the phasing out of jumbo jets because of the crisis, and Corsair also decommissioned its last Boeing 747s a year earlier than planned. Air Transat bid farewell to the Airbus A310 earlier than planned, and the Airbus A340 is also likely to be significantly fewer in the global fleet soon.
Before the crisis, Airbus could no longer keep up with deliveries. The demand, especially for short- and medium-range jets, was so high that the aircraft manufacturer continued to increase production of the A320 Neo-Family. That is now over. Smaller fleets also mean less demand for new jets. The European group has already announced that it will reduce the output of various models. When it will regain its pre-crisis level remains to be seen, but it will probably take a long time.
Boeing had already struggled before, also because of the problems with the 737 Max. The planned restart this spring will not take place. Boeing also suffers from the decreasing demand from airlines. Probably also because of the financial burden of the crisis the plan to establish a joint venture with Embraer failed. Both Airbus and Boeing will suffer. The consulting firm Roland Berger, for example, expects demand for new aircraft to drop by 27 percent by 2030.
The situations of Airbus and Boeing
As it looks at present, Airbus is likely to emerge from the crisis stronger than Boeing from the two aircraft manufacturers. This is because the regional jets of the E2 series are now remaining competitors instead of being transferred to their own portfolio. The manufacturer from the USA can therefore offer no resistance to the Airbus A220 regional jet, nor to the high-reach LR and XLR versions of the Airbus A321. And smaller aircraft are likely to be particularly important after the crisis, because there are fewer seats to fill because of the lower demand. Moreover, Boeing was already financially stricken before.
Prices: first low, then higher?
According to an analysis by Laura Frommberg for Aero telegraph, when the supply of flights is increased again, the first thing that will happen is that the planes are full. So it should be possible to fly quite cheap for a while. A glance at China will give you a first impression. In the People’s Republic, domestic air traffic has been resuming since mid-February. There are now again half as many flights as in times before Corona. But there is no demand. Therefore the airlines offer tickets at dumping prices. From the city of Xianjing, for example, China’s largest airline China Southern Airlines offers flights for 10 to 20 percent of the usual price. Shenzhen Airlines offered flights from Shenzhen to Chengdu – a distance of about 1300 kilometers – for the equivalent of 65 cents. Others try volume discounts or flat-rate flights for one year for the equivalent of 26 euros.
But even if a similar development is likely to occur in Europe at the beginning – in the medium to long term, one would have to be prepared for rising air fares. One reason for this is that the offer will be smaller, because many airlines will go bankrupt, almost all will become smaller and routes will be cancelled. On the other hand, the costs of the providers could also rise. Similar to what happened after 11 September, new standards could be set after this crisis. Whereas after the attacks on the World Trade Center, measures such as tighter security checks and locked cockpits were the order of the day, this time it would be hygiene. Stricter cleaning regulations, fever measurements, health checks even before the flight – what exactly will change is not yet clear. But all this costs money.
Long-haul flights, in particular, are unlikely to be as cheap as they used to be. There could be even less on offer there than in Europe, for example, because there are still financially strong low-cost airlines with providers such as Ryanair, Easyjet or Wizz Air, which are likely to keep the price level reasonably low – although probably a little higher than before.
Fear of contagion will reduce demand
The passenger records of 2019 will remain unbroken for quite some time. Although some airlines predict that demand in 2022 will reach pre-crisis levels, the situation will remain unchanged. But even that is quite optimistic. The reason is not primarily travel restrictions or fear of contagion.
The global economy is facing the biggest recession in a long time. Many people are losing their jobs and can no longer afford to travel. After all, in addition to plane tickets, they often need hotels, rental cars and pocket money.
And even if the recovery comes and more people start travelling again, it is quite possible that the new normality has also led to a rethinking of the way we travel. Will quick weekend trips abroad continue to be as popular as they are now? That remains to be seen.
