CAPA Masterclass follow-up - Market airline capacity projections


Picking up from previous post-COVID Outlook Masterclasses with leading airline CEOs, the CAPA's 17-Jun-2020 Masterclass set out to explore CAPA's new Airline Capacity Projection Model.

Applying the model to various markets across the world offers some unique insights into where the domestic and international growth hotspots might be - or not. By applying the model in a comparative way to the different markets, some useful guidelines begin to appear.

In the latest Masterclass we welcomed CAPA Chairman Emeritus Peter Harbison, as well as a selection of CAPA's team of analysts including: Lori Ranson, Senior Analyst - Americas; Jonathan Wober, Chief Financial Analyst; and Richard Maslen, European Content Editor.

During the 17-Jun-2020 CAPA Masterclass a variety of questions were received from over 3,500 registered viewers. Unfortunately, time only allowed for a relatively few questions to be answered online during the masterclass.

We felt the unanswered questions contained a wealth of information, as well as providing a broad view of the key issues which are top of mind for the industry professionals who were online for the Masterclass.

Below is a snapshot of some of the questions, as well as personal responses from Mr Harbison and CAPA's Managing Director Derek Sadubin.

CAPA's next Masterclass will be held on 02-Jul-2020 and will welcome Dubai International Airport CEO Paul Griffiths to explore the impacts of COVID-19 on airports. Click here to register.

  • CAPA's Airline Capacity Projection Model provides insights into domestic and international growth hotspots post-COVID.
  • The airport sector globally is struggling financially, with some US airports benefiting from the CARES Act.
  • CAPA is working on projection models for sixth freedom hubs like Dubai, Doha, Singapore, and Hong Kong.
  • The US airline industry is projected to see around 40-50% of last year's capacity during the summer, with a concerning outlook for financial recovery.
  • Brazil's aviation market may face a worse outlook than the US, with domestic capacity reaching 30-40% of 2019 levels and international travel remaining significantly reduced.
  • Coordination, monitoring, and passenger confidence are crucial for the recovery of the inter-EU market, but challenges exist due to differing ideas and lack of communication between governments.

CAPA's next Masterclass is being held on 02-Jul-2020 and will welcome Dubai International Airport CEO Paul Griffiths to explore the impacts of COVID-19 on airports. Click here to register.

Do you think that governments will focus on state support for airports only after airlines have been 'sorted out'?

The airport sector globally is bleeding, and struggling badly. We know some airports in the US have benefitted from the CARES Act, but we hear of some bizarre outcomes where some US airports are in a better financial situation now than before COVID, due to the way the Act is distributing funds related to some of the debt-related T&Cs.

Any reason for ignoring the ME&A region?

We're working on models for 'sixth freedom' hubs like Dubai, Doha, Singapore and Hong Kong (following the current work on the US model, as well as India and Japan). The focus on Asia and Europe was due to the fact that we had completed some models on countries in these regions (Aus, NZ, China, UK, Germany and France). It takes close to 2 weeks to produce each model, though the process is speeding up.

It will be an interesting challenge to produce a model for a market wholly dependent on international. The models we've produced to date have unfortunately shown very difficult outlooks for international.

Given the issues described in managing the virus, one might conclude that the US will be closer to Europe than China. In that case, what is your view on the sustainability of the Airlines in USA (AA, DL, and UA) and Europe (IAG, AFK-LM, and LH)?

We're working on the US projection model this week and will be catching up with our analysts to discuss it and finalise the first release. The initial workings we've seen is for the coming summer to see around 40-50% of last year's capacity, but then stagnating and even declining thereafter as people remain reluctant to fly, which makes for a very concerning outlook financially for the airlines. We'll come out with more commentary next week.

But I think your statement about the US being closer to Europe than China is true. And potentially even worse than Europe, because the case load is so high in the US and growing.

For Latin America and specifically Brazil - with the LATAM and Avianca Chapter 11 situations - what do the panel see for this region?

We're working on Brazil, Mexico and Colombia in the next batch of Projection models - after the USA and a batch of Asian countries (Japan, India, Vietnam and Singapore). We're also thinking of pulling together a Latin America masterclass.

