CAPA Live Outlook: The airline industry never the same again

For more information on the Feb-2021 edition of CAPA Live, click here.

Previewing his outlook presentation, Mr Harbison said, "There is something very important that most airlines either do not recognise - or don't wish to: The future airline industry will never be the same again. Vitally, the 2021 industry will - at best - be half the size. Yet the industry is betting the house on a substantial recovery in 2Q and 3Q 2021. What's Plan B?"

Airlines have enjoyed some tailwinds, which helped them remain liquid over the past year, though their debt profiles have deteriorated greatly. These tailwinds included government "generic" economic aid/wage packages, direct equity investments and uniquely low interest rates.

Mr Harbison said it was surprising how so few airlines went out of business in an "unimaginably dreadful year, where international capacity fell to around one tenth of its previous level and many domestic operations fared only slightly better".

Please see Only a few airlines collapsed in 2020

Fast approaching the tipping point

Government "generic" economic support will continue until 2Q, or maybe longer in the US. But in the absence of demand, airline income is likely to remain static, while cash burn continues.

The vaccine rollout should gradually improve consumer sentiment (in some countries, not all) - and the horrific mortality levels should start to subside.

"Cash flow is now critical, but we're fast approaching the tipping point. Cash burn cannot continue indefinitely, so airlines will need to become pro-active, rather than just 'burn the furniture' to keep warm", said Mr Harbison.

Mr Harbison expects cash burn to increase when short haul travellers return, as there will be too many seats available. Airlines will seek to defend their market shares, depressing prices. Business travel will remain heavily subdued, hurting yields, and leisure travellers will buy late, making it harder for airlines to accumulate advance cash. Capacity will not stabilise for months, and oil prices could surge as broader economic demand rebounds.

The loss of business travel and the added complexity of re-establishing medium and long haul international travel will undermine the full service airline business model.

Future Industry Directions

The future airline industry will be unrecognisable from its pre-COVID-19 structure, exhibiting the following seven features:

1. Airline Revenue streams, already rapidly evolving, will change greatly

• Passenger and yield profiles will be very different in the short term, pointing to a new trajectory for the medium and longer term.
• This will be driven by soft consumer demand, diminished business travel and lower average ticket yields.
• The inverse is, necessarily, that ancillaries in one form or another will have to play a much greater role.
• Airlines that have fared better than others over the past year generated 50% or more of their income from non-ticket sources. (They have also been supported in many cases by cargo carriage.)
• Other evolving revenue streams include loyalty programmes (Qantas - half of its EBIT within 3 years); brand leverage; and diversification (AirAsia becomes a digital airline, aiming at 50% non-airline revenue by mid-2020s).

2. Health and sanitation issues are here to stay

• Internationally, it will mean a continuing "Hiccup Effect" as governments protect their borders from new infection.
• Airlines will incur higher operating costs.
• Airports will need to adapt, expensively, to conform with health needs.
• Standardised testing and recognition of vaccinations will be challenging - for years.

3. The entire foundation of competition regulation has been undermined

• Government support for airlines has been so widespread that subsidy will drive much of the near-future growth, especially in international markets.
• This creates fundamental issues around competition and raises the real prospect of regrowth of protectionism.

4. As yield profiles slump, low costs will be even more vital

• Already, LCCs have expanded their market shares across the world.
• FSCs will need to reinvent themselves, including reducing costs.
• Losing business travellers means:
  • Fewer trunk routes
  • Fewer long haul services and fewer airlines
  • Higher prices for long haul international travel.

5. Reducing total airline revenues by 50% must be transformational

• It can mean any or all of the following:
  • A MUCH smaller industry - fewer or smaller airlines (with major implications for creditors and shareholders).
  • Bankruptcies, or slow painful decline as debt burdens weigh heavily.
  • Short haul - where most future growth will come from - becomes much more competitive.

6. International travel will be problematic

• Uncoordinated national responses and the "Hiccup Effect" of sudden border closures make network planning difficult - and costly.
• Long haul trunk routes, with reduced business travel revenues, will have reduced frequencies and fewer airlines, often subsidised.
• Higher fares for leisure travellers a likely outcome.

7. Environmental sustainability

• Pressures will intensify to reduce emissions.
• This comes with:
  (i) added costs and; (ii) revenue loss.

The airline industry that finally emerges will be very different from the one we knew going into this crisis.

Peter Harbison joins a stellar line-up of speakers for the Feb-2021 edition of CAPA Live, our monthly (second Wednesday of each month) virtual global event.

For more information, and to join thousands of industry colleagues to register for this essential industry gathering, click here.

Speakers at CAPA Live, 10-Feb-2021