Analysis Reports

There’s been much talk about the post-COVID industry reverting to the profile of the 1970s, with its reduced traffic levels, the prospect of more active government intervention, smaller networks and higher prices.

But in two very important ways the real timeframe to compare is the 1930s. There are important lessons to be learned from industry and government behaviour 90 years ago.

First of all, WWI had spawned the multilateral Paris Convention of 1919, which established that every state had absolute sovereignty in the airspace over its territory, a response to the new aircraft that easily crossed boundaries. That meant essentially that all borders were closed to foreign aircraft and permission became necessary even to overfly.

Secondly, in the earlier, barnstorming days of aviation the biggest inhibitor of commercial air travel expansion was safety. There was an uncomfortable tendency for airlines to crash, a feature that would-be passengers found undesirable.

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Quarantines and other restrictions imposed on travel between certain states in Australia have forced airlines to cut back many of their domestic services. While this has stifled the recovery of the country’s most important domestic traffic flows, it has also boosted the importance of routes that do not cross state borders.

Capacity has returned to match or exceed pre-COVID levels on some of these routes within states (intrastate). With most out-of-state – and international – destinations out of reach, Australians have been looking closer to home for leisure travel options.

These markets have provided a welcome trickle of revenue for Australia’s airlines. But for a meaningful domestic recovery, they need the high-volume interstate routes to return.

Qantas and the other major airlines have been lobbying hard for state border restrictions to be eased where it makes sense, and for a more targeted and standardised, predictable method for isolating any future outbreaks. Other sectors of the travel industry are also aligned in this effort, putting immense pressure on state governments.

As states get infection levels under control, this pressure seems to be paying off. In the week to 24-Sep-2020 some important state borders have been opened, and airlines have responded by resuming more flights in these markets. Some borders – most notably those involving Victoria, which is now getting an outbreak under control – will remain closed in the immediate future. But elsewhere there appears to be growing momentum to ease interstate restrictions.

COVID-19 cases in Europe reached 360,000 in the week of 14-Sep-2020 – 167% more than the week of 6-Jul-2020 and 100,000 more than the first peak in late Mar-2020.

This second wave of the virus, plus frequently changing travel restrictions and quarantine requirements, is weighing more heavily on airline schedules with each passing week.

Europe is now into a fifth consecutive week of deepening year-on-year cuts in seat numbers. Europe's cut of -60.1% in the week of 21-Sep-2020 is deeper than North America's -56.1% and Asia Pacific's -39.9%, but less than Latin America's -66.8%, the Middle East's -66.1% and Africa's -63.5%.

Europe's route numbers have been cut by only 38.2%, so airlines are preserving networks at the expense of the frequencies that are so important for business travel.

With the last full week of Sep-2020 now under way, European capacity derived from schedules filed with OAG for the month is projected at 42% of 2019 levels, down from 45% in Aug-2020. Oct-2020 capacity is currently projected back up to 47%, but with no sign of positive momentum in the short term, this must surely be revised downwards.

Spirit Airlines is unfazed by the rush of full service airlines into leisure markets after the COVID-19 pandemic wiped out business travel, reasoning that its low cost structure remains a formidable shield against changing dynamics in the US market. 

In the short term, Spirit is encouraged by some widening of booking curves; however, those booking windows are still short compared with historical levels. 

The airline joins operators worldwide in working to build up liquidity and stave off cash burn, but is stopping short of declaring a target to reach a zero cash burn on a consistent basis. To achieve that aim, Spirit has concluded that it will need to increase operations, which can occur one of two ways. 

Recent developments in the South Korean airline industry highlight how much COVID-19 has shaken this market – and how the fallout has affected some airlines more than others.

The pandemic hit during a particularly sensitive period for the Korean airline sector. Major takeover deals involving Asiana Airlines and Eastar Jet had been agreed to but not yet closed, and these moves would have brought significant changes to the industry landscape. But both deals have now collapsed, prompting restructuring for the airlines as they attempt to shape a new course.

Another major change expected this year was the launch of new LCCs, as the government allowed an expansion of this market segment. However, their preparations have been severely disrupted and their debuts deferred by the COVID-19 crisis.

As with most external shocks that have hit the airline industry, the latest crisis will be hardest for the airlines that were already in trouble, or those just getting off the ground.

Welcome to the latest edition of CAPA’s Coronavirus and Aviation global COVID-19 update. We offer this product to our active CAPA Members, as well as visitors to our website to help our industry navigate through this crisis.

The report contains a small selection of news briefs and CAPA commentary from around the world.

Top news headlines:

- Argentina works towards resuming domestic and international aviation from 01-Oct-2020;

- ICAO and other UN bodies call for governments to coordinate on international trade;

- China: CAAC relaxes capacity restrictions at major hubs.

Following the aviation summaries, the report contains the latest coronavirus data, globally and by country:

- More than 30 million cases of COVID-19 now diagnosed globally.

(This report appears in full in Airline Leader #53 under the title “Riders on the storm: Loyalty programmes can help airlines weather the challenges”)

The coronavirus pandemic is causing havoc in the airline industry. Loyalty programmes are helping airlines navigate the storm in various ways, with a strong focus on generating liquidity.

Recent disclosures by some of the world’s largest airlines project that their programmes are more valuable than the core airline. This projection and the ongoing crisis could be a catalyst for seismic change for loyalty programmes.

Among what is an increasing number of positive statements being made by airport managers about infrastructure investment, Latvia's Riga International Airport has committed to sticking with its ‘sustainable’ investment plan, so that it can compete with other airports with the aim of becoming a Northern European air traffic hub.

During the summer of 2020, with the support of the (EU) Cohesion Fund and its own funds, a number of large-scale investment projects worth more than EUR15 million were implemented at Riga Airport.

With so many competitors for that mantle across the region, Riga has got its work cut out, but the direction airBaltic has taken, especially with its fleet selection, could help the airport towards achieving that goal.

The potential is for Europe-Russian Federation hubbing and the development of long haul, with associated short haul feed, and airBaltic is well placed to do the former, having centralised its fleet on the A220 (the old Bombardier C-series). The airline is well positioned to set up a regional ‘low cost’ hubbing operation that could challenge the majors at their legacy hubs.

As the deadline to access loans from the US federal government nears, Southwest Airlines, Delta and Spirit have decided not to pursue that avenue, opting instead to access the markets to continue building liquidity as the COVID-19 crisis continues to result in depressed demand. 

After United used its loyalty programme as collateral to raise capital, Delta has raised a whopping USD9 billion backed by its SkyMiles frequent flyer programme. Spirit has also forged new financings backed by its loyalty programme.

All airlines are working to bolster their liquidity as hopes of break-even cash burn appear to be slipping well in to 2021 as demand, while showing some signs of improvement, remains severely depressed. 

Delta, Southwest and Spirit will avoid some of the more onerous stipulations associated with the federal loans; but all airlines continue to build up significant debt that they will work feverishly to restructure when some sense of normality returns to commercial aviation.