The aviation industry is suffering the brunt of the COVID-19 travel ban. With airlines such as QANTAS grounding all international flights, we are seeing mass layoffs and some airlines on the brink of bankruptcy. Now Virgin Australia has entered into voluntary administration, leaving QANTAS with a near-monopoly of the Australian market. Being the biggest challenge to international travel since 9/11, pundits are debating whether airlines will recover more quickly than in 2001.
While the international travel ban is only a couple of months in, the collapse of airlines has been swift. This has been more detrimental to smaller, regional, airlines such as UK carrier Flybe entering administration in early-March and US regional carriers Trans State Airlines and Compass Airlines ceasing all operations by April. While only three airlines have been listed, we are only in the early stages of the global aviation crisis, and there will be more global restructuring to come.
In Australia, this crisis was brought home with the decline of Virgin Australia. Commencing operations in 2000 as Virgin Blue, QANTAS’ main domestic rival filled the void left by Ansett Australia after their collapse in early-2002. The impact on Virgin’s cash flow caused by COVID-19 now leaves 15,000 employees under a cloud of mystery. Multiple pitches to the government failed, with Richard Branson even offering to mortgage his Caribbean island to bail out the failing airline. Yet this was not enough to stop the airline entering administration.
Global airlines have already been in a financially precarious position. The year 2019 was a dark year for European travel with the collapse of Icelandic budget carrier Wow Air and British carrier Thomas Cook Airlines. Once India’s largest airline, Jet Airways also went bankrupt, failing to receive emergency funds from the State Bank of India. Over these last few years a pattern has emerged, with smaller airlines facing cheaper rivals and unable to continue operations. COVID-19 now adds to these pressures.
Even the world’s largest and busiest carriers are not exempt from these pressures. American Airlines, the largest airline in the world, has suspended 70% of their domestic flights and 90% of their international flights until May. Their move alone reduces global flights by 7.5%. To break this down, American Airlines has 95 international routes to 55 countries. It will now only operate long-haul flights once daily between Dallas-Fort Worth and London, once-daily between Miami and London, and three times per week between Dallas-Fort Worth and Tokyo. All other services are suspended until 6 May.
European airlines, with their hubs in the new epicentre of COVID-19, have also grounded entire fleets. German airline Lufthansa has slashed long-haul flights by around 90% while reducing 80% of their short-haul flights. To picture it, 700 aircraft will lay idle and capacity will be cut to levels on par with 1955 – seven long-haul flights operating three times a week from hubs in Frankfurt and Munich. KLM recently followed suit, slashing their summer operations to just 10% of normal capacity.
The only airline that is breaking this pattern is Qatar Airways. In early-April they added 10,000 seats to their services and added flights to Paris, Perth and Dublin, while still flying to Frankfurt and London to increase capacity. Yet, increased travel restrictions may hamper Qatar Airway’s attempts to buck the trend.
The cost to airlines is astronomical, relying on government bailouts to stay afloat. American Airlines is estimated to receive $6.3 billion in grant aid as part of the Trump Administration’s $2 trillion stimulus package. For all US airlines, this totals around $58 billion USD. To put this in comparison, bailouts for the aviation industry between 2000 and 2015 totalled $71 billion USD. Yet, this isn’t even the largest bailout due to COVID-19 with Singapore Airlines having around $13 billion USD injected into its operations.
But how does this compare to other crises? National governments have learnt lessons from 9/11 on how to protect the airline industry. After 9/11, losses for major airlines reached $9.1 billion in 2001 while losses reached $40 billion between 2001 and 2007. America’s airline industry was the largest casualty, with America West immediately declaring bankruptcy. US Airways, United Airlines, Delta Air Lines, Northwest Airlines, Comair and American Airlines declared bankruptcy in the following years due to a loss of profitability. Yet, bailouts and consolidation ensured they survived.
While COVID-19 may have grounded more flights than 9/11, the circumstances are greatly different. Namely, the grounding of flights happened in March when there is less global travel while 9/11 happened at a peak season with greater international flights meaning airlines will not be as adversely affected in comparison.
However, the aviation industry has grown exponentially since 2000, making the risk greater. In 2000, 1.674 billion passengers used air travel and this figure only fell by 19 million in 2001 due to 9/11. However, in 2018 there were 4.233 billion passengers recorded. As the travel restrictions are more onerous, and the level of dependence on air travel is much larger than 2000, this means the impact could be more damaging for the industry as there is more to lose.
This is crucial when looking to losses for employees. No industry has escaped the pressures of COVID-19 but aviation has been directly affected. QANTAS alone stood down over 20,000 workers while Virgin initially stood down 8,000 workers, with the current entry to voluntary administration posing a threat to their entire workforce. This pales in comparison to major US airlines who are facing around 750,000 job losses, with employees asked to take unpaid leave. Yet if flights don’t pick up the pace by September (peak travel season), the situation for employees will get bleaker.
Overall, in early-March, losses were already expected at $113 billion USD. This estimation has now increased to $252 billion by late-March. To put this in context, this is equivalent to the GDP of Finland, the 42nd largest economy. However, this estimate only will increase in the coming months, especially as COVID-19 impacts the typically busy Northern Hemisphere summer period.
What will now be seen is which airlines can be saved and which ones will be left to the pages of history. For Virgin, this may involve a buy out by investors with a surplus of cash to save Australia’s second carrier. Virgin is already owned by various foreign entities: Etihad Airways (20.94%); Singapore Airlines (20.09%); Nanshan Group (19.98%); HNA Group (19.82%): and Virgin Group (10.42%). A sale to another foreign investor is plausible. However, sale is not a sure thing and the current environment is still worrisome for the thousands of employees.
In the next few years airlines will put efforts towards financial recovery. We won’t see how that will work until focus can be completely shifted to recouping losses and increasing passenger rates. The aviation industry will consolidate around major airlines while smaller carriers are bound to go bankrupt if the trends from 9/11 are replicated. What we can be sure about is that global travel will never be the same again.
