When a 0,1 μm length Virus empties the Sky (episode 2/4)

This article proposes a non-exhaustive overview of the air transport actors’ situation (limited to commercial aircraft > 100 seats): before, during Covid-19 pandemic, and then starts to identify how the sector could recover.

To ease reading, we propose a series of 4 episodes. Here is episode 2: during Covid-19 pandemic, first focus on Airlines/Lessors and Airports. If you missed episode 1, here is the link.

?link to episode 3, link to episode 4

As the situation is quickly evolving, the figures reported in the article may change after its publication.

End of March 2020, the borders shutdown and the containment measures started earlier in part of Asia are extended to western Europe and USA. It causes immobilization of aircraft on ground. Straightforward financial impacts weaken all air traffic actors: Airlines, Lessors, Airports, MROs (Maintenance-Repair-Overhaul), Aircraft Manufacturers and their supply chain.

Airlines/ lessors: difficulties for the independent and small structures

 Before Covid-19 pandemic, ICAO estimated 8 billion passengers in 2035, which would be somewhat equal to the world population...

Then the black April happened: IATA estimates that air traffic has dropped by more than 80% in western Europe. In the USA, the traffic has decreased by 95%: with 97 000 passengers per day, it is the same volume as in...1954!

While the IATA (grouping the 290 main airlines) annual turnover forecast was around 900 billion dollars for 2020, the Covid-19 pandemic loss forecast is already around 250 billion dollars and one might say that this is still an optimistic view.

On top of that, around 35 billion dollars of non-consumed tickets have been sold by airlines. If all would have to be refunded, bankrupts of some airlines are guaranteed.

Let’s have an overview with some representative airlines to assess the situation depending on their business model, their context and their history:

Flag carrier (former national airlines) and some brand carrier can count on the support of “their” governments

• Lufthansa announced orders cancellation of 40 aircraft from Airbus & Boeing on April 7th. Lufthansa estimates a loss of 25 million dollars per day with 90% of its fleet stuck on ground and requests support from the Government which will probably answers positively
•  Air France-KLM has not cancelled the A350 & A220 orders towards Airbus. The board estimates 24 million dollars loss per day with 90% of the fleet immobilized. 80% of Air France's employees (45 000 people) are in partial unemployment. Then, 8 billion dollars help from French government has been announced on April 25th with up to 4 billion dollars additional help from Netherlands State
• Italy envisages to nationalize Alitalia, which encountered difficulties since years now
• United Airlines announced to lose 100 million dollars per day. Then, D. Trump announced 20 billion dollars support for a dozen of American airlines
• Singapore Airlines or Emirates can also count on their rich government to back them, which could even put them in very strong long-term position after the sanitary crisis. Singapore Airlines expects 15 billion dollars funding, including 10 billion from Singapore State. Emirates, where the capital is 100% owned by the crown Prince, has no defined limitations
• Cathay Pacific, which usually carries 100 000 passengers per day, fly currently less than 1000 daily customers...The airline forecasts the same drop for May. The airline’s CEO has decided to slash his base salary by 30% for the rest of the year, so will do Qantas’ Chairman. Both companies request more help from their respective governments (so far Hong Kong supports Cathay with 30 million dollars - to be confirmed - and Australia announced 165 million dollars help for Qantas & Virgin Australia)

Low cost airlines seem to be prepared to a prompt restart when travel is authorized again

• Contrary to traditional airlines and to IATA predictions, Ryanair is rather optimistic, by predicting limited travels rebound in June, then intra-European flights during summer. The Irish airline argues that containment of many people will push them to travel as soon as authorities allow it. Its strategy relies on last minute bookings and aggressive low-cost tickets. In front of it, traditional airlines will suffer from this massive dumping
• On its side, EasyJet, second carrier in France, has grounded 90% of its fleet, since the March 24th and for the whole month of April, with only repatriation flights (more than 45 000 passengers from all Europe over the last weeks). Most employees are in partial unemployment, as the 1700 EasyJet employees in France. Nevertheless, the airline remains at disposal in case of optimistic regulations decision, with tickets for sale from the 1st of May coupled with a flexible cancellation process (More information). Following the recent funding of 2 billion pounds, including from the Bank of England, and the deal with Airbus to delay 24 deliveries, EasyJet CEO reported that the company could face a 9-month downtime of its fleet. Finally, EasyJet announced that the company can be fully operable within 2 weeks as soon as regulations authorize air traffic again
• Unfortunately, the situation is not the same for Norwegian Air Shuttle. The low-cost airline announced on April 21st the bankrupt of 4 of its subsidiaries in northern Europe causing 4700 jobless aircrew; before Norwegian Government attempts to save it with around 300 million euros guaranteed loans

