The COVID-19 emergency has forced us into social distancing and isolation at home. This has inevitably had considerable implications for the mobility of people. Europe is certainly the continent most affected by the effects of the novel coronavirus. Passenger numbers have decreased enormously, with a 52.9% dive recorded in March 2020 compared to the same period last year, according to the International Air Transport Association (IATA).
The total demand for cargo flights has also decreased between 20-30% and now almost half of the cargo is transported on passenger planes. Indeed, there are hardly any wide-body passenger planes flying at the moment. This means that the demand for cargo, even if it is lower than it was before, is now higher than the supply and subsequently the rates for cargo are going up significantly. Essentially, it is not because there is more cargo, but because there is less supply.
AeroNewsX spoke to Wouter Dewulf, a Professor of Airline Economics at the University of Antwerp, on how airlines could transform themselves to remain profitable.
"Fuel is very cheap right now, so many airlines are flying with cargo friendly passenger aircraft. A Boeing 777 can take 30 tonnes of cargo in the hold. In the passenger cabin they can add 10-15 tonnes, reaching 45 tonnes of cargo. Cargo nowadays pays more per kg than an economy class passenger. If the rate for cargo remains good, passenger airlines can temporarily still get revenue from this new configuration transformation strategy. However, I do not expect this phenomenon to last very long. Once the demand for medical protection materials dries up, and the airlines are taking up their long-haul passenger routes again, the yields will quickly go back to their pre-COVID-19 levels."
Has keeping the whole fleet on the ground, as most airlines have done, helped to contain the economic impact?
Professor Dewulf explained that a network carrier runs its network as a fixed-cost operation with variable revenues. The costs of an airline are in general divided as follows: 1/3 of costs are fuel, 1/3 are the staff, and 1/3 are “aircraft related.” Regarding staff, in some countries airlines can place staff in temporary unemployment, but in other countries this is not possible. As for fuel, if you don’t fly, you don’t have to pay for fuel or any route navigation costs (which are indeed variable costs). Regarding “aircraft related” expenses it’s evident that even if you don’t operate services, lease fees and some maintenance expenses remain. Furthermore, if you own the aircraft, you still have to pay off the debts and interests engaged in procuring these aircraft. As a result, if your revenues drop 10-20% and you operate in a fixed-cost network, you’ll quickly run into big losses. In this way, most of the time, it is a good decision at least for the short term, to simply ground all the aircraft in your fleet.
When it comes to state aid during these unprecedented times, there is no difference between privately held and state-owned airlines. Both are scrambling for state aid, which according to the IATA, is the only way to overcome the crisis.
“As an economist, normally I don’t like state aid, because free competition generates highest economic welfare for both consumers and producers. State aid distorts this free competition. For example, I’m against giving state aids to Norwegian and Alitalia which were already in dire straits before the COVID-19 crisis. If you are not competitive you’ll go bankrupt and that’s how the economic system works. Of course, now the crisis is so deep, in fact at least 3 times deeper than the 2008 [economic] crisis. Maybe now, almost all the airlines will go bankrupt, except for a few with deep pockets,and that’s not a desirable scenario.”
An Alitalia A320 landing at London Heathrow Airport. Photo by Anselm Ranta | AeroNewsX
Prof. Dewulf also noted the strong financial position of certain airlines which would potentially allow them to survive the pandemic – possibly even without state aid.
“Ryanair has a very good cash position and they own most of their aircraft (so no monthly fees to pay for leasing – limited cash-out) and they have very little debt. In addition, they have flexible contracts with most of their staff so they don’t have to pay their staff. If they ground their aircraft they don’t have to pay for fuel or air traffic navigation fees. These company features will allow them to survive a longer time. They can contain the losses much better than other airlines. This explains their outcry against government intervention in the European airline industry. Also, Ryanair is not a network carrier, so the moment traffic goes up again, they’ll start up point-to-point traffic on the most lucrative routes. Instead, for flag carriers like Lufthansa and Air France, operating a point-to-point route network only is very difficult because the short-haul network subsidizes the long-haul network and vice versa.”
