Aviation clock set back by three years

Even though there is no clarity on when international flights will resume fully across the globe, one thing is clear: flying is not going to be what it was before the Covid-19 virus struck the world. The way one travels during and after the spread of the virus is controlled is barely going to resemble flying as we know it because the aviation sector is going to be a mere shadow of what it was.

Everything will change — airlines will have truncated fleets, some may shut shop, airports and airport services will change, and other sectors like tourism and hospitality and catering are going to face the impact as well.

A month ago, IATA research showed that 25 million or 2.5 crore jobs were endangered across the world if severe travel restrictions lasted for three months. This situation is worsening as time passes.

The largest hit is going to be experienced by airlines. The International Civil Aviation Organisation (ICAO) highlighted the gravity of the situation in a document released on May 5, in which it disclosed that there had been an overall reduction in international passengers ranging from 44 per cent to 80 per cent in 2020 as compared to last year. The report pointed out that Covid-19 was declared a pandemic and started accelerating in March this year by when global international capacity had reduced by 48 per cent, with significant reduction not only in States experiencing an early outbreak but also worldwide.

The following month, with the number of confirmed cases reaching 3 million globally, airlines were badly hit, with passenger capacity seeing an estimated 94 per cent decline. The most substantial demand reduction (in numbers) is expected to be in Europe, hitting summer travel peak season, followed by Asia-Pacific, ICAO says. The impact on India is normally counted as part of the impact on the Asia-Pacific region.

Overall, IATA is estimating the aviation sector to face losses upwards of $325 billion because of the Covid-19 crisis.

From 3,50,000 to 3,000

Individual airlines like Lufthansa have started discussing what this loss translates into for them. On May 5, Carsten Spohr, the German airline’s Chairman and Chief Executive Officer, said that the airline was flying about 3,000 passengers a day, while a year ago around 3,50,000 passengers chose to fly with the airline daily. He added that in terms of flight schedules, the company had gone back to 1965 — a decade after World War II and following a 10-year ban on flights.

“In less than 65 days, we have returned to the flight plan levels of 65 years ago,” he said. This came after the company recorded the best results in its history for three years in a row.

How much the airline will be able to recover once the epidemic is over is anyone’s guess.

On April 22, BBC reported that IAG, which owns British Airways, had warned that it will take several years for passenger demand to return to pre-virus crisis levels and the UK flag carrier was “formally notifying its trade unions about a proposed restricting and redundancy programme. The proposals remain subject to consultations but it is likely that they will affect most of British Airways’ employees and may result in the redundancy of up to 12,000 of them.”

This came days after the Virgin Australia Holding Limited entered into voluntary administration to recapitalise the business. Virgin also decided to reduce over 3,000 jobs and move its operations from London’s Gatwick Airport.

Blow to Boeing, Airbus

In another indication of how flying is going to change post-Covid, the two aircraft manufacturers Boeing and Airbus reported losses of $561 million and €481 million respectively in the first quarter, Boeing added that as the pandemic continued to reduce airline passenger traffic, it saw a significant impact on the demand for new commercial airplanes and services, with airlines delaying purchasing of new jets, slowing delivery schedules and deferring elective maintenance.

In worse news for the sector, Boeing is planning to reduce the rate of its commercial aircraft production and reducing staffing levels and a leadership and organisational restructuring to align its business to the new market realities.

It is planning to reduce the production of its 787 variety of aircraft from 14 per month to 10 per month in 2020 and gradually to seven per month by 2022. The Boeing 777/777X combined production rates will also be reduced to three per month in 2021.

Similarly, Airbus said that the market environment was strongly impacted by the Covid-19 situation, particularly in commercial aircraft. “We saw a solid start to the year both commercially and industrially but we are quickly seeing the impact of the Covid-19 pandemic coming through in numbers,” Airbus’ Chief Executive Officer Guillaume Faury said.

Of course, airlines cannot remain grounded forever. Some like KLM started daily services to eight cities in Europe this month. Its target for May is the resumption of 15 per cent of its flights compared to the pre-Covid outbreak period.

Lufthansa, which is planning to reduce its fleet size by 100 aircraft, hopes to start operations in June though it is going to be a very slow start-up phase. The airline expects global demand to find a new balance only in 2023.

Analysts agree with Lufthansa’s projections. Says Lewis Burroughs, Head of Aviation-India, ICF, the aviation industry will enter recovery mode as soon as the lockdowns are lifted but he tellingly adds, “The real question is how long it will take to recover,” and says that “based on an assessment of previous crises, the market can typically take between two and six years to recover.”

Jagannarayan Padmanabhan Director & Practice Leader – Transport & Logistics CRISIL Infrastructure Advisory, adds that a quick recovery will not be possible and that as far as the traffic setback is concerned, the clock has been rewound by three years.

Abhilash Abraham, Research Analyst, Aerospace, Defence and Security Practice, Frost & Sullivan, is of the view that the pre-Covid level could be reached by calendar year 2023-24. “In the aftermath of earlier crises, the industry had a quick V-shaped recovery, which was due to the strong surge in rebound demand. Covid-19 has led to a severe global economic downturn and reduced passenger confidence and thus a quick recovery will not be possible,” he says.

Bounce-back in India

In India, however, the bounce-back could be earlier. Pointing out that India has a strong domestic passenger market that has consistently seen strong growth over the last 5-6 years, Abraham says, “By taking into account factors such as potential government support, economic improvements and faster recovery of passenger confidence, the Indian airline industry is expected to reach pre-Covid-19 levels by 2022.”

There is also near unanimity that the industry’s recovery will depend on several factors. On top of the list is the development and mass production and distribution of a Covid-19 vaccine. Once this is available, airlines will regain passenger confidence and it will also lead to easing of travel restrictions.

All this, of course, will apply to those airlines that survive. IATA has warned that apart from the top 30 airlines globally there is a long tail that might simply burn through cash and will eventually be forced to stop operations.

Abraham is candid enough to say that in the current crisis, every airline is in unknown territory, adding that even airlines that had a strong balance sheet going into the crisis are currently facing cash flow challenges and seeking government bailouts. Burroughs agrees that there will be casualties across the industry but does not give any specifics on which or how many airlines could become victims of Covid-19.

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