Please Fasten your Seat Belt

Over the weekend, Warren Buffett, the legendary American investor, announced that he has sold his entire holding of airline stocks. Berkshire Hathaway held sizeable positions in four major US airlines - 11% stake in Delta Air Lines, 10% of American Airlines, 10% of Southwest Airlines and 9% of United Airlines. He has warned that the aviation business has fundamentally changed following the economic fallout from the coronavirus pandemic.

If the “Oracle of Omaha” is worried, surely it is time for us to sit up and take notice.

Turbulence Ahead

The outlook appears bleak for the airline industry, which has been hit by the shutdown of most of its traffic, forcing mass layoffs and even bankruptcies. Flybe in the UK went into administration in the early days of the crisis and Virgin Atlantic has asked the government for a bailout. Qantas has put its staff on leave. Virgin Australia has collapsed. British Airways has announced mass redundancies, as has Ryanair.

Indian airlines are losing about US$10-12 million daily during the shutdown. All major Indian airlines have started undertaking salary cuts for their employees to cut costs. Sydney-based aviation think tank CAPA estimates that India’s two listed carriers, IndiGo and SpiceJet, could report combined losses of up to $1.5 billion in the first half of 2020. IndiGo’s hitherto enviable cash reserves may almost be wiped out as a result.

Governments are providing a helping hand

In a matter of months, the coronavirus reset the clock on a decades-long aviation boom that’s been one of the great cultural and economic phenomena of the post-war world. The International Air Transport Association (IATA) estimates that the global industry will lose US$252 billion in 2020.

In the US, federal government rolled out a US$50 billion bailout fund – part of which will fund cash grants going towards airline workers, and the other part loans for the airlines themselves. Italy has re-nationalised Alitalia, forming a new state-owned entity and investing US$650 million. France and the Netherlands have already pledged as much as US$11.9 billion to save Air France-KLM. In Asia-Pacific, Australia’s Qantas secured a US$660 million loan while Singapore Airlines got a US$13 billion aid package. The essential nature of air travel — it underpins trade, diplomacy, business and tourism — is forcing governments the world over to prop up carriers.

What happens post-lockdown?

As was the case with the 2001 terrorist attack, it is expected that even when the airports start reopening, passengers will be wary of air travel. Thus we still could see low demand during the initial shock period immediately following the reopening. In addition, the economic impact of coronavirus will leave many people with less money to do non-essential travel. Government-mandated quarantines on arrival or re-entry could become the norm — making international travel out of reach for people with limited vacation time or for executives with packed schedules. A concern is that customers will be put off by health-related entry rules that may differ from country to country, especially during an uneven opening-up process.

Passengers are likely to shun short-haul flights. For travelling short distances, flights may be replaced by car or train journeys. Expect a shift from air to high-speed rail travel in Europe and China to accelerate. Some low-cost, short-hop routes are likely to disappear. Airlines will find new ways to make money. In Asia, one of the last strongholds for all-inclusive fares, airlines might increasingly charge economy passengers separately for things like baggage check-in, legroom and meals.

How to win back flyers?

Airlines and airports need to work jointly to ensure that passengers are provided a safe flying experience.Emirates, easyJet and Delta Airlines have all said they plan to keep middle seats empty and some think governments will make it a rule. However, if at least a third of seats remain empty, airlines would have to raise their ticket prices by at least 50% or go bust. Delta Air Lines has changed the way it boards aircraft, and is now boarding them strictly from the rear to the front, so passengers sitting at the back don’t have to pass those sitting at the front. The airline is also boarding fewer people at a time to improve physical distancing of passengers.

Many airlines are also cancelling or reducing in-flight food and beverage service to reduce interactions on board. Southwest is serving individual cans of water rather than its usual full drinks round, for example. Some airlines are offering 'to-go' bags in the gate area instead. Emirates is offering passengers rapid Covid-19 blood tests prior to boarding at Dubai airport terminals. Emirates says the tests produce results within 10 minutes. At Hong Kong International Airport, testing is under way on a full-body disinfectant device. This, the airport says, can sanitize users within 40 seconds, using sprays that kill bacteria and viruses on skin and clothing.

Summary

Flying may never be the same again. Will we all wear masks on airplanes? Will middle seats need to be blocked to provide some distancing? Will travelers need health cards proving they have antibodies to Covid-19 or have received a vaccine that doesn’t yet exist? The biggest question of all is when confidence will return to the airline industry. After the terrorist attacks in 2001, it took a long time:

• three years before airline capacity recovered
• six years before airlines turned profitable, but
• eight years before the average fare—an indicator of demand—got back to what it was in 2000.

Whether the industry takes three years or eight years to recover, is hard to tell. One thing though is crystal clear - whether you are an airline passenger, an investor in airline stock or working in the aviation industry, for the next few years you are in for a turbulent flight. Welcome onboard!

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Thanks for reading.

All views are personal and do not reflect those of my employer.

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