The Airline Industry under Threat from the Coronavirus Pandemic

Of course, the title of this post is a little misleading in that the airline industry is not the only industry facing extraordinary pressure because of the global pandemic. However, it does provide an interesting case study to show how the pandemic can affect an industry in a number of different ways. Just some of those pressures will be discussed in today’s post.

One of the first consequences to the airlines was the detailing of a number of ‘ghost flights’ taking place around a number of important hubs. These ghost flights describe the process whereby an airline will fly an empty (or severely reduced capacity) flight in order to maintain a specific slot in an airport’s schedule. A number of slots on high-profile routes can be worth tens-of-millions of dollars to an airline, and a massive secondary market exists for such slots. However, under EU rules as just one example, an airline must use 80% of these allocated slots or risk losing them to a competitor. As the slots are particularly lucrative and important for the futures of a number of airlines, it is more prudent to fly the planes from and into empty airport slots, rather than lose that slot; this is irrespective of how long the decline in consumer demand may last. The airlines, and a number of onlookers concerned with the environmental impact, as well as other issues (such as increasing the health risk to employees unnecessarily) complained about this and, earlier this week, the EU relaxed these rules on account of these concerns.

The measure is a temporary but required one because the industry is coming under increasing pressure. A number of European hubs have been closed, or airlines have reduced or stopped flights to certain places – Italy being a prime example. In addition, President Trump recently declared a travel ban on a number of European countries, with more likely to follow (the rumour at the time of writing is that the UK will soon be added to the list). Today, Jet2 turned flights around on their way to Spain, whilst Tui have cancelled a vast number of flights between the UK and Spain, leaving travellers scrambling for airports. The US airlines are continuing to fly to Europe, if only to bring back employees and US citizens. However, for other airlines the situations is more dire. Norwegian budget airline Norwegian Air temporarily laid off more than half of its staff and ground 65% of its flights. British Airways, a stalwart of the international airline marketplace, has already warned that jobs will be cut because of the pandemic, in a memo entitled ‘the survival of British Airways’. It is almost certain that a US ban on British flights will have a massive impact upon the fortunes of BA, even though its parent company IAG is strong. The wider suggestion is that the industry could lose up to £90 billion in revenue this year, and that is on the basis that the pandemic subsides at some point this year, which is by no means guaranteed. On top of this, the associated hotel and hospitality industry is suffering also, with revenues predicted to plummet this year. So, what may the industry look like in the aftermath of the pandemic?

This pandemic is the worst-case scenario for the airline industry. This is because flights will be the first thing to be considered as aggravating the situation (as we have already seen), and then once the pandemic subsides the return the skies will surely be gradual and people deem the risk to slowly subside. So, the impact is immediate and the recovery will be gradual. If that becomes the case, then a number of airlines will surely suffer. With such tight profit margins anyway, the number of failures in this marketplace will surely increase. If that is so, how will national governments respond? Will the British government step in to save BA if it fails? One would imagine so. One suggestion has been that airlines will instead seek to survive however they can, and then raise prices for good in order to both consolidate their recovery and protect against future shocks. It will likely then become a competitional or anti-trust issue, although whether the position of consumers is prioritised over the stability of the industry will be something worth watching. One thing is for sure, and that is that the industry will likely not look the same when the planes return the skies as usual.

Keywords – airlines, planes, coronavirus, pandemic, @finregmatters