Rebuilding air traveller confidence – not so much about price

Summary

• There is keenness to rebuild network connectivity
• Fear remains among consumers over the threat of Covid-19 infection
• And there is a big question about demand, with a promised global recession
• Consensus exists that it will take years for recovery, but no-one can seriously predict how many
• Some air travel will be lost to online alternatives

Online alternatives could capture up to 15% of business travel

The consensus of the transfer to online "meetings" is that the figure will be somewhere around 5% to 10%, but some estimates put it as high as 15%. The true scale of the loss may be difficult to measure as ultimately travel spend will grow, buoyed by some markets more than others and as population and economic influences change and cloud the figures.

Business travel, although a small proportion of the total, is the foundation of the travel sector and an essential ingredient of any full service airline's business model, but that certainty comes with a caveat: adaption to new technology could change the approach to corporate meetings in the future. It could also be the undoing of some airlines that have relied on premium clientele to deliver revenues, in the short-term, at least.

As Bill Franke, managing partner of airline investor Indigo Partners noted on one of CAPA - Centre for Aviation's popular Masterclass sessions, any company that is skewed to business travellers will ultimately be behind the recovery of the ULCC and LCC operators.

The business travel sector will shed over USD800 billion in value in 2020

The global business travel sector - which underpins many airline networks - is expected to take an USD820 billion revenue hit this year, USD190 billion in Europe specifically. The issue right now is about getting people travelling again. There certainly is some pent up demand, as highlighted by airlines that have already returned to the air, but that needs to be at a sustainable once competitive forces are in play and capacity returns close to previous rates.

Mr Franke had highlighted in his CAPA Masterclass that the use of price, a major USP of the airlines within his own investment group, would, for the short-term no long have the same stimulus in the 'new normal'. Mr Franke's own expectation is that until there is a treatment or vaccine available for Covid-19, "we're all going to be dealing with waves of events", and that leads to a question of when revenue will rebound to a standard that permits breakeven cash flow.

"If you're running an airline today you want to have cash against your objective of when you will be able to have load factors of 50% to 60%, which should provide you with breakeven cash flow, and that needs to be the first objective", he said.

Please see: CAPA Masterclass #4: Indigo Partners on aviation and travel beyond COVID-19

Restoring traveller confidence will be a complex process

The big pressing issue is first to ensure passengers feel safe to travel, and that is a complex mix of factors that extends far beyond any airline's control. It is the entire travel journey, from door to door which requires wider collaboration and coordination. More than ever, all stakeholders now need to take collaboration and coordination seriously.

World Travel & Tourism Council (WTTC) president and CEO Gloria Guevara, echoed the thoughts of Mr Franke and the need for collaboration in the latest CAPA Masterclass series on 3-Jun-2020, stating that pricing will not be the main factor to improve demand for everyone. The most "crucial" factor, she said, was rebuilding passenger confidence as quickly as possible through a coordinated industry and government approach to safety standards and removal of inconsistencies.

Please see: CAPA Masterclass #5: How to restore traveller confidence

But, evidence from airline association International Air Transport Association (IATA) suggests that airlines in particular are initially using price to stimulate demand with low fares. IATA's research shows fares for travel on domestic markets in May-2020 were down almost a quarter year-on-year, falling -23%. International air fares for the limited international services active in May-2020 were also down, but at single-digit levels. Price is an emerging pattern in the recovery process.

IATA sees initial signs that demand for air services is beginning to recover after hitting the bottom in Apr-2020. Latest figures show that daily flight totals rose 30% between the low point on 21-Apr-2020 and 27-May-2020. This is primarily in domestic operations and off of a very low base (just 5.7% of 2019 demand), but while this uptick is not significant to the global dimension of the air transport industry, it does suggest that the industry has seen the bottom of the crisis.

In fact, IATA director general and CEO Alexandre de Juniac, explained during the recent CAPA Masterclass that domestic travel in Europe is "starting to reopen" in Jun-2020, with further expansion in 3Q2020. He also said regional travel will begin to restart in 3Q2020, adding that international and intercontinental capacity should be around 50% to 60% of 2019 levels by the end of 2020.

The vital role for government multilateralism

Making the right decisions on the recovery will ultimately define its path. "We need to learn from what happened after 9/11," said Ms Guevara, who noted that the reason it took so many years to recover was because governments didn't work in a coordinated approach. "We implemented some safety standards that for every country in the world were different which led to uncertainty, fear and that impacted recovery" she noted.

"People need to know what to expect and how the experience of travel will be for them," she explained, working on the view that if all airports, airlines and governments behave the same way to standardise practice then traveller confidence will return quicker. "This is the opposite to what we had after 9/11," Ms Guevara added.

