Can Airlines Survive Covid-19?

Can Airlines Survive Covid-19?

The airline industry roared into 2020 bursting with promise.

Even the grounding of the Boeing 737 Max in the wake of accidents and concerns about flaws in its manufacturing did not lead to a slowdown. (Although it did dampen some expansion of new routes and additional flights for airlines that had counted on having those aircraft in service.)

But alarm bells started going off throughout the industry when President Trump halted flights from China when reported cases of the novel coronavirus began to surge there. Airlines with international routes that service Southeast Asia were the most directly impacted, but every airline monitored the situation with concern…

Since that time, the effect of shutdowns and cancellations has snowballed. Airlines are running at reduced capacities, with decreased routes and single-digit load factors.

The TSA reports that air travel volume is down 90% over this time last year.1

90%!

Some airline companies experienced across-the-board pay cuts. Others vowed to employees that this would be a last resort.

Meanwhile, airline stocks — which were hitting healthy highs at the beginning of the first quarter — nosedived at record rates. The drops were so precipitous that financial advisers across the board recommended them as a bargain buy. The thought was the airlines would recover once the summer travel season kicked off.

The S&P 500 Airlines subindex, comprised of the nation’s major airlines, was down about 30% by the end of the first quarter.2

So What Does the Future Hold?

Revenues for the first half of the year will clearly take a substantial hit. How individual companies weather that will depend in part upon government assistance.

Another key factor in the equation is each individual airline’s cash position. A company like Southwest Airlines, with ample cash reserves and lean debt, has a clear advantage over an airline like Delta, which is in a weaker position.

However, the shutdowns have lasted longer than many have anticipated, and there doesn’t appear to be a clear path for the country to return to business as usual for weeks, maybe months, to come. Unemployment has soared, and businesses are adapting to web meeting platforms over face-to-face options.

Additionally, it looks like the belt tightening will extend beyond the airline industry to the economy as a whole, as financial prognosticators predict a lingering and significant economic downturn.

Even after the danger has passed, out-of-work consumers may rethink vacations. Businesses will continue to cut costs and will scale back business travel. The airline industry will likely end up looking quite different — perhaps for years to come.

Some predict that airlines geared more toward domestic U.S. travel stand to rebound more quickly than those who offer more international routes, favoring firms such as JetBlue and Southwest.1

Edward Russell of The Points Guy predicts an industrywide hard reset for airlines, from which they will come out “leaner and meaner.” He predicts that air travel will not turn back to anything resembling normal before summer 2021 and quotes Delta Air Lines CEO Ed Bastian saying, “This is 9/11, SARS and the Great Recession all rolled into one.”3

Russell describes airlines being in a triage mode, paring down staffing, schedules and routes. On April 2, he noted the Transportation Security Administration (TSA) screened a mere 5% of the number of travelers that had passed through checkpoints at the same time last year.3

Is It the End of Big Airlines?

Mike Blake of Insider.com assures us that travel will rebound.

Weeks of enforced cabin fever will spark the American desire to travel for pure leisure and reconnection with loved ones.

Blake quotes a Tripadvisor statement saying, “People’s desire to travel is resilient. What we’ve seen through SARS, Ebola, terrorist attacks and numerous natural disasters is that the travel industry has always rebounded.”2

It’s likely we will start seeing great deals on flights and other travel services. In fact… it’s already happening…

And chances are bargains will continue for a long time to come.

Additionally, many airlines relaxed cancellation and change policies as fears and shutdowns pursuant to the virus caused consumers to change plans in the early days of the pandemic. In a bid to keep consumers happy in the uncertain future, it is likely that these more lenient policies will continue, making the purchase of a ticket a lower-risk proposition.

Kunal Shah of Fortune predicts consolidation and a trimmed-down workforce.

In the short term, airlines will serve fewer routes and offer less capacity, focusing on high-volume routes that promise the greatest return. One driver of this reduced capacity, Shah explains, is the current mothballing of older airplanes. With no plans to replace these aircraft in the near term, potential capacity will remain limited, while plans to purchase new aircraft will be tabled until these lean times pass.4

Airline execs are expecting government aid to serve as a bridge at best, but not a total solution, as they each find their own way to survive this crisis. The $50 billion stimulus package that the government has established for the airlines will help them to pay employees and meet obligations in the coming months.

But their ultimate survival will come down to strategy, timing and perhaps the factor they have the least control over — diminishing fears of the virus.

With purpose,

Dr. Patrick Gentempo

Patrick Gentempo