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I need not tell you what happened in March, 2020.
Whether you’re watching this now or far in the future, that date will forever remain
in people’s minds as when the century’s first pandemic emerged.
It will remain in people’s mind’s as when the era of social distancing and isolation
began.
It will remain in people’s minds as when they got sick, or when a loved one got sick,
or worse.
In addition, though, for the millions of people worldwide working in the aviation industry,
March 2020 will mark the date when they lost their jobs, when their company started turning
south.
It will mark the beginning of the end.
There is perhaps no industry more severely impacted by COVID-19 than aviation.
As it is a brand new virus, in these early days, when there is no immunity or vaccines,
the only way to stop or slow its spread is through physically isolating people.
That is intrinsically in opposition to what aviation is—aviation works to bring people
together.
That meant that one of the first measures governments implemented to slow the spread
was to ban travel.
When the virus first emerged, its transmission primary occurred in China, with only isolated
cases elsewhere from those who had travelled from the epicenter.
For this issue, the solution was simple—ban travel from China.
A number of countries, notably including the US, barred foreigners who had recently been
in China from entering their borders and, in response to the sharp decline in demand,
a number of airlines cancelled their flights to greater China.
The financial implications of this were limited as few foreign airlines are significantly
exposed to China—partly due to the strength of the Chinese airlines.
Most of those mainland Chinese airlines, meanwhile, are government-owned so they could take the
hit.
Of course nearby Asian airlines like Scoot, Cathay Pacific, and ANA would struggle, but
the lockdown of China was more or less a weatherable hit.
But then the virus spread: first to South Korea, so airlines cancelled flights to South
Korea, then to Iran, so airlines cancelled flights to Iran, then to Italy, so airlines
cancelled flights to Italy, but then it seeped through Italy porous borders to take hold
of the entirety of Europe.
That was the moment when, to airlines, the situation became severe.
Europe is home to, by revenue, three of the world’s six largest airlines—the Lufthansa
Group, Air France/KLM, and IAG.
To have a virus devastating their home territory was an untenable situation—nobody wants
to travel to the center of a Pandemic.
But soon, the untenable situation became worse.
On Wednesday March 11th, televisions switched on to the American president sitting behind
his desk in the Oval Office.
A speech in this setting is reserved for only the most solemn occasions.
Only four such addresses occurred in the entire 2010s decade.
The president laid out some steps in his administration’s response to the virus, the most stunning of
which being a complete ban on all foreign travelers from Europe.
That was unprecedented.
Europe and the US are two of the most culturally and economically linked regions in the world
and never before would anyone even imagine anything even close to a complete travel ban
between the two.
The amount of individuals this would impact was astronomical.
The North Atlantic is home to one of the busiest flows of long-haul flights in the world.
More than 1,700 aircraft per day cross the Atlantic—many of those enormous wide-body
jets.
These are some of the most profitable flights for airlines out there.
To imagine that this would all just come to a stop was unthinkable.
Now, Delta, American, and United would join the big European three to have their demand
slashed by the virus.
All six of the world’s largest airlines, by revenue, went into crisis mode.
Beyond just the transatlantic flying, intra-Europe and US domestic traffic figures dropped off
a cliff.
As one example, United Airlines, the fourth largest airline in the world, issued a press
release announcing a 60% reduction in their flight capacity in April, 2020.
Even with those drastic cuts, they predicted an average load-factor—how full their planes
are—of 20-30%.
Since then, they’ve cut flights even further.
Most every airline in Europe started experiencing net-negative bookings.
That means that they were refunding more bookings than they had coming in.
Some airlines, including Qantas, Virgin Australia, WestJet, and more decided to cancel all but
their domestic flights.
Other airlines, including LOT, Brussels Airlines, and Austrian Airlines decided to just completely
close down for a few weeks or months.
They would fly no flights at all.
Since its occurrence, 9/11 has been the defining crisis for the aviation industry.
