Crash landing: Pandemic remaking the aviation industry

As the pandemic shuts down the global economy the aviation industry is proving one of the worst hit sectors. High overheads and fixed costs have always made airlines vulnerable to drops in income and coronavirus has cut into their bottom line like nothing else. The now inevitable loss of most the summer season’s business, when airlines usually make most of their profits, is a particularly bitter blow.

The question now is will the industry be able to ride out this storm? And what will it look like on the other side?

In the near future the prospects look grim. News from the aviation industry reads like a casualty list with brutal job cuts all around. British Airways is planning 12,000 redundancies. Easyjet is planning to cut 3,000 staff and closing three UK bases – Stansted, Southend, and Newcastle. Ryanair is seeking to stave off 3,500 job losses via voluntary pay cuts.

Nor are airlines the only ones affected as other vital components of the aviation sector suffer as well. Airbus has announced it will be cutting 1,700 jobs in the UK. Rolls-Royce is cutting 3,000 jobs in the UK and has started the process by offering voluntary redundancy to every employee in its UK civil aerospace division. The baggage handler Swissport is planning to cut 4,556 jobs – over half its 8,5000 strong staff. Worldwide not a single company looks to be escaping untouched.

More may be on the way. A New Economic Foundation report, commissioned by the Trade Union Congress, suggested that UK aviation sector employers are planning to cut 39,000 jobs, 27% of the sector’s entire workforce, in the next two to three months. If one takes into account jobs tied to the supply chain up to 70,000 jobs are at risk.

In the longer term, and without government support, they predict that perhaps 69,000 people, 50% of all aviation sector employees, could lose their jobs. Another 55,000 would be at risk in related industries.

The brutal cuts are not surprising given the state of the industry during the pandemic. Since April the number of global scheduled flights has been down over 60% each month as compared with last year, according air travel data analyst OAG.

Profits have cratered. The International Air Transport Association predicts that the aviation industry will lose $84 billion this year, its biggest loss in history, and $16 billion next year. By comparison the industry lost $31 billion as a result of the 2008/9 financial crash and oil price hike.

Various airlines have already filed for bankruptcy as a result including Trans State Airline, Virgin Australia, and Avianca. Aeromexico, went under today. Closer to home FlyBe’s potential bailout was sunk, in part, by the pandemic.

If anything, the surprise is that more airlines haven’t gone under. Part of this is thanks to the generous bailouts and support packages states across the world have rolled out to stabilise the economy in the face of coronavirus.

The US approved support packages for airline and airports worth $50 billion and $10 billion each as early as March. Lufthansa recently agreed a €9 billion package with the German government. France has unveiled a €15bn support package for its aviation industry.

The UK government has been far less generous in this regard with John Grant, Senior Aviation Analyst at OAG, calling the UK’s response “woeful” when compared to its European peers. Notably, the UK has unveiled no sector specific support for aviation. Virgin Atlantic was also left scrambling after the UK Treasury flatly refused the company’s proposed £500 million bailout package.

Still, bailouts can only go so far and, in the long run, the aviation industry needs to see people flying again in order to survive.

At the moment, this is difficult. Fear has pushed down passenger numbers. Understandably, in this age of social distancing, many people worry about the prospect of spending hours in close quarters with a large number of strangers. Quarantines are another major issue. An IATA survey found that 81% of recent travellers would not consider travelling if it involved a 14-day quarantine period.

Industry experts are confident that flight and passenger numbers will eventually bounce back. However, as Grant observed “the question is when, and how painful it is”. He estimated the current crisis would cost about two to three years in growth. Other more pessimistic estimates suggests four or five years might be needed for a full recovery.

Under such circumstances Grant expects to see more bankruptcies on the horizon among “tier two and tier three carriers”. High fixed costs are one issue. Furthermore, even before the crisis, the market was too fractured with most small carriers barely scraping by. Of the roughly nine hundred airlines worldwide Grant estimated 70% of the profit was probably accrued by about twenty-five airlines.

These larger and more profitable carriers, which have the most cash reserves and capacity to raise money either from private sector, are best positioned to ride out the pandemic. Meanwhile, smaller national carriers like Air Serbia – previously maintained as points of national pride – might finally be forced to dissolve or be taken over.

Indeed, looking forward to 2023/24 Grant expects to see a “very different” aviation industry with a major consolidation along the lines of what happened in the USA post-2008. If this is the case the crisis could appear a blessing in very heavy disguise for the airlines that survive. It was only after the post-financial crisis consolidation that US airlines became consistently profitable. However, passengers, who could well find themselves facing higher fees down the line, might be less inclined to see the silver-lining.