Why supply, not demand, is the concern for airline recovery

Readers of my recent columns should be in no doubt about my disdain for the tired slogans that have been bandied about in recent months, let alone the misuse of language and statistics and the near epidemic levels of statistical illusion, particularly in confusing recovery and growth.

As we have suggested numerous times, we have few concerns on the demand side of the recovery, other than the time horizon over which it will first appear and then grow. Indeed, there are few reasons to adjust the view that it will not be until 2024 that short-haul travel recovers to previous levels, with long-haul travel taking longer to bounce back.

Indeed, we continue to model scenarios at airport and market levels reflecting the traffic and supply sides, where one of the key constraints is the limitation on destinations that are either open or where returning from them does not involve a period of quarantine and associated testing.

Against this background, each northern hemisphere summer month that passes without an airline’s key markets being open either materially or fully has a concomitant effect on cash and ensures another bleak winter. As with everything, timing is all.

BEHAVIOURAL LAG

Looking beyond the restart and recovery phase, there is no reason whatsoever to think that the pandemic will result in any change in the key drivers of traffic. In the case of business traffic, however, there will be what is perhaps best described as a behavioural lag in the restoration of its drivers.

This inevitably reinforces the view that the recovery will be characterised by volume if not value. The real risk is that too much capacity returns too soon in a dash for cash, against a background where FOMO – fear of missing out – takes over from more rational deliberation with the consequent resetting of fares.

Despite this relative, if not absolute, optimism in respect of demand, there is the usual caveat that generalisations are dangerous, hence the need for a bottom-up rather than top-down approach. Furthermore, travel for the purpose of business, which could involve an airline’s business or first-class cabin, has a number of segments where the speed of recovery will be determined by the impact that premium cabins have on the performance of individual businesses.

We are all very aware that during previous geopolitical/economic disruption, not only is the hurdle to justify business travel set higher, but that the focus is often on lower-cost solutions regarding both the aircraft cabin, and also accommodation, where this inevitably results in at least some permanent structural change.

While there has been great excitement in some quarters over the impact that virtual meetings may have in the future in reducing travel and its associated cost, this will prove to be misplaced over perhaps a two-to-three-year horizon. We have taken part in virtual conferences over the past 16 months or so, and while they provide a platform for presentation, only in very few cases has there been the necessary and useful interaction between the presenter and the audience. There has also been none of the generally useful conversations “in the margins” with the presenter in a conference environment.

As a result, it is reasonable to expect conferences to return, but here, as with everything, there will be a re-evaluation in respect of those which really are important, not just in terms of content but more particularly as a forum for meeting and business development. Similarly, there are good reasons to expect a return of international trade shows and exhibitions, as there is a need to see and feel the goods, as well as for producers and customers to meet.

INCENTIVE TRAVEL

The one component of MICE (Meetings, Incentives, Conferences and Exhibitions) that may lag even further in its recovery is incentive travel, but here there is a “two-way pull”.

Consequently, although we are, albeit over a longer period than for VFR and leisure traffic, confident for a recovery and then growth in travel for the purpose of business, there is an inevitability that there will be an impact for the supply side both in terms of class of travel and fares, where economics has an inescapable impact on the latter.

In this respect not only does this provide an opportunity for new entrants with differentiated products and lower costs to “cherry pick” either on currently served routes (assuming timely airport access) or sufficiently proximate routes, but it also poses some issues for the established carriers around cabin configuration.

Although its entry into the market is perhaps later than expected, the new premium economy cabin from Emirates might be very timely.

From the outset we have been clear that the demand for air travel will have remained fundamentally unchanged, notwithstanding the caveats we have highlighted. What we have also been very clear about is that the main change as the industry restarts more widely, recovers and then grows will be on the supply side and where for some this will clearly be a challenge but for others a real opportunity. It would be inappropriate for me to share here which names appear under the “challenged” heading in our list of airlines. But in this respect, it may be a case of plus ca change.

Chris Tarry’s column is first published in Airline Business