There is currently very limited co-ordination between countries. Quarantine requirements could add 14 day lockdowns at each end of any journey, and eve where travellers are freely permitted to access a country within a so-called bubble, their previous travel (outside the bubble) could ultimately force them to comply with entry restrictions.

Ms Guevara said there is "no way we are going to have corporate travellers" if countries continue to implement 14 day quarantines, adding this will further delay the recovery of both corporate and leisure travel.

The concern over a second wave of infections is understandable and adds to the traveller's fear. But the fact more countries are talking about 'bubbles', 'travel bridges' or 'corona corridors' that do away with any quarantine requirements for a select group of travellers from certain countries where the coronavirus has been contained, is positive and highlights signs of a coordinated approach to recovery.

If introduced, they should allow international travellers - for business or leisure - additional freedoms. At the same time they will still need to be subject to carefully prescribed and standardised safety procedures.

Travel replacement by online virtual meetings - temporary?

The ongoing restrictions still make the technology of online virtual meetings an attractive option for business travellers, but technology will never be a long-term solution, argued Ms Guevara. She described tech as an "enabler" where currently companies "have no choice but to use it", but there remains a high demand for businesses to travel for face-to-face dealings and onsite monitoring - which cannot be replaced by technology.

Virtual holidaying via these platforms is not an option however and there is likely to be pent up demand once restrictions start to ease. Mr de Juniac explained that the motivation for VFR and leisure will return "quicker and stronger than business", adding the "appetite to fly for personal reasons is still pretty strong".

He acknowledged that many companies will be looking to reduce travel budgets in light of Covid-19, while others will turn towards technology for meetings and business dealings instead of travel. While "travel cannot truly be replaced by technology", he admitted "we are a bit worried" about the motivation for business travel. Having faced lockdowns and travel restrictions this is generating a situation where fear transcends desire.

Developing multilateral safety protocols

New safe travel protocols have been developed and endorsed by industry associations - including both WTTC and IATA, as well as EASA, UNWTO and the ICAO Council - with a view to providing consistency to destinations and countries as well as guidance to travel providers, operators and travellers about the new approach to health and hygiene in the post Covid-19 world.

Their goal is to ensure that robust global measures are being put in place to help rebuild confidence and which are jointly embraced by the governments and private sector.

Ms Guevara urged governments to adopt them quickly so that they can be implemented globally and restore much-needed confidence in order to restart the travel and tourism sectors. As with learning from the mistakes after 9/11, WTTC's analysis of past crises shows that recovery comes fastest when governments invest in the future.

"This is the time for governments to borrow and invest in infrastructure projects relevant to tourism so that we can get the economy moving again. Right now is not the time for them to save their money and do nothing" urged Ms Guevara.

Many governments have shown their understanding of the important economic and social effects of air transportation and travel and tourism by supporting the sectors financially. The current Covid-19 crisis epitomises the long-running level playing field debate.

Government support for airlines is uneven and only temporary

The world is not evenly divided with respect to government assistance to airlines. Mr de Juniac, said he is "not worried" about competition concerns regarding government bailouts for airlines. He predicted bailouts and the purchase of equity in airlines are only "temporary" measures and won't block the evolution of the sector, arguing that competition authorities will be paying close attention to the situation to maintain competitive practices.

Looking at Europe specifically, opportunist strategies have been adopted by some airlines, none more so than Wizz Air which has already proven that, even with current constraints, there are opportunities for development for those that are willing.

The airline's CEO and founder Jozsef Varadi highlighted during a previous CAPA Masterclass that the airline had bullish intent to be one of the leaders in the recovery of international air transport. The opening of new bases in Albania, Italy, Cyprus and Ukraine from 01-Jul-2020, operating more than 50 new routes with 11 stationed aircraft highlights this.

Phased reintroduction of routes - but with lower frequency - is likely

Wizz will likely be the exception to the rule and the approach adopted by easyJet might be the model that many others will initially follow. The carrier's phased return to operations involves operating around half of its 1,000+ routes in Jul-2020 and 75% in Aug-2020, but frequencies offered will equate to less than a third (30%) of normal capacity during the period.

May-2020 has perhaps marked a turning point, but looking back at last month does not make positive viewing. You have to go quite a way back into the realms of history to find a comparable year with a similar level of flight numbers.

Another CAPA analysis - Global aviation's time travel: back to 1996 fleet & 1986 flight levels- highlights the annualised equivalent of May-2020's frequency decline of two-thirds year-on-year takes the industry back to 1986 levels.

It may not be that bad, now airlines are starting to add capacity, but it does show how the industry has evolved over the past 35 years, a period during which it has faced numerous previous major hurdles. But likewise, it also illustrates how far it has fallen over the first half of 2020.