Since civil aviation began, traffic numbers just grew and grew and grew until suddenly,
on a sunny September morning, that all stopped.
It was bad, and airlines did go bankrupt, but overall, the industry eventually made
it out the other end.
Less than a week after Coronavirus became a Pandemic, though, one thing became abundantly
clear to airlines—Coronavirus, to them, financially, was worse than 9/11.
This was the most severe drop-off in passenger demand in the history of aviation.
Airlines are no strangers to doing things that lose money.
There is perhaps no industry out there that so robustly embraces the idea of a loss-leader
than aviation.
Airlines will go to great lengths to retain loyalty—both of individual travelers and
of their corporate contracts.
For example, airlines can and often do keep routes flying in the depths of winter, when
traffic is the lowest, in order to reliably present themselves as the go-to airline for
their customers.
If, say, there’s a US-based company with significant amounts of travel to Barcelona,
they’re only going to set up a corporate contract with an airline that can fly their
employees there year-round.
Therefore, American Airlines, for example, might fly there for twelve months a year even
if only eight of those turn a profit.
That’s because, with the loss of corporate contracts, they might only turn a profit flying
to Barcelona five months a year, so overall yearly profit will be higher by taking a loss
four months a year.
The equation changes when nobody, including those corporate customers, wants to travel,
though.
Therefore, with the Coronavirus reaching pandemic level in one of the lowest-traffic periods
of the year, airlines quickly were able to make the decision to cut loss-leading long-haul
flights.
These cuts are deep.
The Lufthansa group, for example, the seventh largest airline in the world by passengers,
is reducing its long-haul schedule to a sole flight from Zurich to Newark, then flights
from Frankfurt to Sao Paulo, Newark, Chicago, Montreal, Tokyo, Bangkok, and Johannesburg.
To think that this is what the seventh largest airline in the world in 2020 looks like is
unimaginable, but the situation at the world’s largest airline, American Airlines, is even
more severe.
This is their long-haul network during the Coronavirus.
They’ll fly just Miami to London, Dallas to London, and Dallas to Tokyo.
This is a situation without a lot of good news.
Jobs will be lost and airlines will go bankrupt, but there is plenty of hope that the industry
can survive.
While this fall will be far, airlines do have further to fall than after 9/11.
In 1999, United, American, and Delta achieved operating margins—the ratio of their earnings
to revenues—of 6.8, 6.5, and 12.7 percent, respectively.
In 2019, those margins were 9.9, 6.6, and 14.0 percent.
These are small differences, but a few percentage points can mean the difference between life
and death for an airline.
Another saving grace for airlines is the recent plummet in oil prices.
This is the byproduct of a price war going on between two of the world’s largest oil
producers—Saudi Arabia and Russia.
The two countries had long worked together to limit output based on demand and therefore
more or less control oil prices, but, after Russia refused to reduce their output, Saudi
Arabia responded by slashing prices and increasing production in order to price Russia out of
the market.
Therefore, the same barrel of jet fuel that would have cost airlines $60 in February costs
only $40 in March, 2020.
That’s a significant discount on airlines’ biggest cost and, if it were not for the biggest
drop in demand in the history of aviation, they would be celebrating a huge increase
in profits.
In the midst of the crisis, though, they’re taking the small win of smaller losses.
The aviation industry, as a whole, never truly recovered from the effects of 9/11.
That’s because “recovery” implies getting back to normal, and that’s something that
never happened after 9/11, and certainly will never happen after Coronavirus.
It’s nearly impossible to predict what will happen in the aftermath of a situation never
seen before.
As we’ve seen already and will certainly continue to see, the response to extraordinary
circumstances is extraordinary measures.
Therefore, the industry will emerge from the other end something completely new and novel.
How deep the dip sinks will be determined by how high the curve soars and that will
be determined by world governments, organizations, and more than all, how every individual out
there responds to COVID-19.
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