Coronavirus: How the Covid-19 crisis may reshape air travel

The first faint stirrings of economic revival are in the air. Denmark is planning to start reopening schools next week and Austria has announced a phased reopening of stores. But, Czech Republic aside, there is no immediate sign of governments lifting coronavirus travel bans. And while that situation lasts, airline fleets around Europe, including those of Aer Lingus and Ryanair, remain firmly grounded, with their owners' losses mounting.

Estimates of the cost of all this run into tens of billions of euro. Aviation industry body the International Air Transport Association (IATA) recently calculated that Europe's carriers could lose €70 billion worth of sales as the Covid-19 pandemic virtually halves demand for flights this year.

A lot of Irish people are watching very carefully for what happens next. The Government estimates that 26,000 people work in aviation in the Republic. That includes everything from working directly for airlines to the business of leasing aircraft that never land here but are owned and financed by Irish companies.

Meanwhile, air travel’s bedfellow, tourism, employs 180,000 here, about one out of every 11 workers.

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However, what happens to air travel next is anyone's guess. Industry figures and observers agree that weaker airlines are destined to go to the wall. "The sad reality is that a number of airlines will likely not survive this," says John Farrelly, managing director of Propeller Recruitment, which works for carriers around Europe.

That could turn what was a shortage of aircraft early this year into a surplus once the crisis passes. Irish aircraft lessor Avolon last week cancelled orders for 75 Boeing 737 Max planes that it was due to receive from this year through to 2023, while it postponed the delivery of others to 2024.

A shakeout seems inevitable, particularly in Europe, whose highly competitive and splintered market was thought ripe for consolidation even before anyone had heard of Covid-19.

Stephen Furlong, an analyst with Dublin stockbrokers Davy, notes that, with 950 million aircraft seats, the European and US markets are the same size. But if you want to book a flight in the US, you have a choice of 10 carriers. "In Europe there are 100 airlines, so you can see that there is going to be some consolidation," Furlong says.

Fewer airlines with fewer planes seems to be the starting point for anyone willing to take a stab at predicting aviation's future. Lufthansa this week lent some credence to that. The German group, which also owns Austrian Airlines, Swiss and Eurowings, announced it is axing its low-cost carrier Germanwings, cutting back on flights from its Frankfurt and Munich hubs, and retiring older Airbus and Boeing long-haul craft.

Day-to-day level

What happens at a more day-to-day level is harder to call. Few people are flying now, but the great unknown is whether people will want to fly when this is all over – or will our current enforced reliance on remote working and video conferencing herald a more fundamental change?

Enda Corneille, country manager with Gulf carrier Emirates, argues that a "snap-back" will happen. He points out that while air travel has not suffered body blows as severe as the coronavirus restrictions, it has rebounded from serious setbacks in the past, including the terror attacks on New York's World Trade Centre in September 2001, which left people afraid to fly for a time.

It took six months, until the spring of 2002, for the recovery to begin after those attacks, Corneille recalls. He acknowledges that it could be a taller order this time around. “A lot of things will have to happen,” he says. “Governments will have to ease restrictions both on borders and travel, and airlines will have to come after that, ramping up services.”

He explains that modern connectivity means that individual states closing their borders in one region as coronavirus spread had a knock-on effect elsewhere in the world. For example, Australia and New Zealand's decision to shut down last month hit several of Emirates' more popular routes out of Dublin, as Irish people connect to its services to both countries from Dubai. Those closures must be reversed to help spur demand.

No one denies that there will be some recovery, but there is debate over its scale and timing. Pat McCann, chief executive of Dalata Hotel Group, who sees some coronavirus restrictions lasting into September, believes that international travel will remain very muted, even in a best-case scenario.

He argues that however well the Covid-19 crisis is managed here, the problem is that our largest trading partners, the US and the UK, which are also our main tourism markets, continue to struggle with the coronavirus. "They are still very far behind Ireland, " McCann observes.

Conferences, concerts, sports and other large events on which the hotel group and its rivals partly depend for business will be cancelled or postponed, McCann surmises. General tourism, too, will inevitably suffer as its main sources fumble their way through the crisis.

Dalata's marketing staff are already turning their attention to luring Irish holidaymakers to the chain's properties. The logic is partly that restrictions will limit business from other quarters, while Irish people themselves may not be willing to risk travel for a while, even though holidaying here is more expensive than in popular destinations such as Spain.

McCann points out that Spain, along with other countries favoured by Irish holidaymakers such as Italy and France, has suffered a lot during the last few weeks, something that could deter tourism to those locations in the short term.

“They have taken a very hard hit. Will people go back there in the short term? It’s unlikely, it’s not going to happen overnight. It will take people time to get the confidence to do that.”

