The Travel Industry Faces Its Most Severe Crisis Since 9/11. What’s on the Horizon for the Airline Industry?

By Dick Slansky

Category:
Industry Trends

Airlines are in the fight of their lives. The airline industry is being dealt a very serious blow by the current coronavirus pandemic.  Hotels and resorts have emptied out, and most countries have issued global travel warnings and outright bans.  The short-term outlook is airline industryvery bleak for the airline industry in the wake of a nearly complete shutdown of international travel.  How will the airline industry be able to weather this storm?

Airlines are the lifeblood of the aviation market.  When airlines succeed and prosper, the rest of the commercial market prospers. Conversely, when airlines struggle, the entire market struggles from aircraft OEMs, to service, maintenance, and MRO, to travel agencies and the entire hospitality industry.  The current nearly complete shutdown of travel will be devasting in the short term and could permanently change the industry in the longer term, depending on how long the curtailment of travel lasts. https://thepointsguy.com/news/airlines-suspending-operations-coronavirus/

Two influential travel groups recently issued dire projections on the state of the industry. One came from the US Travel Association, which predicted the US could lose 4.6 million travel related jobs in 2020 that would exact over an $800 billion shortfall on the US economy.  The International Air Transport Association (IAIA) projects that losses in global airline revenues could surpass $113 billon.  This could turn out to be a pivotal time for the travel industry, the airlines, and the overall commercial aircraft business.  

The 9/11 terrorist attacks on the US, a time when the US airspace was closed for four days, is markedly different from the situation caused by the coronavirus pandemic.  In the aftermath of 9/11, the airline industry was able to persuade people relatively quickly that new security measures made air travel safe.  Six weeks after September 11, things started climbing back to normal.  The situation is much different with a global pandemic.

While air travel itself can remain safe, with the overall safety record of the industry being quite remarkable, but with the current pandemic, the destinations for the passengers are not safe.   Moreover, countries are closing their borders and banning travelers altogether.  People aren’t afraid of air travel, they are afraid if they go somewhere and get sick, they can’t get home, or just go somewhere and get stuck because of travel bans.  It could be months before certain flights and routes are resumed.

In addition to health and safety concerns, the almost overnight collapse of global financial markets is also depressing travel during the coronavirus crisis.  Retirement portfolios, savings accounts, 401k plans, stock, and options clearly won’t be paying as much for the foreseeable future, which will damper people’s travel plans.  This situation could lead to a somewhat problematic recovery, taking longer to bounce back than past hits on the travel industry because of the multiple levels of issues.

But not all is gloom and doom.  Fortunately, the US airlines are now in much better shape financially by a wide margin than they were after 9/11.  They all have been profitable for ten years in a row and have generated nearly half of the global airline industry’s profits in that period.  US airlines have much better balance sheets in recent years, a lot of cash on hand, and unencumbered assets they could borrow against, which will be needed as cash balances fall precipitously due the unprecedented drop in air travel.  Also, the US airlines will seek financial assistance from the government to help weather the coronavirus storm.

airline industryHowever, it is not a rosy picture for all the carriers, especially some of the foreign airlines.  Italian carrier, Alitalia is considered to be very vulnerable in this crisis and was recently re-nationalized by the Italian government.  The future of Norwegian Air is uncertain, along with the financial health of Virgin Atlantic.  Cathay Pacific is fighting for survival, with business starting to decline with political protests in Hong Kong, and now exacerbated by the pandemic.  Additionally, many of the smaller foreign carriers cannot expect to get governmental bailouts like the US carriers.

Industry experts and analysts are projecting a range of recovery scenarios for those that do survive, from the duration of recovery to the state of the industry when this crisis is over.  The general consensus is that the next 12 months are going to especially tough, and some carriers will not survive.  One possible bonus for travelers is that airfares, which have already plummeted, could get ridiculously low, as carriers simply try to mitigate their losses rather than generate any profits.

Some analysts speculate that the industry is 4-5 months away from bottoming out, and the beginning of air travel in countries and regions that first experienced the outbreak, like China, Korea, Singapore, and some other countries in APAC.  The IATA is reporting that in late February there were more sales for airline tickets in China than for refunds, which might be an early indicator that China is at the bottom and working their way up.  Other global regions like the EU and NA are still on a downward trajectory.

There is hope among some in the travel industry that when the pandemic is over, and travel restrictions are lifted, that there will be a pent-up demand for leisure travel stimulated by people wanting to resume life and get back to their travel plans.  Others maintain that business travel might be permanently dampened once business travelers become accustomed to the virtual business place. We shall see.

 

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