In judging how airlines will emerge from the crisis, the calculation is not as straightforward as some would have it, writes CTAIRA analyst Chris Tarry
Among the very many slogans, exhortations and statements that we have encountered regularly over the past year or so, two come to mind: “We are where we are” and “build back better”, where one is in effect a positioning statement and the other an attempt to influence behaviour.
The common theme linking the statements is the starting point of the business and the ability of the management to implement and deliver change. On this point, across the wider aviation sector, there is by definition significant variation.
There is no doubt that the demonstrable results of vaccination programmes are fundamental in establishing perhaps the necessary condition for moving beyond the restart phase: something, for example, that is clearly evident in the USA, where at the time of writing the seven-day average for the number of travellers passing through TSA checkpoints is close to two-thirds of the number on the corresponding day in 2019. Conversely, in February 2021, the latest month for which data is available, the number of UK terminal passengers was just 4.8% of the total a year earlier. Similarly, across much of Asia, the markets remain closed.
The sufficient condition for restart is that markets are again opened. However, by definition, this will be an asymmetric process, not least because there are still shortcomings on the part of many governments to determine what the specific risk actually is for an individual traveller and what the particular risk mitigation regime should be. The default position, in the absence of the specific data, is more draconian.
What is also increasingly clear is that for the foreseeable future, travellers will have to comply with different, country-specific testing regimes – even for those travellers who are able to demonstrate that they have been vaccinated.
We have no doubt about the extent of pent-up demand, but it will remain just that until “the flag drops” on a bilateral and also multilateral basis. What is needed is confidence on the part of the intending traveller and a consistent and predictable approach on behalf of individual health ministries.
There also needs to be a sense of perspective about how quickly the pent-up demand both materialises via bookings involving new cash, rather than redemption of vouchers and, beyond that, the extent to which it can be accommodated.
In Europe we have seen Ryanair announce plans to operate up to 80% of its summer 2019 flying programme where flights going on sale will inevitably have a benefit in respect of cash in advance of carriage (once outstanding vouchers have been redeemed). In the USA, there have been numerous reports of airlines not only bringing back pilots for the expected continuing recovery but also some airlines, at least in the short term, not having sufficient pilots for their planned flying programmes.
So much for “we are where we are”, but what about “building back better”? Here, in terms of cash, for many airlines the crisis impact will be no different to having at least four and a half – if not five – winters in a row.
Over the past few weeks, we have seen another “dash for cash” through additional debt (now some $320bn for the industry overall) and aircraft-related financing, as the restart, let alone recovery phase, has remained largely stalled.
Beyond this, perhaps there should be at least some concerns over a number of ABS structures, given the change in asset values and the increased focus on airlines’ credit ratings.
Furthermore, each time the airline industry has experienced an event-related disturbance, there has been a structural change on the supply side, where airlines with a less encumbered history have emerged not only stronger but have also been able to take a greater share of the markets they operate in.
There is also still a need to disabuse some managements of their view of how their companies will actually be positioned in a recovering market amid increasing distortions resulting from, in some cases, government support and the extension of slot waivers.
What has always been evident is that how any company performs in an upswing will, almost by definition, determine how it will do when the going gets tough, and also how it will recover from more difficult times.
Across the industry at the end of 2019 there was, as ever, a wide range of experiences. In short-hand format, airlines that have the lowest costs appropriate to their market – and within this where they have maximised the share of the costs that are variable – combined with the maximum access to liquidity, will almost by definition prosper or, most recently, do less badly. Add to this managerial agility and you have the three distinguishing factors for future success.
It is not only, however, the airlines that fall into this group that will be able to benefit from the opportunities when markets re-open generally and in other cases more meaningfully. In addition, there will inevitably be opportunities both for new entrants, new airline models and also for new managements at established airlines.
As ever, the opportunities will be specific to individual markets. But there is a particular need for realism in respect of how genuine the opportunities that have been identified on paper are for the airline project they are working on, how quickly they will materialise and how much profit and cash they will deliver once they move into the real world. Here, not everyone can or will be a winner.
Chris Tarry’s column is first published in Airline Business