The airline industry faces its biggest crisis since 9/11. What's next?
The global travel industry has been dealt a devastating blow by the rapidly evolving pandemic related to the coronavirus, also referred to as COVID-19.
Hotels have emptied out and national borders have been closed. The U.S. went so far as to issue a global level 4 "do not travel" warning for trips abroad on Thursday, underscoring the increasingly wide reach of the pandemic.
But, so far, few groups have been hammered as hard as the airline industry.
On Tuesday, two influential travel groups issued dire projections on the state of the industry. One came from the U.S. Travel Association, which predicted the United States could lose 4.6 million travel-related jobs this year that would inflict an $809-billion hit on the U.S. economy. Another was from the International Air Transport Association (IATA), with that group warning that losses in global airline revenues because of the pandemic would surpass its earlier estimate of $113 billion.
To better understand this global crisis and provide historical perspective, TPG reached out to longtime airline industry observers — including former CEOs of top airlines and current aviation analysts and consultants. We asked for their thoughts on the pandemic, how it compares to industry crises in the wake of 9/11 and the 2002-2004 SARS (severe acute respiratory syndrome) epidemic, and when and how carriers can recover.
The 9/11 terrorist attacks — when the U.S. airspace was closed for four days — created a situation that is different from the one posed by the COVID-19 pandemic, says Robert Crandall, who served as CEO of then-American Airlines parent company AMR Corp., from 1985-1998. After 9/11, “the airline industry was able to persuade people fairly quickly that new security measures made travel safe,” he says.
“Six weeks after Sept. 11, things started climbing back to normal,” he tells TPG.
Unlike the COVID-19 pandemic, the SARS epidemic was geographically contained to Asia, limiting its impact on U.S. and European carriers, many of which did not have extensive service to the region at the time.
Phenomenal growth in long-haul international flights over the past 20 years has made the airline industry more vulnerable to the repercussions of the coronavirus, says Henry Hartevelt, a travel analyst with Atmosphere Research and a former airline executive.
Harteveldt, who did marketing and planning for American, TWA and Continental, among other airlines, tells TPG that the increase in long-haul international service has been the result of many factors, including the introduction of new, longer-range aircraft, globalization of the world’s economy, the rise of China as an economic superpower, and the rapid global expansion of Middle East carriers Emirates, Etihad Airways and Qatar Airways.
Regional events such as 9/11 and the SARS outbreak differ from the "rolling, global phenomenon” of the COVID-10 pandemic, explains Michael Premo, president and CEO of Airlines Reporting Corp., which provides financial settlement services between travel agencies and airlines.
“A global, highly contagious disease poses frighteningly different questions,” says Crandall, adding, “People do not fully understand coronavirus, aren’t sure about how you get it, and don’t know what the fatality rate will turn out to be. It’s logical for people to want to stay home until fear of the unknown passes.”
Helane Becker, a Wall Street airline analyst for more than 35 years who currently follows U.S. carriers for Cowen, notes: “People are not afraid of travel. They are afraid if they go somewhere and get sick they can’t get home, or if they just go somewhere and can’t get home.”
In addition to health and safety concerns, the collapse of the global financial markets is also depressing travel during this latest crisis, says consultant Gregg Saretsky, former WestJet CEO and a former senior executive at Alaska Airlines and Canadian Airlines International.
“Retirement portfolios, savings accounts, 401(k) plans, stocks and options clearly won’t be paying as much, which will put downward pressure on people’s propensity to travel. I think this is going to be a very problematic recovery and take longer than it has in the past because of the multiple levels of issues. The time frame to some degree will be a function of how quickly COVID-19 plays out,” Saretsky believes.
U.S. airlines today are in far better shape financially than they were after 9/11.
Michael Derchin, a veteran airline analyst who worked for Pan American World Airways and American before going to Wall Street in 1979, says U.S. carriers were “troubled” going into 9/11, which came 23 years after the U.S. industry was deregulated in 1978. “Things were not sorted out at that point in time in terms of industry restructuring,” he explains.
Derchin calls 9/11 a “catalyst for a major consolidation” among U.S. airlines. Carriers subsequently filed for bankruptcy, restructured operations and balance sheets, reduced costs and merged, which he says the government permitted “so they could get back on their feet."