Charter airlines are at agony

In 2019, Aigle Azur and XL Airways had already collapsed due to the high competition and internal bad management. The Covid-19 pandemic strikes a second blade on the sector. Already weak and in prey to financial difficulties, Flybe then Thomas Cook went bankrupt in March 2020. Also, Air Europa was currently under buyout from IAG but the current circumstances may delay this takeover

Lessors are under pressure

Over the last decades, lessors have continuously developed their growth to represent up to half of order backlog for Boeing and Airbus. Due to the business model, lessors are under pressure. On one hand, airlines ask them to delay the rents of the planes stuck on ground and, on the other hand, banks still request them to pay their loans. Therefore, lessors are impacted with a month delay, and the month of May shall be tense.

On April 9th, Avolon cancelled 75 737Max & 4 A330Neo and postponed 9 A320Neo. And the biggest Lessor, GECAS, cancelled 69 737Max on April 17th.

For the first time over the last three decades, there may be more end of leasing than new contracts and hundreds of aircraft will be put back on the market due to bankrupts of the weakest leasing companies.

In addition, the overall value of leased aircraft shall logically fall due to their immobilisation, especially the oldest specimen that have been grounded first and that will reintegrate the fleets last.

Airports are also directly and severely impacted

Many airports around the world notice collapse of the air traffic, between 60% up to 95%. With this, all connected activities fall: hotels surrounding the airport are empty, food services and commercial galleries are closed, and flows of passengers shuttling from taxis or public transport is an old memory. This impacts air transport jobs. As an example, French airports represent 200 000 employees in France (commercial stores included).

Smaller regional airports currently worry about their survival. Even if investment projects are postponed sine die, majority of airports have already to reimburse existing investments. Around 80% of airports’ costs are fixed costs that are not so easy to lighten , and usually paid by landing taxes, passenger taxes...End of traffic puts airports in a tense financial situation; thus some airports ask Government support (e.g. in France).

In the USA, the Covid-19 nearly closed the world’s busiest airport - Hartsfield-Jackson Atlanta. All European largest airports are managing 90% fewer flights compared to last year (more information). Paris Orly, second French airport, closed its doors on the 31st march for the first time in history, following government decision to restrict air traffic volume and in order to transform the airport as the bootcamp to transfer Covid-19 victims abroad via sanitary flights. Paris Roissy Charles de Gaulle remains open for some rare commercial flights (5% of usual traffic) mainly for repatriation and for air freight. 35% of employees are still on duty, especially for security and maintenance. (More information). The same figures are noted for Toulouse Blagnac airport that recorded a fall of 95% of the traffic and an activity rate around 20% for the 300 employees.

Another issue encountered by airports is the available space to stock all aircraft on tarmacs. For instance, in Europe, TARMAC Aerosave, one of the biggest aircraft storage capacity in Europe, is currently hosting around 230 aircraft in its different sites (Toulouse, Tarbes and Teruel) which is 40% more than usual. Same in Alice Spring (small Australian airport), that hosts temporarily 4 Singapore Airlines A380.

Let’s take a step back

For Airlines

The crisis is historic. During the containment, some airlines try to maintain marginal activity by refurbishing cabins into fret transport, but globally, air carriers are in dire straits. Small actors might stop, while biggest airlines, especially national ones (or former national ones), will be saved by States. We can see that some States do not hesitate to sustain their airlines, despite their economic liberalism ideologies (e.g. USA).This underlines how transport is strategic for the States (among others, let’s mention people repatriation or sanitary evacuation, transfer of goods, importation of sensitive freight….).

We should also witness a merge of some airline actors in the coming years. Some consolidation and restructuration (alliances or fusions/acquisitions) will happen. In this case, historical actors may take benefit from low cost purchase of weak competitors.

Tourism will eventually restart, with local travels at least in a first time. Thus, superjumbos & long-range aircraft will remain longer on ground. What will be the proportion of loss due to some business travel disappearance (replaced by videoconference alternatives for cost reduction measures)? 

