How long will it take for the industry to recover, and will it take longer for some portions of the industry to recover than others?
Travel markets will likely recover in three distinct stages: domestic, regional, and finally long-haul international flights. Domestic air travel is already running at 85 percent of pre-pandemic levels in China. As countries gain more control of the virus through health mandates or the vaccine rollout, we will see travel within their political border increase to levels closer to those prior to the pandemic.
Once domestic travel begins to recover, we’ll see regional moves to allow flights across political borders, say U.S. to Canada or U.S. to Mexico. These arrangements will be driven by bilateral relations and local convergence on rules. It should be noted, one of the biggest impediments to travel is the mixed bag of rules that are applied in the various legal jurisdictions, rules which can change overnight by fiat.
Long-haul intercontinental travel will be the last to return. This will require more unity on global travel rules or acquired herd immunity. This means that the wide-body aircraft market, with the exception of freight, will be the most challenged over near to medium term until health and political factors create more operational predictably. This has always been the case. Wide-body aircraft have always been the riskiest market since more seats means more potential to fly below capacity, and longer flights mean the political and cultural connections are thinner, which leads to greater potential for limited operating ability.
Earlier this year, the federal government provided $32 billion in relief for the airlines. Are there any other measures that can be taken?
Airlines are throwing off variable costs like labor and fuel as quickly as they can, but they still need cash. At a recent conference, it was noted that the airlines had become increasingly creative with asset-backed financing, and even using their mileage programs as collateral. These programs are estimated to be valued in the tens of billions, which makes me wonder if airlines are just flying airplanes to collect data. The bigger point here is that airlines need to defend their routes to protect the inherent value in their brand, and that takes cash. As I indicated before, the current operating environment is not profitable when you extrapolate the pre-pandemic cost structure.
It’s a balancing act for the airlines, burning down asset value via borrowing to defend the residual value of their brand and market position. One thing I airlines might want to address is pay levels. U.S. pay is higher compared to the E.U., which leads to higher cost structure and higher fares for comparable distances. This is difficult as the pilot union is quite a strong lobby, so the trade-off is more planes on the ground to avoid labor altogether versus pilots taking a pay rate more in line with the variable revenue of an airline. One thing is for certain, if there needs to be incentives, it needs to come from policymakers as airlines are running out of things they can finance to keep them aloft.
Near term, the planes likely won’t be flying, so the key thing the policymakers should address is the massive unemployment in the travel industry. As for helping the airlines, I guess that comes down to whether you see them as a strategic resource like phone and power companies. There is significant GDP generation in this infrastructure, but what does it take to keep it current without creating moral hazard? In some sense, the flight route rights are an incredibly valuable asset we have already granted the airlines and are a component of their underlying equity. What more should be done? Should we give public funds in order for airlines to protect their flight route assets? If the policy goal is to get back to normal as quickly as possible on the other side of this pandemic, then that would make sense. I am mixed on it, not for any fundamental public policy, but rather I think letting the airline route assets churn in takeover/makeover could lead to innovation and more choice.
Do you predict any lasting changes to the airline industry following the pandemic?
I think there is pent up demand for vacation travel, and recent holiday travel says that people are willing to travel despite the risks, so no changes here. I wonder what changes the work-at-home experience might inspire for a post-pandemic travel market. People and companies may find they like saving money and time if they’re able to effectively operate with less business travel. If that happens, the airline business models will be impacted for the full service, multi service class carriers. These airlines depend on higher fares for last-minute bookings and changes, so if that premium revenue stream is affected, it may affect their entire operating model. If this happens, I expect to see pressure for an airline in this sector to drop down to a Southwest Air model, single class, quicker turnarounds, and lower costs (union willing, or legally driven if through bankruptcy).
The watch word in aviation markets has always been resiliency. It is a market that has continually grown in one way or another since its inception, and it it’s unlikely to stop now. So, extrapolating from this, the names and faces may change, but probably the most surprising thing will be how much does not change from before.
How might the industry change in a broader way after the pandemic?
Industry and health scientists could come together to develop a solution, not just for COVID-19, but for any significant infectious disease. Global chains of airlines and hotels might become global monitoring sources for general traveler health without sacrificing individual privacy.
Better coordination of action is needed. Deciding to shut down travel between political boundaries is fraught with political problems, but businesses have much more latitude with much lower political impact. Businesses can act more quickly with less precise data and fewer constituents to answer to.
Risk sharing on a global basis makes sense such as an airline and hotels in other parts of the world contributing to the cost of shutdown in other parts of the globe, but it is hard to see how this can happen with current insurance market products, so maybe there is a potential change there as well. Probably the best route to something like this is an industry effort to coordinate data collection, analysis, and sharing to help establish the risk potential and impact mitigations with enhancements to business continuity products that focus on risk sharing in global travel as opposed to local conditions only.
More high-level strategic thought would be if the monitoring process was coordinated and somewhat open to researchers who could share epidemiology models for forecasting potential spread. It would be easier for business leaders to understand and act on information versus politicians, but currently the knowledge and coordination for this rests in government agencies. I think it would be a healthier if the travel industry imported some of this monitoring and participated in the decision making as opposed to simply being bystanders in the process and accepting the policies and laws they are prescribed.
Are there any “outside the box” thoughts you have on what we may learn during this period that could lead to permanent changes?
After 9/11 the climate scientists got a clear view of what was going on in the absence of jet contrails. There was missing temperature rise in the global data, but after 9/11 there was an immediate spike as air travel was suspended. This was due to a reduction in light reflecting clouds as the contrails “seed” the water particles with foreign matter to latch them together. I wonder what the climate scientists will find in the data after this dramatic drop and what it might mean for climate science and policy going forward for aviation and other industries.