The state of aviation - Q2 2021

Stein Mjåtveit

As lockdowns, facemasks, and social distancing have become household terms around the world, our global society has become accustomed to a more restricted way of living. The leaps made in modern technology have allowed us to adapt in ways that were impossible back when the Spanish flu ravaged the globe more than a century ago. A handful of vaccines have become our strongest ally in defeating the coronavirus, and thanks to the efforts of our talented scientific community, along with unprecedented financial backing, they have become available at record speed.

In stark contrast to the exponential growth of technology companies, we find the devastating effects that lockdowns and travel restrictions have had on restaurants, hotels, and the aviation industry. Operators have been struggling, dedicated pilots, cabin crew, and administrative staff have been furloughed or lost their jobs, and some airlines have not been able to survive the effects. Thankfully, hope is on the horizon, and although there are still many obstacles to clear, uncertainties to navigate and vaccines to be administered, the outlook improves every day.

The impact in numbers

In a report released by ICAO on the 27th of January 2021 called "Effects of novel coronavirus (COVID-19) on Civil Aviation: Economic impact analysis", it is estimated that COVID-19 reduced the number of seats offered by airlines by 50%. In combination with the reduction of passengers by 2,690 million passengers (-60%), this equals an approximate financial loss of 370 billion USD.

As a secondary effect of travel limitations, the tourism industry has suffered a loss of between 910 and 1,170 billion USD in 2020, due to 100% of worldwide destinations having travel restrictions. Global trade also went down by 9.2% in 2020 compared to 2019 levels. 

What makes the prediction of our recovery difficult is the many variables that are outside of our control, such as the: 

  • Duration of the pandemic and its severity levels moving forward.
  • Depth and length of the global recession.
  • Length of lockdowns and travel restrictions.
  • Recovery in consumer confidence in air travel.
  • Potential shift in industry and consumer behaviors.
  • Ability of the air transport industry to absorb losses and withstand financial adversity.

The ability (or inability) to withstand financial diversity has already reshaped the landscape in our industry, seeing as seven European airlines have ceased operations since April 2020. It is worth noting that in the same period we have also seen several new airlines entering the market, which depending on fleet size, can result in a higher net total of available career opportunities for aviation personnel. In Norway alone, we have seen two new airlines entering the market, Flyr, and Norse Atlantic Airways. Norwegian Airlines have also navigated through a challenging year but seems to be on the brink of recovery with operations planned to resume in 2021.

A shift in consumer behavior

One of the major changes in consumer behavior that many are predicting is the decrease in business travel. Several large companies have announced that they will cut back on business travel in favor of digital meetings, a commitment that will force airlines that cater to this segment of the market to reinvent themselves. Leasure travel is the segment that is predicted to recover the fastest, which means that airlines are already adapting their marketing strategies and product offerings to serve the leisure market to a higher degree. SAS in Scandinavia is one example of an airline that has recognized this shift, as their CEO, Richard Gustafsson reveals in their Q1 2021 interim report: 

"The passenger mix will have an increased share of leisure travelers in the future, which places even greater requirements on flexibility and seasonal adaptations to our operations."

- Rickard Gustafson, President and CEO at SAS

Finnair has also announced their summer destinations and it is evident that they will be focusing more on leisure travel as well. Hopefully, the proactivity and customer awareness displayed by many airlines will ensure that there is a sufficient supply of available seats this summer. 

Scaling up to meet the demand

Scaling down has been a difficult challenge for airlines and their devoted team members, but scaling back up again will also present a tough challenge as travel restrictions are lifted. The countries with large domestic markets, such as Russia, China, and the US of A are recovering more swiftly compared to Europe and other parts of the world where the complexity of government alignment poses additional challenges for reopening. It is often said that the North American market serves as a "crystal ball" for what will happen in Europe 1-2 years later, and if that becomes the case in the recovery phase of this pandemic we can see signals of where the challenges will lie for European airlines.

2021 Q1 report - ICAO Share of international-domestic passenger traffic by region (2019)

Source: Effects of novel coronavirus (COVID-19) on Civil Aviation: Economic impact analysis.

Delta Airlines had to cancel around 100 flights during Easter due to a shortage of staff, and during Thanksgiving and Christmas in 2020 they canceled 615 and 300 flights respectively for the same reason - not having enough pilots. Delta Air Lines is the second-largest airline in the world by the number of scheduled passengers carried and the largest by revenue and market cap. If they are having problems securing enough staff to operate their routes, you can imagine how critical it will be for other operators to be proactive in predicting the increase in demand - a daunting task given the complexity of the market dynamics in the upcoming months.

Data from China also provides us with an indication of how swiftly demand can rise in markets where legislative and restrictive measures are adjusted in unison. It provides both travelers and airlines with a higher rate of predictability compared to an environment where several governments are acting independently of each other.

2021 Q1 report - ICAO Domestic passenger traffic in China 2020 vs 2021

Source: Effects of novel coronavirus (COVID-19) on Civil Aviation: Economic impact analysis.

In Europe, we can also see a noticeable difference between the recoveries of domestic and international travel, but with smaller and more fragmented domestic markets, this does not necessarily make life easier for European airlines. Different levels of financial aid from the different European countries further changes the competitive landscape and will continue to shape it for many years to come.

2021 Q1 report - ICAO Europe international vs domestic

Although there are signals of pent-up travel demand in Europe, the slow deployment of vaccines in the region (with the exception of the UK) inhibits market recovery and is likely to translate into a delayed recovery in the region compared to other parts of the world.

Who will be the winners

Ryanair and Wizz Air have consistently been more bullish in their predictions of market recovery in Europe, and their actions back their perspective. According to CAPA, Ryanair is planning more than 80% of pre-pandemic capacity for this summer, while Wizz Air will already be back up at 100% capacity this month. The aggressive approach of these two airlines is more than hopeful wishes for what this traveling season will become, it is a strategy that is likely to increase their market share substantially on the other side of this pandemic.

New airlines entering the market will also have favorable conditions for success since it is currently a "buyers market" when it comes to aircraft leasing agreements, slot times, and talent acquisition. Never before has such a high number of qualified pilots been available for employment, and those who are willing to invest in the recovery of aviation will benefit from this talent pool as they build their organizations and take to the skies.

Although there are few airlines who have been as vocal as Ryanair and Wizz Air about their plans for meeting increased demand, there are many airlines that are capable and ready for recovery. Who will be the most successful remains to be seen, but there is no doubt that boldness is required to get out ahead of the curve as we are approaching what will hopefully be the trailing edge of this pandemic.

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