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18 Jul, 2020 14:39

Staying grounded or crashing and burning? The airline industry is facing the worst crisis in its history

Staying grounded or crashing and burning? The airline industry is facing the worst crisis in its history

Airports are deserted, planes are mothballed, and the money’s running out. Stuck between state aid and limbo, the Covid-19 epidemic is destroying an already reeling industry.

For a long time, aviation was considered the industry of superstars. Becoming a pilot or stewardess was, for many, a dream job bar none. A great image, well paid and always jetting off to sunny climes or exotic destinations.

It was a time of glamorous air hostesses serving gourmet meals, of free-flowing free alcohol, and plenty of legroom for all. Luxurious Pan-Am Stratocruisers would glide across the Atlantic in a leisurely eight hours, ferrying Hollywood stars, politicians, and businessmen. Crews would party overnight in places such as Paris or the fun-loving Beirut of the 1950s or 1960s before returning, ready for the next trip.

There has been a radical change since those golden years, however, not just because of the advent of low-cost airlines, wage dumping and intensive working hours for staff. In my opinion, the golden age came to an end around 50 years ago. When charter flights started in earnest in the 1970s, the specialness was lost. Tourists in sandals and shorts replaced the once-elegant patrons, airlines began cramming in more and more customers, and that and cost-cutting put an end to the essential delight of flying.

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The oil crises of the 1970s were the catalyst. I remember my father, an ambitious young pilot, suddenly finding himself sat at home jobless as the aviation industry slashed jobs due to the explosion in crude oil prices. Cabin crew were dismissed en masse, and the mood in the industry was one of despondence.

Tempi passati are the days when flying was something special. The atmosphere at many bus stations is more relaxed than at most airports, where, since the attacks on September 11, 2001, we have to be herded through a barrage of security checks.

More recently, the climate preservation movement brought in the so-called concept of ‘flying shame.’ According to this trend from Sweden, anyone who is thinking of traveling by air should be too embarrassed to get on a plane at all, as a result of its ozone-destroying emissions. The travel industry has felt the effects of this new fad, but worse was on its way.

The greatest crisis in its history

Since March of this year, and the arrival of Covid-19 and lockdowns, the aviation industry has been confronted with the greatest crisis in its history. Hundreds of thousands of employees have been laid off, state rescue packages have been put together, and uncertainty hovers over the future.

Summer, the high season for flying, is looking meager as the pandemic drags on, the virus mutates and the much-feared second wave keeps people from traveling at all. Most discouraging, and rightly so, is the possibility of arriving on board with a temperature and not being allowed to fly.

Instead, we prefer to stay put and wander around our hometowns. In some senses, many people have really internalized the lockdown. A real closed-mindedness has taken hold. The time of easy and effortless travel, once accessible via travel brochures and the internet, seems to be over.

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The 2020 pandemic has condemned us to immobility. Airlines worldwide have had to ground their aircraft, and they’ve remained grounded for months. It was a 99 percent outage, as only around one percent of aircraft remained in use for transporting protective masks and other vital goods. No business could have prepared for this.

From May onwards, airlines around the world have had to be rescued by government measures, during which the state negotiated or imposed many conditions. The French government's arm is particularly far-reaching when it comes to the future corporate policy of Air France-KLM, thereby placing it firmly in the cockpit when designing route plans as well as future fuel consumption.

Will it ever recover?

The future of aviation is now something of a game of roulette, due to the roller-coaster of stocks and shares. This is because some investment funds, such as US Global Jets ETF, are betting on a rapid recovery for the industry. However, from a purely financial perspective, how many people want and are able to resume their usual flying habits?

Business flights will continue to collapse, because the video conferencing heavily used during lockdown will end the old practice of business travel. Furthermore, there may be a change in travel behavior because of recurring health risks, perceived or real.

On the other hand, aviation is also the growth market in certain areas, such as in China and across Asia, where domestic flights have increased sharply. Likewise, in a country like India, there are still opportunities for growth in the industry, due to the sheer size and the mobility of people looking for work. Nevertheless, industry players in both countries, including the shining stars such as those in the Chinese HNA Group, have come crashing back to earth, bankrupt.

IATA, commercial aviation’s trade association, expects a 50 percent drop in passenger traffic and cumulative losses of more than $250 billion in 2020. To put that in perspective, the losses for US airlines as a result of the September 11 attacks were estimated at between $5 billion and $15 billion.

This will compound the already high level of debt in many companies, which have not been able to cover their capital costs for years, because of low margins. Low-cost airlines such as Ryanair, on the other hand, have much less debt.

The aircraft manufacturers Airbus and Boeing, and with them the entire supplier industry, such as the highly specialized niche companies in the steel and IT industries, are also affected by the drop-off.

There is no shortage of superlatives when we talk about the most serious crisis aviation has ever experienced, according to Airbus CEO Guillaume Faury. Around 15,000 jobs from a total of 135,000 are being cut at his company. Its competitor, Boeing, is dismissing 16,000 employees. Both companies have solved their past problems more cosmetically than fundamentally, in no small part due to government subsidies. This slump was already present before the coronavirus crisis. More than 160,000 jobs on the suppliers’ side are expected to be affected, too. Leading Austrian aerospace companies, such as FACC, the main clients of which are Boeing and Airbus, are also suffering.

Warren Buffett, born in 1930 (the year before the maiden flight of Pan Am’s American Clipper departed Miami bound for Panama, with Charles Lindbergh – the first man to fly solo across the Atlantic – at the controls), sees no future for aviation. His investment company, Berkshire Hathaway, sold all its shares in the four largest US airlines – Delta Air Lines, United Airlines, Southwest Airlines and American Airlines – at a loss in May 2020, accelerating their decline in valuation in spite of low kerosene prices.

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Now, you may think Buffett idiosyncratic, but he always acts with a great sense for certain developments. His next move is to venture into the natural-gas industry. Apparently, he considers this fossil fuel to be a safer bet than aviation in the long term.

Market observers point to a faster recovery in the aviation industry than in the automotive sector, which may not return to pre-crisis levels until 2030. The demand for air travel is expected to increase again from 2023, which would require the availability of new fleets. However, that forecast may be optimistic and the current situation represents a hammer blow to US and European companies. This will no doubt impact training and job opportunities for young engineers and mechanics.

China takes flight

Since many things are rearranging themselves in this period of upheaval, the Chinese state-owned aircraft manufacturer Comac could benefit. China, like many other states, had turned away from Boeing after design flaws caused crashes. Boeing’s Covid-induced capital crisis has been compounded by a crisis of confidence.

As a consequence, the distinct possibility arises that Comac could use this period to establish itself as a leading player in the industry. In 2017, after eight years in development, the first Chinese-made passenger plane made its maiden flight. Together with Russia, China further developed its ambitions in this important area of mobility. In recent years, buyers from China have purchased patents and companies on a large scale. We Europeans stood by watching and applauding as contracts were signed in a matter of hours.

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Aviation had its beginnings in German and, later, American hangars in the 20th century, and experienced its heyday in these countries. It was pioneers such as Otto Lilienthal and the Wright brothers who made their flying machines, which were ‘heavier than air,’ take flight. Many more trailblazers and businessmen set records and carried out the subsequent commercialization of flying.

However, the future of air mobility will probably be determined and controlled by Asian companies and customers. Whether flying will be fueled by hydrogen, or kerosene will be taxed, one thing will likely to be true by 2023: some airports west of Istanbul, where the largest airport in the world in 2019 was opened, will be superfluous. And some well-known names in the airline business may already have gone the way of Pan Am, and have crashed and burned.

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The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.