Who will flip right into a pumpkin?
A presentation by the Executive Chairman of the CAPA Center for Aviation, Peter Harbison, entitled “Midnight Approach: Who’s Going to Turn into a Pumpkin?” Is a story of hope and deception and a little more hope.
- Despite a massive slump due to COVID, airlines have had some positive strong tailwinds, but will the sector actually see the light at the end of the tunnel?
- Business travel will continue to be severely subdued and undermine the full-service airline model.
- While the government’s generic economic aid has paid wages, more aid is needed from governments.
Read or sit back and listen to this interesting talk on the future of aviation after COVID-19. Peter Harbison, Executive Chairman of the CAPA Center for Aviation, shares his expert opinions. He begins:
Meanwhile, I hope you will appreciate what I am talking about – half a dozen key points. The first is that reality starts to bite in the second quarter of this year as the government supports the drying up as the money needs to come in. In fact, we are approaching the new turning point. The next is, do we actually see the light at the end of the tunnel? Then a little bit about business travel, how it undermines the full-service airline model by losing a large part of it. Then where are the governments when you need them? Good question. A little bit about stab wars, the vaccination process. Then I’d like to finish with some future industry directions as I see them, some pretty big ones.
So far, airlines have had some very strong tailwinds that have helped them stay liquid over the past year despite a massive, massive market slump. In the process, of course, their debt profiles have deteriorated significantly. The government’s generic economic aid paid wages. Many countries have granted their airlines loans and / or equity, fortunately for tailwinds. Fortunately, the stock markets remained strong. A capital increase was also possible. Assets have remained high so it has been possible to take on debt.
Very often, well-funded lessors have been relatively generous in helping airlines stay afloat. And of course the interest rates are uniquely low and seem to stay that way for a long time. As a result, remarkably fewer airlines collapsed. There’s a list of them, but what was surprising about that year wasn’t how many collapsed, but how many didn’t collapse. It was just a remarkably terrible year. International capacity had dropped to about a tenth of its previous level, and many domestic operations didn’t do much better from February to March 2020 through the end of the year. At the same time, some new airlines have actually hit the market.
So now we are almost in the middle of the first quarter of this new year and the situation is still dire. What will happen next? The government’s generic economic support is expected to last through the second quarter, possibly more in the US, depending on what happens in Congress. The airline revenues are likely to remain unchanged and the cash burn at appalling rates continues. The introduction of vaccines is gradually improving consumer sentiment and hopefully will help lower the death toll and lower new cases. However, cash flow is critical now. We are approaching the turning point. The Cash Burn cannot be continued indefinitely. So airlines need to start being proactive instead of just burning the furniture to keep warm. Hope will not be an appropriate strategy in this process. It’s almost midnight.
How different will it be in the second quarter? First of all, which markets will do best when the state taps are turned off? Vaccinations tend to improve the consumer and general outlook, especially in the US, UK and of course Israel, which has been moving very quickly, and likely in China, but most importantly not globally. Business travel will remain severely subdued. International capacities are still below 10% of the prepandemic level and many borders are still closed. But the US and China should be showing some pretty good signs of improvement.
Let’s look at Europe first. Only a few weeks left before bookings recover for the second quarter, which is a key period for European airlines. Government responses at the borders are still fragmented and uncoordinated, vaccination progress is slow and uneven, and I’ll talk a little more about that later. Passengers book late and are now reluctant to fly internationally if they risk quarantines or flight cancellations. Eurocontrol, which covers the whole of Europe, expects activity to remain low until the first quarter and not to increase slightly until April and May of this year.
Meanwhile, seating capacity in Europe has continued to lag behind the rest of the world. The Middle East is down 56%. Africa has fallen by 50%. North America is down 48%, Asia-Pacific is down 45%, and Latin America is down 42%. Seat capacity in Europe has decreased by 74%. Even Europe’s LCCs, which have generally performed better around the world, are starting to do it hard. The decline in sales actually accelerated in the final quarter of 2020. EasyJet is the hardest hit as they haven’t expanded their capacity for various reasons. But this general decline for the LCCs is very important in my opinion, especially for Wizz and Ryanair. Europe’s airlines desperately need cash for the first quarter. Will it arrive in time? Probably not. The UK’s vaccine rollout looks pretty good, but the timing is too short to either build public confidence or give governments a willingness to open their borders. Selling in the markets before Easter in Europe will therefore be very complex. There’s a very upbeat chart here from the New York Times that suggests that vaccines could pretty much take the UK epidemic off the ground in weeks, considering they’re all covered by the end of June. This is an optimistic approach and maybe we really don’t know these circumstances what it will be. On the other hand, the Financial Times suggested last week that health officials say there are three different variants of the virus circulating in England, the mutation of which is believed to undermine the immune protection of the previous infection and current vaccines. So this is not good news.
In the UK, IHME, which has been very accurate in its forecasts for the past 12 months, is again forecasting a surge and acceleration in UK deaths to around 170,000 by the end of May, which is obviously having an impact on all areas of the board regarding government and consumer sentiment . Spain, which is heavily reliant on renewed tourism growth, is actually expected to get steeper in terms of deaths in February, March to April. Not a nice sign. In France, the trajectory is also on the up. So all of these are signs that it is difficult to see how Europe can recover quickly.
I mentioned earlier that US domestic aviation should return first, and this is interesting for a number of reasons. First, there is a very stark contrast between the US and most other developed nations’ attitudes towards the whole process, for a variety of reasons. It is a unique country in many ways. However, the ability to tolerate nearly 4,000 deaths a day is something most governments are not ready for. Compare that to China, where the initial outbreak was really extreme and they have since recovered and have things largely under control. Your travel restrictions get really tightened with each new outbreak, and I’ll talk a little more about that in a moment. As a result of this process and the original stance and slow growth policies, China’s domestic travel is roughly on par with pre-COVID levels. While the US remains around 50%. However, both countries expect a rapid recovery when the vaccines are introduced.
Well, these pictures are probably worth a thousand stories. First of all, it is interesting that both markets are now comparable in size. These graphs show capacity in 2020 in red, and you can see that China slumped there very quickly at the end of February as capacity was reduced and market closings have just occurred. In contrast, the US was well into March before things closed there. The red line above showing a much slower response and in many ways it was suspected has changed the whole US approach.
The dotted green line and the solid green line, the solid green line, show where we are in 2021. China is back to 2019 levels. Interestingly, this is an important time of year. Chinese New Year, the Lunar New Year, is an important time to travel and there have been significant travel restrictions to dampen further outbreaks. But the dotted lines ignore the Chinese downturn after mid-March to late March as it’s just a problem with filing schedules. But as you can see, both the US and China look pretty optimistic beyond the end of this month. The US tends to have up to 15 million passengers by the end of March, closer to 15 million seats, and China probably a few million more.