Normality – now defined as 2019 – will not return anywhere for at least a year or two, McCann argues. He says it will require eased restrictions and, at the very least, sight of a vaccine against Covid-19. “Look at what’s happened with our key markets,” he says. “They are the ones that will bring in the level of tourism we need, and they are not going to be open any time soon.

“I don’t want to appear negative, but we simply have to face reality.”

Pent-up demand

Corneille is more optimistic, arguing that forcing people to stay at home now is creating pent-up demand for when restrictions ease, but he sees no semblance of normality beginning to return before the autumn. “I’ve heard someone say that October will be the new August,” he says.

However, that view is tempered by the need for governments to act on restrictions and the timing of that. The Emirates manager does point out that there is a question over how long countries can sustain lockdowns. “How long is it reasonable, or even possible, to keep people in quarantine?” he asks.

Passengers have to return in sufficient numbers for airlines to make money

As restrictions lift, the issue then is whether people are willing to travel.

“As things are beginning to move, it then comes down to the rate at which people begin to feel comfortable getting on an aeroplane,” Corneille acknowledges.

Even if industry figures are split over the speed at which travel will recover, there are clues from the other side of the world about the pattern of any recovery. Furlong notes that in China, where Covid-19 was first identified and which is possibly coming out the other side of its crisis, domestic flights have been picking up first.

In an Irish context, that translates to European travel being the first to show signs of recovery. “It will take longer for intercontinental traffic to come back,” Furlong suggests. Either way, passengers have to return in sufficient numbers for airlines to make money.

Furlong says that most carriers need to sell about 75 per cent of the seats on their aircraft to make a profit, so it is unlikely that all the planes now grounded will simply take off as normal once restrictions are lifted. He thinks European airlines are in for a longer haul than that, with passenger numbers not returning to their 2019 levels until 2022.

Even as tourists return, now that more businesses have found staff can work remotely and turn up at video conferences instead of physical meetings, will corporate travellers show up in fewer numbers? Corneille argues that they will come back. “They will have to make that meeting, get those sales or do that deal,” he says.

Furlong believes businesses will cut back on such meetings, although not entirely. Where something requires five meetings, organisations may forgo one or two such gatherings, but they will still need people to get together in person the rest of the time.

However, even such cutbacks could depend on the company. Farrelly makes it clear that Propeller Recruitment will continue to travel. “There is no substitute for meeting someone face to face and we don’t plan on changing this,” he emphasises.

Irish outlook

The likelihood of European traffic being first to start on the road to recovery is good news for Ryanair. The Irish group is the continent’s biggest carrier, but is now operating 20 flights a day, compared with the 2,500 it normally operates. It flies short- and medium-haul routes and does not have intercontinental services.

Ryanair is in a good position to see out the storm, as it has €4 billion in cash and 367 aircraft against which it has no liabilities, and can thus use as security for borrowing if it were needed.

Aer Lingus, which is operating at about 10 per cent of normal capacity, is in a more complicated position. It has a European network, but has been focused on growing its transatlantic business, transferring growing numbers of passengers between North American and European flights at Dublin Airport.

Whenever the return to the skies begins, there are a few factors that could help airlines get some altitude

A slow recovery in long-haul business will hit its traffic while slowing plans to expand in this area. The airline had been likely to announce one new transatlantic service this year, or the expansion of existing ones.

Furlong points out that Aer Lingus has some important North American routes, including Dublin to New York, which will aid it in supporting this part of its business. It depends less than others on business travel, which comes to about 13 per cent of its revenues. Lufthansa relies on corporate passengers for up to half of its sales.

Aer Lingus is part of International Airlines Group (IAG), along with British Airways, and Spain's Iberia and Vueling. That group has about €7 billion in cash, and is better positioned than most to hold out while its fleets are grounded. Furlong argues that the situation for Aer Lingus could have been very different had IAG not bought the Irish airline in 2015.

The IATA has warned that most world airlines only have enough liquidity to last two to three months, making them worse off than the Irish carriers. Nevertheless, both Aer Lingus and Ryanair have cut pay by 50 per cent across the board for April and May.

Whenever the return to the skies begins, there are a few factors that could help airlines get some altitude. One is pent-up demand, should it materialise, while another is the possibility of less competition for those that return.

More tangible than either, though, is fuel cost. Airlines will be able to hedge future needs at historically low prices as demand for oil has collapsed. While there are charges now associated with previous hedging deals – Ryanair said last week that it will have to pay €300 million over 2020-21 fuel hedges – cheaper deals will at least help to bolster profits, or even allow carriers to discount seats to lure passengers back.

“People lose a lot of fear if there are cheap air fares,” Corneille observes.