Apr 08, 2022

Chapter 5

And Then There Was 2020...

“If I were reincarnated I would wish to be returned to earth as a killer virus to lower human population levels.”– Prince Philip, Duke of Edinburgh

It all began in December 2019 in a small wet market in the Wuhan Province of China. A strange and mutated version of the SARS-CoV-2 virus. In this chapter we will not discuss how the virus was spread, nor how it was created, but, how the virus which manifests itself in human beings as the COVID-19 disease crippled the entire world including the entire airline industry across the world.

In February 2020 when the entire world realized that this disease we're no longer relegated to the corners of Wuhan Province China, and that it had spread across the world starting with Europe, the entire World went into prevention mode. Leaders around the world did everything they could to stem the spread of the virus. The most obvious and at the time seemingly best action that could be taken was to stop or in some way restrict flights traveling across continents and countries. Needless to say, this had a significant impact on the aviation industry worldwide.

At the height of the pandemic about March and April 2020, the airline industry for the first time saw a reduction in air travel and air transportation of approximately 90%. This left thousands of aircraft that needed to be stored anywhere they could find spaces around the world. Being so unprecedented the storage of these aircraft costs a tremendous amount of money to store and maintain while they wait to get back in the air. The entire events were so devastating that many wonder if the aviation industry will be the same ever again.

This was the mother of all tragedies to impact the airline industry to date. Unlike other events in the past, the airline industry was hit by a very unique set of circumstances and challenges. These challenges cause the stakeholders of the airline industry, as well as customers and partners, to rethink the entire business model and mindset about the airline industry.

First, for the first time in its history, the airline industry worldwide was mandated to stop flying aircrafts with 90% of their fleets grounded. With lack of revenue and the mounting cost of trying to pay its employees, and maintain grounded aircrafts, the losses skyrocketed.

Second, the pandemic not only affected the airline industry but affected the capital markets and the financial sector as well. As already stated in chapter 4, the airline industry is intricately tied to the capital markets. With the capital markets dropping by about 35% in its valuations. This made it very difficult for the airline industry to actually raise capital in that time when it needed it the most. This further compounded the losses for the entire industry.

Thirdly, the not so obvious effect of the actions taken by the airline industry because of the pandemic. Due to the increased overhead cost of operating airlines when measured as a function of a decrease to 10% in operations, the airlines found the need to start furloughing and doing early retirements for a lot of their pilots and crews. The furloughs themselves are benign enough, yet the early retirements have a secondary effect. It is the belief of this  author that the aviation industry is needed in the world and will never go away. Therefore, by early retirement of some of their most senior pilots, this will exacerbate the pilot shortage, when the airline industry inevitably bounces back from this pandemic.

As investors and stakeholders pull their interest and funding out of the airline industry, furloughs and layoffs mount, and the cost of operating relative to income being generated, governments around the world found it necessary to step in and assist financially the airline industry. Loans were given to the airline industry with the promise that they will keep their employees employed. However, as the money initially loaned to the airline industry started to run out they began to furlough and fire some of their employees. Governments around the world again had to step in with further assistance financially. At the time of this writing, there is still funding set aside in case it is needed for the airline in the United States.

As of this writing in mid-May 2021 the airline industry does seem to be back on their feet with approximately 80% operations. Nonetheless, this has highlighted significant flaws in the business model of the airlines.

First, airlines operate with very low profit margins - in many cases operating at a loss and need to be backstopped by investors - that airlines themselves have very little room to maneuver with the slightest shot from an outside event.

Secondly, the airline industry is not necessarily independent of the governments of the country within which they operate. Events of the past year-plus have shown us that the airlines are not truly independent in a real sense from the government of the countries with which they operate. In essence, they are generally on "Economic outpatient care”.

It is clear the airline industry is making a comeback as of this writing in mid-2021. It is also clear that the airline industry in the past will not be the same in the future. Very significant changes are already on the foot as the airlines try to adapt. They have got to survive under increasing competition and need for survival, and survive the increased government regulations across the world due to the pandemic. It is clear that the story is still unfolding therefore, there's only one question left to be asked: Where do we go from here?

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Policies should not engage in stimulating demand for aircraft by airlines. The additional costs could jeopardize the solvency of the latter and be ineffective in ensuring a steady flow of orders for aircraft manufacturers.

Moreover, rather than focusing on large players, interventions should ensure that young firms and start-ups are included, for instance through complementary measures (e.g. the French Aeronautics support plan includes funds and subsidies dedicated to small and medium-sized firms). Failing to include young firms may lead to excessive consolidation by the largest players. (OECD - COVID-19 and the aviation industry: Impact and policy responses)

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