When the air traffic will restart again, many sanitary questions will raise to prevent or reduce in-flight contamination. EasyJet announced that the middle seat could remain empty, whereas Air France argues it has no real sense. Air management is at the centre of both Manufacturers and Airlines communication strategy to reassure customers. Current HEPA filters (High-Efficiency Particulate Air) used in many cabin ventilation systems should capture the coronavirus-19, which range size between 0.06 to 0.2 μm (more information). In addition, air regeneration frequency during the flight is highly efficient with the total air renewal in 3 minutes, with 70% of the air recycled while the remaining 30% are extracted from outside. These performances are close to what is done in surgical operating rooms. Finally, cabin cleaning and disinfection process can be improved with relevant products or by increasing their frequency. However, this will have impacts on airplane turnover time, thus cost.

Also, the need to have more space in the aircraft to avoid promiscuities and anti-Covid19 sanity gestures might also be a reason to require larger places in aircraft. In that way, A380 cabin layout could be good opportunity…

The little rays of sunshine for Airlines comes from

• the oil price that has been divided by 2 since from January 2020 to March 2020 then dropped to its new record level on April 20th
• some hopeful decrease of airport fees (e.g. Paris Orly airport suspended the parking fees for the 137 planes on its tarmac)
• delay of taxes from governments (e.g. announced by France)

Anyway, when the sanitary crisis will be solved, the question will still be on the economic crisis: due to the recession, will the demand still be there? Will tourism by plane still be a habit? Will companies, for cost reduction and sanitary prevention of their employees, reduce the number of business trips? And, if the traffic restarts with a low cabin filling rate (due to a slow restart and to sanitary social distancing), it will be difficult for airlines to be profitable...for a while!

For Airports

During the containment, airports play crucial role in the battle against the pandemic. First, airlifts are logistics vital links to perform sanitary evacuation of disease people. Also, it is the first spot to send/collect then route medical devices, such as masks or artificial respirators from China. On the other hand, it is also the weak link for transmission originating from imported cases as residents come back from abroad, especially in Asian countries where governments fear second wave of contamination.

For sure, airports will also be at the heart of the post containment period. As airports are public areas, some questions need to be answered globally, among them:

•  Redesign the airport areas: how to manage social distancing during check-in and boarding? How to manage public areas (shopping galleries, restaurants, waiting areas)? How to adapt some quarantine zones for passenger waiting their test result, like in Tokyo’s airport (More information)
• More sanitary rules: Will it be mandatory to wear mask in airport as well as in aircraft? If so, which type of mask will be required?
•  Re-think the boarding process: equip airlines’ check-in desks with sanitary windows or even close them and push passengers to perform more online actions? Will security gates be equipped with temperature (fever) detection scanners to identify then filter out sick passengers? Will it be necessary to show sanitary clearance (health passport) or vaccine guarantee (if available one day) before buying a ticket or before boarding?
•  Surrounding activities: how to restart social business in the airports?

Conclusion for Airlines & Airports

Airlines and airports are directly and dramatically impacted by this 0,1 μm length Covid-19, and much more in terms of traffic decrease, geographical footprint and most probably duration than any other air transport crisis before (1973, 1998, 11.09.2001, 2008...).

Thanks to States' support, airlines and airports should resist in short term even if the landscape will probably evolve (typically with some consolidation & restructuration).

The question is now to know how it will restart? The day after de-containment and re-open borders, things will certainly not be the same as before:

• For sure, airlines and airports are at the heart of the sanitary questions to be answered and applied. As aviation is an activity linking point A to point B, both not being always in the same country, it is necessary to have global rules, managed by international organizations.
• The 11.09.2001 induced security reinforcement: tracking of passengers, biometric passports, improved boarding security scanners, more hand luggage restrictions, aircraft security improvement with an armoured door between cabin & cockpit... In the same way, Covid-19 will reinforce sanitary aspects. In the end, it is astonishing how we got used to all these new constraints. Optimistically we may also adapt fast to the sanitary rules.
• Once the new sanitary rules are in place and accepted, it will take time for business and tourism travellers to fly again with the same frequency and distance ranges, and finally …is it really what society wants?

Episode#3 coming soon: it will present the impacts on MROs, Manufacturers & Suppliers. Stay tuned.

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This article was written by Jean-Baptiste Didiot (Associate Partner at Mews Partners), Nicolas Lambert (Senior Manager at Mews Partners) and Fran?ois Vergnet (Manager at Mews Partners).

Contact us if you want to exchange more on the topic. https://www.mews-partners.com/secteurs/aeronautique-espace-defense/