A decline in demand is also to be expected for business trips. Many companies are currently noticing that at least some of their meetings can be held via video conference. But of course there will always be meetings that cannot be held via video. Nevertheless, business travellers could also switch to other means of transport. According to a study by the major Swiss bank UBS, the tolerance of business travellers is increasing with regard to the length of train journeys. Instead of two to three hours, respondents can now imagine spending four hours on the train. For leisure travelers it is even six hours. During this time, up to 500 kilometers can be covered. In 2019, such routes would account for around a fifth of the European market. Precisely because business flights are a lucrative segment for airlines, many airlines now have to look at how they can replace the revenue they are losing.
Declare your state of health before the flight
Post-Corona is also likely to change a lot for passengers. Exactly which measures have to be prepared for, and which of them will be permanent, is not yet certain. Many airlines are currently announcing that masks will be mandatory in the aircraft. But it is unlikely that this will be stopped in the long term. It is quite possible, however, that it will become standard practice to declare one’s state of health before the flight. Body temperature checks before boarding could also increase as a measure to protect against infections. Some airlines have already introduced such checks. The focus on hygiene will probably be felt everywhere, and instructions at the airport and on the plane will soon be part of the travel experience, just like safety instructions or the call to pay attention to luggage. Some airlines have introduced special protective uniforms that their employees wear during the Corona period. Protective suits and visors in front of the faces are unlikely to become standard in the long term. But gloves, disinfectants and perhaps face masks would probably be seen much more often on board. We must (or may) also be prepared for more frequent cleaning of much used areas during the flight.
As far as hygiene is concerned, the airlines are stepping up their efforts. Some have already announced that they will introduce a much more thorough cleaning routine even after the crisis. Delta, for example, began to spray the cabins of all aircraft with disinfectant overnight from 1 April onwards. Prior to each flight, the same standards that apply to overnight cleaning are now also applied. This includes the disinfection of tables, touch screens, armrests and seat pockets. This will be maintained in the future as well. Many other airlines have already followed suit.
Fewer direct flights, more transfers
In the new world of aviation after the coronavirus there will probably be fewer destinations on offer than before. When the airlines gradually increase their offerings again, they will concentrate on the lucrative routes with high margins. Those who want to travel to destinations with less demand will have to be prepared to change. Before the crisis, the trend had clearly been towards more direct flights. That should be over for the time being. Airlines that are linked with other airlines in joint ventures or alliances now have an advantage because they can continue to offer a large number of destinations thanks to their partnerships.
There are also likely to be changes on shorter routes. Domestic or regional flights below a certain mileage are likely to become less frequent because, as explained above, the train is becoming a more realistic alternative. Such routes were put to the test anyway as part of the discussion about the climate damage of flying. On the other hand, the current crisis could represent an opportunity for ultra-long-distance projects such as Qantas’ Project Sunrise – even if this sounds paradoxical at first. But the record-low fuel price could make routes like Sydney – London much cheaper for the airlines. The prerequisite, however, is a high natural demand, also from business customers.
…and what about the environment?
Flight shyness was probably the word most hated by the industry in 2019, with more and more people saying they would rather not fly because of the harmful effects on the climate. It is hard to deny that the industry is not one of the most environmentally friendly. Airlines had therefore increasingly opted for compensation models in which travelers could buy certificates to offset their CO2 emissions. Myclimate, Atmosfair or Compensaid now generate significantly less revenue for their carbon offset projects, in which the passengers’ money is invested.
Is the industry becoming more climate friendly? Probably. Just because the train is likely to become more attractive than flying, and there is generally less flying, emissions will also be reduced. In addition, many airlines are removing their old models from their fleets earlier than planned. This, too, could have a small effect on CO2 emissions. However, things look less good when it comes to investing in new, more efficient aircraft. As mentioned above, deliveries will probably tend to be postponed. And for certain projects there is probably simply not enough money.
But one thing is clear: people will always fly. After all, the need to travel, to discover distant countries, will not diminish even in a crisis. But instead of being taken for granted, it may once again – as in the early days – be a privilege.
German Sources: Lufthansa, Reuters, dpa, aero telegraph, visionsblog.info