Will Airlines ever recover from the pandemic?
Pre-Covid, most major airlines seemed to be an unstoppable force, with major airlines such as Delta posting a record 4.77 billion USD profit in 2019. The industry was strong as Delta CEO, Ed Bastian declared “As we enter 2020, demand for travel is healthy and our brand preference is growing, positioning Delta to deliver another year of strong results.” in 2019. Unfortunately, Delta’s real earnings were a record 12.39 billion loss or -$2.53 per share in 2020.
Airlines seem to be everything but unstoppable today, facing dwindling cash reserves, devaluing assets, historic drops in demand, and increasing travel restrictions. Many major investors, including Chairman and CEO of Berkshire Hathway, Warren Buffett, are exiting major investments in the industry, citing broken business models and long roads to recovery.
Wall Street and investors continue to downgrade airlines, but Ed Bastian suggests a full recovery is on the horizon as countries begin vaccinations and airlines elevate standards of cleanliness, and implement rapid testing programs.
Contradicting predictions from airline investors and airline executives poses the question, can airlines return to their former glory or become the remnants of a prosperous past? To initiate a major recovery, airlines will require the complete absence of COVID-19 border restrictions, meaning the completion of a global vaccine rollout.
Lifting restrictions is necessary as most developed countries require visitors to go through a lengthy and problematic entry procedure often including COVID-19 testing, in addition to an expensive 2-week hotel quarantine, making any sort of major travel impossible.
Most popular destinations are expected to have a vaccinated population by 2023. After a vaccination rollout, the IATA and WHO hope to implement travel passes and immunity passports that will allow visitors to seamlessly share vaccination history with governments and entry destinations without restrictions.
Vaccinations will initiate the recovery, but experts believe a gradual recovery is more likely than an instantaneous one, some projecting a full recovery in 2025. This leads to the second solution to a profitable airline industry, which is compressing aircraft sizes. Pre-covid, major airlines such as Emirates were hooked on large aircrafts like the Airbus A380 and the Boeing 747. Unfortunately, the demand required to sustain these aircraft may not return quickly and airlines will be much better suited with smaller aircraft such as the Airbus 220 till travel demand is fully recovered. Downsizing will allow airlines to fly at higher capacities and avoid flying dead flights, which usually generate a net loss.
The final major change for airlines must be a greater push to the premium economy cabin. Pre-Covid, many airlines began realizing the great profits that lie in this hybrid class, some industry experts even calling it industry cash cows. Premium economy is essentially economy class with the added benefits of extra legroom and a few minor perks such as a welcome drink.
The added cost of premium economy to airlines is minimal but the benefits of premium economy to business travel are massive. Businesses are still recovering from the major losses they suffered due to COVID-19 and are searching for ways to lower travel costs. Businesses can’t downgrade employees to economy class because employees traveling in economy often land tired and unwilling to work. However, they also cannot afford to keep employees traveling in business class. This paves the path for premium economy as it provides the small but crucial benefits that make business travel comfortable at an affordable rate. Businesses are infatuated with premium economy and are willing to up to 80% more for premium compared to economy class, allowing record margins for airlines.
In terms of when a recovery could start, the International Civil Aviation Organization (ICAO) predicts in a best-case scenario 54% of 2019 international travel, and 84% of domestic travel can return in June 2021. However, this estimate is likely contingent on the assumption of timely global vaccination. A more conservative estimate would be a 30-40% recovery in domestic travel in highly developed nations and a 10-15% recovery in international travel by June 2021. This estimate is in line with domestic air travel trends in China, a country that has flatlined its COVID-19 cases. An international recovery will lag a domestic one as new COVID-19 variants emerge and developing economies begin mass vaccinations.
Airlines have a long road to recovery, but if restrictions are lifted and they can successfully compress their aircraft sizes while remaining focused on their most profitable cabin, the premium economy class, there is perhaps still hope they can re-emerge from this pandemic as profitable as before the crisis.