Fight or Flight: COVID-19's Impact on the Airline Industry
Airline travel has come to evoke a multitude of feelings over the years. For some, it represents the excitement of exploring new cities, for others, it is merely another aspect of conducting business, and for many, travel is crucial for their livelihood. But now, amidst the COVID-19 panic, airline travel has taken on another identity of danger and uncertainty that invokes fear in many. Air Canada, the largest airline in the country, is continuing to roll out limited runs with an emphasis on flying Canadians back to their home countries. However, smaller, privately-owned companies such as Porter Airlines have suspended flights altogether until June 1st, 2020. With this information in mind, the International Air Transport Association’s (AITA) prediction that airlines may face revenue losses approaching $113 billion due to COVID-19 in 2020, comes as no surprise. The short-run verdict is resoundingly bleak but questions remain surrounding the extent of the impact and the future of the industry.
When interviewed on the matter, professor Karl Moore, airline industry expert and Associate Professor of Strategy & Organization at McGill University approached the issue with calculated caution. While he noted that "this pandemic is unparalleled in aviation history," he also put forth the notion that “many are overstating the extent to which the world has changed.” Moore’s balanced approach considers the possibility of two competing factors: firstly, the economy will undoubtedly plunge into an economic recession. However, “once the lockdown is over, wealthy Canadians will likely be eager to travel as a result of pent up demand.” Furthermore, following the initial drop in airline prices resulting from COVID-19 but prior to the implementation of various travel bans, news outlets such as Business Insider reported that millennials were flocking to purchase plane tickets at discounted prices despite the associated health and safety risks. To some, wanderlust is more serious a condition than COVID-19. So, despite this potential surge in consumption, why does Moore believe that “overall, the industry will be left with a net negative?”
His statement speaks to two major elements of demand: a consumer must be both willing and able to purchase a product. COVID-19 uniquely affects both of these factors as consumers will neither have the money nor the trust necessary to participate in air travel. Thus, this pandemic will have an unprecedented impact on the industry. Historically, airlines have dealt with their fair share of blows. In the early aughts, 9/11 heavily eroded consumers’ willingness to fly as fear permeated the minds of civilians across the globe. In 2006, the IATA stated that 9/11 had created a “large temporary impact” on travel demand, and from “2001 to 2006, airline revenues from domestic U.S. flights fell by $10 billion a year.” Just a few years later, the 2008 economic recession decreased consumers’ ability to pay for flights, and in the lowest trough of the recession, the U.S. airlines industry collectively lost $24 billion. Discretionary spending was down, and the luxury of commercial travel no longer appealed to cost-conscious consumers.
While these numbers appear daunting, they pale in comparison to COVID-19’s potential destruction. Rather than merely temporarily discouraging air travel, the pandemic is reshaping the ways in which we communicate and work. The rise of work-from-home technology such as video conferencing software Zoom, indicate that business travel, particularly between nearby cities, has a decreasing utility. This does not indicate that in-person business, which strengthens trust between business partners and provides powerful global networking tools, will cease existence altogether. Rather, it merely indicates that overall, travel for business will decrease, especially as companies seek cost-saving solutions during a recession. Thus, whether for leisure or business, the demand for flights will continue to decrease during the foreseeable future.
Beyond market factors, government intervention poses an interesting question: if the free market fails to revive the airline industry, will subsidies act as its saving grace? Only time will tell whether or not companies will squander or effectively utilize their resources. Currently, Air Canada, the nation’s largest airline, is using its government-sanctioned aid to address the havoc the pandemic has unleashed upon its employees. As Canada sinks deeper into mass unemployment, devoting its money towards paying wages to its remaining employees appears to be a noble and practical use of financial capital as, without workers, the industry would be impossible to sustain. Recently, thanks to the emergency wage subsidy package, Air Canada has even rehired more than 16,000 workers as their CEO Calin Rovinescu works to “keep as many of [their] employees as possible during the crisis.” For now, government subsidies will continue to act as short-term bandages to lessen the burden on this hemorrhaging industry.
During hardship and uncertainty, consumers have historically tightened their purses and avoided risk. All signs point towards the airline industry deteriorating, and there is little to indicate a resurgence any time soon. Although financially volatile and at times viewed as frivolous, airlines provide an integral service and stimulate the economy through tourism and global business exchange. Suffice it to say, COVID-19 has grounded the airline industry but will it be able to take off again anytime soon?
Editor’s Note: All values mentioned are in USD unless stated otherwise.