Could coronavirus result in resurgence of flag carriers?
The outbreak of COVID-19 has resulted in an unprecedented global crisis. Aviation, the industry that connects the furthest corners of the globe, has suffered a lot. And the pain is yet to end: airlines, due to plummeting demand and temporary travel restrictions are seeing their cash reserves burning in front of their eyes, despite their best efforts to cut-costs.
The International Air Transport Association (IATA) highlighted that on average, airline operating costs are 51% variable and 49% fixed and semi-fixed. While the variables, such as fuel, which is at a very low price point right now, and costs to operate the flights could be reduced to a minimum by grounding the fleet and reducing the number of flights, fixed costs are exactly what they are – fixed. Depreciation, insurance, leases for aircraft and other tangible assets are costs that are difficult to overturn.
Subsequently, the peaks that were predicted for the aviation industry over the coming years are now being pushed further back. With a 40% drop in passenger demand in 2020, and a recovery of 19% in 2021 and 10% in 2022, airlines would need 2,000 fewer aircraft than previously estimated, according to research done by Vertical Research Partners, reported Aviation Week.
Already now, airlines are reducing the amount of aircraft they have on their books, with older aircraft, like the Boeing 757s or 767s, or gas-guzzling giants like the Airbus A380 or Boeing 747 sent to their final resting places earlier than airlines themselves expected to do so.
However, could coronavirus also be the culprit of new airlines popping up left and right?
Soil for new airlines
As the great Rocky Balboa once said,
“It's not about how hard you hit. It's about how hard you can get hit and keep moving forward. How much you can take and keep moving forward.”
The words could not be less true for aviation, an industry that has seen a fair few gut-punches over the years. From numerous oil price shocks, financial crises and the post-September 11 travel slump, the industry has only risen in terms of passenger numbers over the years. It has recovered from each crisis, no matter how bad things got at one point.
But each recovery, just like each crisis, was different. The post-9/11 travel slump sent shocks through the United States’ commercial aviation and resulted in a consolidation process that was further cemented by the 2008 financial crisis. Now, the market is controlled by four players with smaller and more niche airlines, like jetBlue or Spirit Airlines, trying their best to make inroads on the top four’s market share. While arguably, the top four have slept on their laurels in terms of subjective passenger experience, their pre-coronacrisis results were impressive, to say the least.
In terms of other markets, Europe has seen its fair share of consolidation as well. Air France-KLM, Lufthansa, International Airlines Group (IAG), all have used difficult periods in time to grow as groups or form bigger entities by a way of mergers. Low-cost carriers used opportunities of downturns to reduce their long-term and fixed costs by acquiring aircraft on the cheap whilst global demand was down and aircraft manufacturers had nowhere to go. Factories were running despite economic downturns and they had to make up at least some of the manufacturing costs.
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