It is bound to raise eyebrows from analysts and investors when a long-term value investor like Warren Buffet unloads Berkshire Hathaway’s entire stake in the five largest US airlines (Delta, Southwest, United, and American Airlines). It signals an all but total loss of confidence in the airline industry. Airbus chief executive, Guillaume Faury, said that “We are now in the midst of the gravest crisis the aerospace industry has ever known” and estimates that it will take at least 3-5 years for passenger travel to return to pre-crisis levels. There is no doubt that the Covid-19 lockdown has resulted in a dire predicament for the airline industry:
– International flights are down 87% since January, with most major airlines receiving bailouts and/or suffering job losses.
– The German government has agreed to a 9 bn Euro bailout of Lufthansa, acquiring a 20% stake in the company.
– British Airways has put 23,000 of its 42,000 staff on furlough with a risk of cutting the workforce by 12,000.
– Budget airlines like EasyJet and Ryanair are set to cut staff by 4,500 and 3,000 respectively.
– Rolls Royce is cutting 9,000 jobs and Air France said it will immediately phase out its entire Airbus A380 fleet.
– The International Air Transport Association’s (IATA) latest analysis shows that globally COVID-19 could cost airlines $314 billion in 2020, a 55% decline compared with 2019.
The bleak outlook begs the question of whether air travel will indeed ever return to a pre-crisis form and if so, how? There are several issues here that need to be addressed and we will start with the immediate and move toward the long-term.
The first and most pressing issue is safety. Mass air travel is unlikely to resume until there is widespread perception among the public that it is safe to do so. The European Aviation Safety Agency (EASA) and the European Centre for Disease Prevention and Control (ECDC) issued guidance for air passenger travel (the document can be found here). It includes detailed measures on airport screening, pre-travel checks, enhanced cleaning and disinfection, passenger management on-board, and the use of PPE equipment.
However, the reality is that social distancing simply cannot take place within the confinement of an aircraft. While there have been various proposals of empty seats and in-flight distancing measures – they are likely to fall flat from a financial standpoint. Ryanair Chief Executive, Michael O’Leary characteristically commented on the idea of an empty middle row as “mad” and added that 45cm of distancing would be “hopelessly ineffective” – a statement I would reluctantly have to agree with.
Therefore, safety and social distancing remain an urgent issue for the airlines. One which will likely continue until either the virus trickles down to negligible levels or a cure is found. This means that only those willing to take a risk or those with urgent needs will be more inclined to travel, resulting in an overall reduction in passenger travel for the airlines. Yet it is true that the same can be applied for any confined spaces or public modes of transport – they cannot guarantee 100% safety regardless of the measures in place.
This leads to the second core issue for the airline industry which is adapting to a changing environment. A discussed predicament is that leisure travel is likely to recover faster than business travel. Covid-19 brought videoconferencing to a new level of prominence, with many businesses likely to see this change as permanent. The financial gains and ease of use may very well cut all but essential business travel. This spells more trouble for the airlines for whom business travellers rank in double the amount of revenue compared to everyone else. Ben Baldanza, former Spirit Airlines CEO said that, “I actually worry more about business travel long-term than leisure travel… You’re not going to take your vacation through Zoom or Skype.” Airlines will have to adapt to this new reality. They may have to go through a period of downsizing to stay competitive or reinvent their marketing campaigns and loyalty plans for frequent flyers.
Another option that is being explored is an increased focus on air cargo. Some airlines may find that it would make more financial sense to reallocate their assets to the freight side of the business. Industry specialist Mark Diamond argues that from now on, “Airlines should treat air cargo as a core business. Cargo contribution should no longer be an afterthought in airline network and fleet planning, but rather a critical part of route decision making, alliance planning, aircraft selection and overall strategic plans and investment decisions.”
The third key issue facing airlines is sustainability and environmental impact. The trend is already well-established: there is an increasing awareness amongst the public on how travel choices directly impact their CO2 footprint. This has (and will) inevitably lead many to think twice before booking their next flight, leading some to fly less or even not fly at all.
Air travel has an image problem that can only be resolved by taking active steps in increasing sustainability and reducing the CO2 emissions. Newer and more efficient aircraft, less use of plastics on-board, and a more ethical and transparent supply chain are all welcome steps in the right direction. A Publicis Sapient survey found that “66% of respondents said they would be more likely to purchase from an airline that has increased its sustainability efforts, and 73% said they are paying attention to brands that are making a positive impact during the pandemic.”
While any significant change in sustainability will no doubt pose its own challenges, it is an opportune moment for airlines to use the lockdown and thoroughly re-think and re-integrate sustainability throughout their business model. It is not an issue to be taken lightly. Done successfully and it can remedy some of the public’s perception. Conversely, done unsuccessfully (i.e. by paying lip service), and it will further cement the industry’s tarnished environmental credentials.
Andrei E. Rogobete is the Associate Director of the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.