Frankly, I think Brazil could look a bit worse than the US model - getting to somewhere between 30-40% of 2019 capacity (not demand) levels for domestic during the summer and flatlining/declining after - and international just a tiny shadow of its former self all year and into 2021. Will let you know when it's ready.

Is OAG schedule data reliable for airport planning when airlines are massively cancelling capacity with 2/3 weeks' notice?

Good question, and you're right, it does provide headaches. When we use the OAG data continually, however, we can usually detect patterns on a week to week basis, so we do try to apply those forwards and adjust our projections accordingly.

With a supply-led recovery, is it likely airline cash burn will start to increase in the coming months? Subsequently, could we see more airlines exit the market as they operate routes that are unable to cover direct costs?

Cash burn will inevitably increase as you suggest. But where the goal is largely to reduce the previous cash burn levels and even break even on directs, at least the wheels are turning again and - the big issue - encouraging passengers to fly again.

As I said in the masterclass, 2021 is going to be worse than 2020, as direct and indirect government funding dries up and competition returns. There will be casualties. I think most managements are just sort of hoping it won't happen, but without any clear path beyond 2020.

Do you also have access to what used to be called MIDT, measuring demand rather than capacity?

No, we don't use MIDT as it doesn't have a lot of value for this exercise. But we do take from a range of forward looking sources - search, surveys etc.

But really it's pretty hard to estimate real future demand when in many cases there isn't yet a confirmed product for sale.

Capacity is all well and good. We could assume that airlines will only operate profitable flights, but will they be able to? Are there views on load factors? Breakeven load factors? Will there be enough passengers to produce enough variable profit per flight to cover fixed costs?

Only partially agree with your assessment. There's going to be a lot of unprofitable operation before sufficient travellers are lured back into the air. Capacity is going to have to lead demand for some time to come on most routes, notably international.

For the demand side, even though we don't include projections in our model, we are trying to analyse those markets (e.g. China) which are ahead of others in recovery, to see how quickly load factors pick up and then to compare as other markets open. Airlines will be watching that too, so we can assume they'll at least be making some capacity judgements based on that.

I can't see most new capacity covering much more than direct costs (at best) for the next few months and into 2021 - given the added health related costs, slower turnarounds, limited fleet utilisation overall, some social distancing measures, and, in particular, passenger willingness to fly. The latter is the big one!

Exceptions are perhaps some domestic markets - Australia, NZ, China, Vietnam, perhaps Japan.

In Australia - which has (had) three of the biggest domestic city pairs in the world - we've just started reopening in a big way. On Sydney-Melbourne, a one hour flight, the airlines are publishing almost a full schedule, half hourly flights. That lends itself well to cancellations, especially as the bulk of travel is discretionary.

(Incidentally, Qantas Group, which has its dual brand, is offering a lot of very cheap fares on Jetstar, the LCC, and higher than usual on Qantas - possibly to help burn the billions of points and cancellation credits they hold).

So many different interim issues, which will wash through.

Big problem is that their highly sophisticated revenue management systems are totally redundant in this environment.

Then there's a host of potential debt covenant breaches, as aircraft assets are revalued to their real values. But that one is too terrifying even to think about…

How far in advance are airlines filing their schedules and opening flights up for bookings?

They vary enormously. And of course there's a lot of same day/last minute cancellations, especially where several daily frequencies are marketed, as airlines test the markets.

Domestically, e.g. Qantas has opened up for at least the current scheduling period.

A lot of issues around this, not the least the bad reputations airlines and agents have attracted over (non)refund practices. Definitely puts a drag on ancillary sales, although these should be becoming more valuable for airlines, as cheap fares are marketed to lure passengers back.

It is said that fares will be high under post-coronavirus travels. How are current domestic fares in general? What will international fares be like as more green lanes open up? In such situations, will LCCs have an edge because of the low cost model, or FSCs have edge because holiday travel will take off later than business travel?

Costs will certainly be higher, so there will be a need for higher prices.

Frankly, I can't see most new capacity covering much more than direct costs (at best) for the next few months and into 2021 - given the added health related costs, slower turnarounds, limited fleet utilisation overall, some social distancing measures and, in particular, passenger willingness to fly. The latter is the big one!

But airline strategies are varying. In most cases there are the typical lead-in fare deals, but in Malaysia, for example, the airlines are charging higher domestic prices.

