‘If you think 2020 was a bad year for aviation – wait till 2021’ – the real crunch may be yet to come

Global flight levels hit the floor, tens of thousands of staff lose their jobs as the aviation sector realigns to meet falling demand levels. 2020 will not be remembered fondly, but “if you think 2020 was a bad year for aviation – wait till 2021,” was the strong warning from CAPA – Centre for Aviation chairman emeritus Peter Harbison during the most recent of the company’s Masterclass series.

During the early stages of the pandemic CAPA had warned that by the end of May-2020, most airlines in the world would be bankrupt and it called upon coordinated government and industry action if catastrophe was to be avoided.

“As the impact of the coronavirus and multiple government travel reactions sweep through our world, many airlines have probably already been driven into technical bankruptcy, or are at least substantially in breach of debt covenants,” it claimed.

A coordinated government response may not have materialised, but a piecemeal approach has seen many countries across the world provide some form of parachute from saving airlines from freefall. The contrasts have been significant ranging from what some see as obvious state aid to others offering very little support to ailing operators.

Most airlines are starting to relaunch some operations but at levels significantly below those seen before the public health crisis. Traffic restrictions in place to avoid continued spread of Covid-19 and potential second waves of infection continue to blunt international recovery, albeit domestic travel shows signs of returning, led by the likes of China and Vietnam, with others following behind as they pass through their individual coronavirus lifecycles.

But, let’s not get too excited about any return to normality. Speaking on the CAPA Masterclass: Market airline capacity projections: contrasting Asia Pacific and Europe, Mr Harbison’s warning that 2021 could be “a lot worse” for the aviation industry than 2020 again calls for governments to engage and anything but a “concerted joint effort from governments” to support the sector could lead to a troubling next year.

Mr Harbison said airlines are “burning the furniture” and “mortgaging the future” in their efforts to keep cash flowing. “All we’re doing is putting bandaids on what is a gaping wound. We’re not fixing the wound,” he said.

He added: “Without inter-governmental coordination and a decent, new, sensible framework, we will not be surviving in 2021. We need to coordinate, and the alternative is protectionism, much less competition and far fewer people flying and an industry which will be uneconomic”.

When the government support funding, airline capital raisings expire and airline competition resumes in earnest, the real crunch comes,” warned Mr Harbison. “Intergovernmental coordination will be essential,” he said, and noted “now is the time to establish a new framework – not among the ashes”.

A perfect example is within the European Union, where CAPA’s chief financial analyst Jonathan Wober highlighted during the masterclass that the lifting of travel restrictions in Europe “has not been done on a coordinated basis”.

Mr Wober described the reopening of markets as “very patchy and very uncoordinated” and noted that without the reopening of operations between EU member states, airlines will be restricted to domestic markets, which are relatively small in Europe.

As such the re-expansion and recovery phase following the coronavirus crisis “could be a lot more challenging” for European airlines, he noted and the reintroduction of capacity by airlines will result in greater costs compared to the shut down period at a time that the degree to which revenue will return remains unknown.

In the United States the reopening of states and lifting of stay at home orders is “driving a little bit of an uptick in demand that maybe airlines did not expect at this point in time” particularly for the peak season in Jul-2020, acknowledged CAPA’s senior analyst Americas Lori Ranson during the masterclass.

Ms Ranson said some airlines are adding more capacity than expected, particularly for Jul-2020, and commented: “That’s a little bit encouraging, but they’re trading yield for loads right now”. She said airlines are offering low fares to encourage travel, but it remains to be seen how many customers will make bookings.

Airline revenue “is still on rock bottom”, according to Ms Ranson, who added: “Revenue is going to remain depressed for the foreseeable future”. She also noted US international travel “is going to be very tough to rebound until there is overall global coordination in terms of what passengers know and what they can expect when they reach their destination”.

US business travel demand is especially expected to remain low for the foreseeable future especially while the large conventions and trade events that drives much of this demand remains limited. This is a case globally too, albeit there is some positive movement being seen across Asia.

Also speaking during the masterclass, CAPA analyst and content editor The Blue Swan Daily Richard Maslen stated it is difficult to assess how badly business travel has been impacted by the coronavirus pandemic. Mr Maslen said the adoption of webinars, digital platforms for meetings and other systems will have “a long term effect on business travel, but we still don’t know to what degree”. He also noted the global economic recession “will effect business travel significantly”.

At this stage of the recovery Mr Maslen noted many airlines are reintroducing routes, but generally with reduced frequencies and smaller aircraft than before the coronavirus crisis. He highlighted that the reduced frequency in particular “just doesn’t work for business travellers”.

LEARN MORE… You can watch the full CAPA Masterclass session on-demand by clicking here or on the image below. This latest edition in the series also explored the new CAPA Air Capacity Models that project the recovery of air capacity in key aviation markets. After launching with editions covering Australia, China and New Zealand, it has now been extended with versions covering France, Germany and the United Kingdom.

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