Where is the airline industry headed?

The world’s oldest airline

The airline industry is just 100 years old. KLM Royal Dutch Airlines founded in 1919 is a claimant for the crown of the ‘oldest’, but it ceased operations for a few years in the 1940s during the Second World War. Avianca of Columbia was founded in 1919, but was originally named SCADTA. So Qantas, founded in 1920 claims the title as the ‘world’s oldest continuously-operating airline under one name’, and had planned a huge party to celebrate its centenary in November.

Along came a virus

The COVID-19 pandemic has not only cancelled Qantas’s party but has brought the entire airline world to its knees. The short-term effect of the worldwide shutdown was dramatic with airlines all over the world ceasing operations abruptly. This writer commented on that extensively, (see “Unknown Unknowns”) and of the coming “Airline Apocalypse” but now, six months on, the crisis is showing few signs of receding.

Unprecedented state support

The pandemic has seen a level of state support to airlines that is unprecedented. Ishka (https://www.ishkaglobal.com) a global airline financial analysis specialist, has estimated that 62 airlines around the world have received USD 88.68 billion (approximately 16 trillion LKR), in direct support from their governments.

For many airlines, such as in the USA and Australia, this has been in the form of reduced fees and also direct payments to employees to prevent job losses.

But even this has only postponed the inevitable. All major US airlines are planning significant job cuts as the summer season comes to end and the government salary subsidies expire.

Comparing the support

Attempting to compare state support for beleaguered airlines is a difficult task. The national priorities, strength of the country’s finances, ability to raise debt, political realities, and emotional attachments, all play a part in the formula.

Mauritius and Fiji, two island nations with mainly tourist traffic, have largely escaped the human cost of the pandemic. The Fijian islands are isolated, with only 11 active cases and two deaths. Mauritius has recorded 10 deaths and has 11 active cases. (Source)

Both nations’ governments have provided significant support to their national carriers. Air Mauritius (ICAO: MK) has received USD 225 million in subsidies, amounting to 38% of 2019 revenues, but has also filed for bankruptcy protection and is restructuring the airline.

Fiji Airways (ICAO:FJ) a similar sized carrier to MK, has received USD 203 million, about 38% of turnover in 2019. FJ has a leased fleet of aircraft and is burning through cash at the rate of USD 38 million a month, with the majority of this money is earmarked to pay the leases, even though the aircraft are not flying.

Aircraft lease contracts typically do not have exit clauses, and the user-airline is liable to pay the cost regardless of the operating environment. This has caused a lot of controversy in Fiji, where many people feel the money is better spent on other areas. CEO of Fiji Airways Andre Viljoen has said there is “no way out short of bankruptcy”.

Where does this leave the beleaguered national airline?

The travel restrictions that are a vital part of coping with the pandemic are not likely to be relaxed anytime soon. Expecting international travel to recover before the November 2021, at the earliest, is unrealistic. Most industry analysts forecast that a sustained recovery to 2019 passenger numbers (not revenues) is unlikely until summer 2023. Qantas’ CEO Joyce has stated that he does not expect an improvement until the Christmas 2023 season at the earliest.  Qantas has placed its long-haul fleet into storage for the next three years at least.

South Asia’s national airlines have been perennial money losers due to a number of reasons. For more analysis on why this is so, read my series on Asian Airlines.  Most airlines in the region are poorly managed, overstaffed and have high cost bases. They are also overly dependant on international tourist traffic. Without domestic passengers to rely on, recovery is a distant dream.

Obviously the state must support locally based employees and ensure that the national economy does not collapse due to massive unemployment. But should cash-strapped economies also support very profitable foreign companies?

Will the leasing companies survive?

Three huge leasing companies, Air Lease Corporation, Aercap and Avolon, dominate the aircraft leasing space. All three have been very profitable and should be capable of weathering this downturn in the industry. There are also a number of smaller and aggressive lessors, many based in China, which are also well placed to survive in the long-term. They will be hungry for business and could easily step in to assist smaller countries, especially those who already have strong economic and political ties to China, once the pandemic recedes.

The burning question, is whether state funds should be used to pay already inflated aircraft leases to foreign companies? Ishka estimates that aircraft lease prices have plummeted, with the monthly lease of a five-year-old Airbus A330 dropping to less than USD 290,000 a month. Sri Lanka’s national carrier pays over USD 1,000,000 for very similar aircraft and is locked into these contracts for many more years.

Should the taxpayer fund the profits of foreign leasing companies, by paying for aircraft that are lying unused and are likely to remain that way for the foreseeable future? Currently, a sum of USD 13 million (LKR 2.4 billion) is due to the lessors as rental payments every month. It is likely that the state will have to pay over LKR 500 billion over the next two years alone, to meet the lease costs for the national carriers’ fleet.

Can we afford this or should be looking for other solutions? As Albert Einstein allegedly said, “The definition of Insanity is to do the same thing over and over again, but expect a different result”.

Since 1947, when Air Ceylon was founded, we as a nation have struggled to run a profitable national airline. Perhaps it is time to try something different?

 

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