A Ryanair 737-800 at Humberto Delgado Airport (Lisbon). Photo by Karam Sodhi | AeroNewsX
Is it conceivable that, in the face of airline bankruptcies, the uncovered routes will be serviced by the companies that will survive thanks to state aid? The Professor doesn't think that's going to happen in the case of airlines like Ryanair, Easyjet and Wizz Air which have large cash reserves, a point-to-point network strategy, and are able to vary their costs. For them, it will be easier to survive as it is fairly straightforward to start up their network again.
"Obviously, I don’t think it is a good idea to have just a few airlines left, that’s why, although as an economist I’m against state aid because it falsifies competition, on the other side and amidst the biggest aviation crisis we’ve ever had, it is now fully justified to give bridging loans to let the airlines survive at least till the next year. In addition, it is a good moment for the airlines to use the cash to put their house in order, cut the unnecessary costs, trim their networks, rejuvenate their fleets, and come out of this crisis ‘leaner and meaner." In these difficult days it might be easier to negotiate with the unions labour related items which were previously impossible to discuss. However, I still have 2 remarks. The first is that giving state aid is helping airlines that should have gone bankrupt by now like Alitalia and Norwegian. Secondly, one day these airlines will have to pay back these loans. We’ve seen Air France receiving 7 billion euros and they hardly made any profit in the last couple of years, so how will they pay back these loans with their limited cash flow? Their cash flow is so low that I’m sure that it will take years and years for the payback, if they ever pay these back..."
New re-growth for all-cargo airlines?
Recently CargoLogicAir, the British company that suspended operations in February, resumed flying. It was CLA itself that requested the suspension of its AOC (Air Operator Certificate) for three months as a measure to deal with the weak market environment. In the last 4-5 years, the cargo market was more or less stagnated and cargo volumes transported stuck at around 60 million tonnes per year with very limited growth.
“Pre-COVID-19 about half of the cargo was transported in wide-body passenger aircraft. However, as the passenger transport market growth is faster than the cargo transport growth, we will see in the future more and more wide-body passenger aircraft flying around the world that can take more cargo. So, in ten years, not half of the cargo will be transported in passenger aircraft, but 60%. During the last couple years, the supply of cargo capacity available in the aviation market was growing faster than the demand. Trade wars and uncertainty around Brexit, issues in the Middle East and the US protectionism generated a stagnating international trade level.This resulted in a continuous decline of prices in the last 10 years and it would have continued right now. However because of this crisis, passenger aircraft aren’t flying and even if the cargo amount is less, the supply of cargo capacity is even lower. This means that prices are temporarily going up and all-cargo aircraft companies, like CLA, will fly.”
A CargoLogicAir Boeing 747-8F landing at Frankfurt am Main Airport. Photo by Chris de Breun | AeroNewsX
New configurations inside airplanes, is that a possibility or will nothing change?
In the last few weeks new aircraft cabin interiors and passenger seats that have a special focus on social distancing measures, were presented. Keeping in mind both the comfort of passengers and their safety, will this remain an obstacle to economic recovery or perhaps an incentive to fly without too much worry?
“It seems that we will have to live with the current pandemic situation with COVID-19 for the next 2 years and maybe after that, there will be COVID-21 and so on. It costs so much money to change the aircraft interior configurations and I think that there will not change much on that side. Also ‘the middle seat empty’ policy, at the beginning will be implemented but not in the long term. If we look at the first flights of civil aviation in the 30s and 40s and the first jet engine flights in the 50s and you look now, not much changed. Of course, the aircraft are more fuel-efficient and bigger, there are avionics and fewer pilots, but the interior design of an airplane is more or less the same as fifty years ago. So no, I don’t think that the interior design will change after this pandemic crisis.”
The Janus design. The center seat is turned to avoid physical contact between passengers. Rendering by Aviointeriors.
Post COVID – 19 terminal logistics and customer feedback
All airports have been designed in such a way to make the most of space, contrary to the policy of social distancing and therefore it could be that the pandemic will completely change the philosophy of terminal logistics. One of the negative aspects of passenger air transport is the long waiting times for security checks, boarding, and baggage claim. As a result of this crisis, there could be mandatory health checks – meaning waiting times could be even longer. According to Professor Dewulf, in the short-term the logistic of airports will change just slightly, but as there will be less demand anyways, such will not be too complicated.