LCCs are likely to be more aggressive generally, and will probably perform better. Business traffic will be slower to resume and proportions will be smaller than previously as businesses seek to recover.

What kind of coordination is needed for the EU to recover the inter-EU market?

Two things are key. Coordination of market access, i.e. opening up borders evenly (but that will depend on where individual states are in terms of controlling COVID-19).

Secondly, and top of the list of other things, is passenger confidence - and that will only be restored as consistency of treatment along the travel journey becomes the norm. Here is where the EU (and EASA) can influence directly; but there are also issues like a lack of travel insurance to cover COVID.

Can anything be done to advocate a Global Health model for airports and airlines, with a monitoring mechanism to instil passenger confidence?

That's the billion dollar question.

There are numerous bodies which have established their various standards - and are trying, to varying extents, to coordinate. But what makes it most difficult is that there is such a mix of government(s), private interests, airports, airlines, and each with slightly differing ideas. And there is a real lack of communication between governments at present as they seek to protect their own borders.

You're right in implying that coordination and monitoring will be essential in providing confidence to would-be travellers.

Apart from IATA's concerns about safe distancing onboard flights (e.g. middle seat blocking) and its impact on airline revenues, are there other health and sanitation measures that are expected to be implemented which could potentially impact airline recovery?

There are many other areas where costs will hurt airlines, including slower turnarounds in order to clean/sanitise aircraft. This is much more onerous on short haul operations, where high utilisation is critical to low costs.

Then of course there is the fact that much of the fleet will be grounded, while their capital costs still continue.

In terms of revenues specifically, simply the fact that there is some reluctance to fly in the first place will make pricing difficult. Airlines had developed highly sophisticated revenue management systems which allowed them to generate maximum price for each seat. That is no longer possible because all of the fundamentals have to be recreated to adjust to new passenger behaviour.

Does the panel feel that any confirmation of a second wave of infection will permanently ground some of the bigger carriers that are surviving on government handouts if further lock downs are enacted?

Bear in mind there are currently about 150 national "lock downs" where any visitor, including nationals, must endure 14 days' quarantine. So that has a massive impact on international operations.

We're sort of in the "Phoney war" at present, holding our breaths, getting some oxygen from governments and burning the furniture at the same time (e.g. United selling down their Loyalty programme, airlines raising cash against their aircraft assets).

Although everyone is hoping the uncertainty will be swept away soon, it simply ain't going to happen. Most countries are really still dealing with their first wave - think USA - and I think rushing into getting people back into the air brings a real risk of moving too quickly in a way that creates concern for passengers, as there is no consistency of treatment.

If passengers don't feel happy travelling (and companies fear for their employees), demand will be very soft. In turn that will hurt revenues. If you add to that the potential for a second wave - yes, a lot of airlines will be in a bad way.

Delta has already shocked the market by disclosing it was at risk of defaulting on its debt covenants (as asset values were deteriorating). So if they, the world's most profitable airline, are endangered, you have to assume others will be feeling very nervous - and we're only three months into this.

Because of low treasury yields, airports and other real assets have turned into very attractive investment opportunities, providing stable cash flows and annual growth. As a result, EBITAR multiples have reached 20x2B rates. Do you believe that interest in infrastructure will lose its attractiveness due to COVID crisis?

Our Airport analyst has provided some thoughts:

EBITDA multiples on airports have actually reached more than that, up to 40x, but those were rare, and years ago. The average has been about 18x in recent years, though there have been exceptions (e.g. London City on sale).

Right now, there is very limited deal activity. Certainly, new transactions are off the menu altogether, and that will be the case probably for 12 months or so while investors decide if there is a future in airports. When activity recommences it is likely to be more in the way of P3s, which have been gaining in popularity around the world and especially in the U.S.

P3s are an 'entree' to the business, and public sector investment is going to dry up, so there may be some new players who sense the 'main chance' as long as the air transport business does look to have a future.

There is still a little bit of activity, where deals were already in train, e.g. two in Japan (concessions), one ongoing and one delayed for three months, India (concessions delayed, not cancelled) and Brazil (final concession tranches on smaller regional airports).

CAPA's next Masterclass will be held on 02-Jul-2020 and welcome Dubai International Airport CEO Paul Griffiths to explore the impacts of COVID-19 on airports. Click here to register.

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