Social distancing is easier at airports that are still pretty empty. (Photo by Nicolas … [+]
By Bruce Spear, Taylor Cornwall, and Khalid Usman
Bruce and Taylor are partners in Oliver Wyman’s transportation practice. Khalid is a senior vice president in the same practice.
After eight months of curtailed service because of the coronavirus pandemic, airlines around the world are hurting — battling back against an evaporation of demand unlike anything they’ve faced in previous recessions. Overall industry capacity is down 57 percent from October 2019, and even the bright spot — short- and mid-haul travel — remains down 46 percent, according to Oliver Wyman’s PlaneStats.com. The second quarter was the worst financially in the history of the airline industry. Third-quarter results are not showing much improvement. And now, the industry once again faces a spike in the number of COVID-19 cases around the world and a series of new lockdowns by major cities.
Where most demand shocks have involved a sharp drop in consumption that eventually rights itself in a matter of months, COVID-19 has instead triggered a tentative stop-and-start recovery that is likely to keep airline operations off balance for years. Airline executives wake each morning to news of rising cases counts, government-imposed travel restrictions, and consumer anxieties over resuming their regular routines. All are capable of triggering dips in demand that have implications for airline operations and planning.
To cope with the uncertainty, carriers have had to adopt new strategies that let them move as quickly as the virus. In addition to slashing capacity, as carriers did early in the pandemic, their most recent moves involve adjusting their schedules, operations, and cost structures to capitalize on opportunities, minimize cash-burn, and remain agile enough to respond to a meaningful pick-up in demand. Until there is a vaccine widely available, survival will depend on how long carriers can tread water and how long their cash holds out.
Rewriting the playbook
Amid the sharp drop-off in long-haul and business travel, network carriers are laser-focused on the leisure market — pitting them more than ever against low-cost carriers. The largest US airlines are even opportunistically chasing demand — recently adding about two dozen new routes, mostly to sunny destinations, in a nod for winter getaway traffic.
Airlines, striving to become more agile, are having to rethink how they run their business. That is translating into dramatically shortened planning cycles, in some cases condensing the process from six months to six weeks or less. Traditional metrics for forecasting passenger demand have also been rendered useless. This has prompted some carriers to turn to novel machine-learning methodologies and unconventional leading indicators, such as COVID-19 case counts, rate of testing, and changes in government travel and public health policies.
In an effort to avoid across-the-board cuts, airlines are also variabilizing some of their costs to better match the current volatile ups and downs of demand. For instance, pilots and flight attendants have agreed to part-time contracts or reductions in guaranteed minimum wages — helping to reduce costs when not flying, while enabling airlines to scale up quickly as demand reemerges. They are also looking for opportunities to outsource functions at airports and headquarters, which can enhance flexibility. Unlike the cost-cutting that accompanied previous recessions, variabilization may not always produce the lowest cost per seat-mile or per-flight hour. The strategy is designed to minimize cash outflows, as well as align costs with demand.
In addition to chasing demand and reducing cash burn, airlines are stockpiling cash to help weather the storm. To build up reserves, they have deferred investments and aircraft deliveries, borrowed against core assets, including frequent flier programs, and tapped government loans. US and European carriers have collectively raised more than $50 billion since the pandemic began. Still, will it be enough to last until demand returns? That depends on COVID.
New ways to stimulate demand
Rather than wait for the virus to run its course or for a vaccine, airlines and airports have been teaming up to experiment with new ways to make passengers feel safe flying today. On-site COVID-19 testing is being tried at a growing number of airports, including London’s Heathrow, and on US flights to Hawaii. Several nations are now requiring COVID tests, either administered upon arrival or through submission of recent results.
But it’s not just a fear of contracting the virus that is keeping people off planes. Would-be travelers also are worried about having trips cancelled at the last minute, or worse, getting stuck at some destination after testing positive for COVID. Government travel restrictions change frequently, adding to the anxiety. To combat this, some airlines are piloting insurance coverage for coronavirus-related disruption of trips.
One of the more ambitious approaches is the creation of “travel bubbles” — designated routes between a set of markets with low COVID case counts and testing programs with low numbers of positives. These corridors of safety allow airlines to provide more assurance that trips will not be interrupted, and passengers will be safe end-to-end, and not just on the aircraft. The catch is that success depends on government policy and public compliance to keep the rate of infection at a modest level. Japan has established a travel bubble that includes Laos, Malaysia, Cambodia, Taiwan, and Myanmar; Australia has one with New Zealand and is in talks with Japan, South Korea, and Singapore.
After COVID
Right now, airlines are understandably preoccupied with short-term survival, but they also need to plan for when demand finally returns. Will they be ready? Once people are willing to fly, there is a chance that many carriers will find themselves unable to ramp up service fast enough. It could be because too many aircraft were taken out of service, or too many laid-off pilots and mechanics need recertification or found employment outside the industry. Airlines and governments must remember that decisions made today may have ramifications for the speed of the recovery.
While government support allowed some carriers to defer major layoffs for months, that support has now mostly ended, and airline bankruptcies and large-scale layoffs are back on the table. Four of the largest carriers in Latin America have all filed for bankruptcy protection in recent months. In the US some 32,000 airline workers were furloughed just after the Coronavirus Aid, Relief, and Economic Security (CARES) Act — which offered payroll protection — expired September 30.
Even for carriers that avoid bankruptcy, many will be left with weakened balance sheets and limited capital for expansion. This needs to be a concern for governments around the world, given the role aviation plays in global economic growth. According to an August report of the United Nations World Tourism Organization, COVID-19 has put up to 120 million tourism-related jobs at risk. The economic damage is likely to exceed $1 trillion in 2020 alone. The United Nations Conference on Trade and Development predicts the pandemic threatens as much as 2.8 percent of the growth in global gross domestic product.
The longer COVID-19 weighs on the economy and suppresses demand for air travel, the longer it will be before aviation can meaningfully contribute to a global economic recovery. While the industry and governments have responded quickly to help carriers survive the first nine months of the pandemic, they still will have their work cut out for them even after the world begins to recover.