“It will take at least 2 years to get back to 2019 levels. In the next year, I’m sure that people will keep distance, only half of the gates will be used, there will be fewer flights as well, but that will not be a real problem. In the long term, the mask is going to look like something that will remain for people that are traveling and maybe documentation will be higher, like ‘COVID-19 certificates’ and health checks and maybe health testing at the airport will probably remain after the pandemic crisis, at least temperature testing.”
During the 70s and the 80s, the average speed for planes was around 1000 km/h and passengers could show up at the airport just an hour before the flight departure, and the security checks involved just a brief pass through a metal detector, shoes and jacket on, and a quick scan of hand luggage by an X-ray machine. Today not only do planes fly slower because of fuel efficiency, but also travellers have to be at the airport approximately 2-3 hours in advance. So travel is much slower and time consuming than it used to be.
“Airport management love people there because they stay there waiting and they start shopping, eating and so on, obtaining ‘non-aeronautical revenues’ a big part of their revenues. So yes, I think that they will ask passengers to get to the airport even earlier to the airport. For long-haul flights, customers will not complain too much, but for a short-haul flight, they will dislike it. Maybe passenger class differentiation could be set prior to boarding. For example business class could show up at the airport just an hour and a half before the departure, economy 3 hours before, and so on.”
Post COVID-19 airline ticket costs: will they skyrocket?
As mentioned, a lot of airlines will not make it through the COVID-19 crisis, so this could lead to a total revision of the cost of tickets. Airlines will indeed have to dispose of older aircraft as KLM did with the 747, but there are quite a few of new airplanes that have to fly. An airline makes money by flying, so if it doesn’t fly it doesn’t earn money. Professor Dewulf doesn’t believe that prices will go up, despite the fact that airlines would love for this to happen. A lot of aircraft are parked at the moment, so either they’re retired and hence bringing them into the desert, or they’ll soon be flying. There don’t seem to be any other possibilities. Very soon, the remaining airlines will build up their full network again, because it simply can’t be built up “a little bit.”
“You can’t really have 2 short haul flights a day in the morning and in the evening, if you want to attract business customers you should have also an afternoon flight because business passengers would hate it get to a city in the morning and then the return flight is only in the evening. If the meeting is finished at 4 pm they want to come back home in the afternoon. So, you need to have the full network going to become profitable.”
A Transavia Boeing 737 at Humberto Delgado Airport. Photo by Karam Sodhi | AeroNewsX
The future of low-cost airlines: will they disappear?
Initially, people will be scared to travel, as the figures in China now prove. Airlines will therefore need to encourage passengers to fly by lowering prices. However, many countries could perhaps ban travel or make it a very complicated endeavour. Professor Dewulf mentioned that it is safe to say that low-cost airlines like Ryanair and easyJet won’t disappear. Indeed, he thinks that these airlines will, very soon, reintroduce flights once the pandemic situation is under control. Note that an airline with a similar business model, Wizz Air, already reintroduced certain flights to avoid giving refunds.
Of course this will mean significantly fewer flights than before, probably 40-50% less, but of course, demand will be significantly lower. In addition, because the supply is higher than the demand, these aircraft need to be filled and the only way to fill seats is by decreasing ticket prices. Dewulf is adamant that after 2-3 months of network rebuilding, there will be huge discounts for customers as airlines look to encourage people to fly for them to be profitable.
A Wizzair A320 landing at Hamburg Airport. Photo by Max Sutter | AeroNewsX
What about the distant future?
This crisis is of course the worst in all aviation history and one of the worst in the history of mankind. It will most certainly change attitudes in human interaction but perhaps such changes could extend to aviation; will we continue to have planes with passengers not adequately spaced out?
“I’m not sure about these big changes. Maybe, in the beginning, they’ll keep the middle seat empty, but in the future, I think they’ll force people to wear a mask, with testing and health certificates compulsory. It is very difficult to predict how things will go.”
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