“Fortunately, the U.S. airlines are now in much better shape financially by a huge margin than they were after 9/11. They’ve been profitable 10 years in a row, and also for the past 10 years have generated half of the global airline industry's profits,” Derchin says.
U.S. airlines “have much better balance sheets, a lot of cash on hand, and unencumbered assets they could borrow against, which is needed as cash balances fall precipitously, due to the unprecedented drop in air travel demand, and the airlines seek financial assistance from the government to weather the COVID-19 storm,” he adds.
However, it's not a rosy picture for all carriers. At the top of the list of those considered most vulnerable in this pandemic crisis is the Italian carrier, Alitalia, whose re-nationalization was announced by the Italian government earlier this week. Harteveldt says the future of Norwegian Air is uncertain, and notes there also has been speculation about the financial health of Virgin Atlantic. In addition, he says Cathay Pacific is fighting for survival, having seen its business start to decline when political protests began in Hong Kong, then plummet further as COVID-19 swept through Asia.
Craig Jenks, who heads the New York-based Airline/Aircraft Projects Inc. consultancy, notes that carriers in the U.S. and United Kingdom are seeking state aid equal to approximately 25% of 2019 revenues, and that IATA is seeking a similar target percentage for the industry globally. But he suggests that many carriers may not get government bailouts. These include airlines in the China-based HNA Group, such as its Hainan Airlines flagship; Asiana Airlines in South Korea; Southeast Asian low-cost carriers such as Bamboo Airways and VietJet (VietJet) in Vietnam and Nok Air (Nok Air) in Thailand; South African Airways, and Eastern European legacy and state-owned carriers such as Croatia Airlines and Romania’s TAROM.
Aside from possible casualties among the airline ranks, executives and analysts disagree about how long a recovery might take for those that do survive.
Saretsky, the former WestJet CEO who holds a Bachelor of Science degree in microbiology and biochemistry as well as an MBA from the University of British Columbia, believes “recovery will be a function of how quickly we get on top of COVID-19. There’s more panic than logic surrounding COVID-19 today.”
He predicts recovery will come “when you see people survive an infection and life gets back to normal, there’s support from the stock market. I think it will be a tough 12 months.”
One possible bonus for travelers, he adds, is that airfares — which have already plummeted — could get “ridiculously low if the situation gets worse, with carriers trying to mitigate their losses rather than generate profits.”
Crandall doesn’t know how long it will take the airlines to recover. “It depends on what more intensive testing tells us about the number of cases we have and have had, on whether we discover drugs that aid recovery, on mortality rates, and on when we get a vaccine. No one knows, but we know it is going to be a long haul,” he says.
Reid projects the industry “is hopefully two to five months away from the trough or peak.”
Premo’s IATA colleagues told him in late February that there were more sales for airline tickets in China than for refunds, something they had not observed in the previous six to eight weeks. “That’s a pretty good indicator (Chinese airlines) were at the bottom and are now working their way up. U.S. carriers are still on a downward trajectory,” he says.
Harteveldt predicts airlines’ traffic and revenues will return to “normal levels” three to six months after a return “to a normal state of health.”
However, he warns that “with the economy now disintegrating further by the day, there is a credible risk of an economic recession. If we see an extensive number of layoffs, a substantial increase in unemployment rates, a sputtering return of business travelers and a slow hiring pace as we recover from the crisis, it could take a year to 18 months for the industry to reach precrisis levels of both traffic and revenue.”
The COVID-19 crisis is currently roiling the economy of the U.S. and other nations, and it's uncertain how long it will persist. But even if the COVID-19 outbreak turns out to be seasonal and relatively short-lived, both Premo and Reid warn it could return in the fall of 2020 or possibly the following winter, imposing, what Premo calls, “an even bigger burden on the industry.”
Once the disease is under control, executives interviewed question what longer-term impact it might have both on leisure and business travel.
Premo, for one, says he is a “huge believer in human nature. People like to go.”
Both Becker and Derchin anticipate business travel might be permanently dampened once travelers unable to fly today become accustomed to holding meetings or attending conferences via teleconferencing rather than in person. “Technology has gotten so much better, we’re getting to the point where a lot of business travel is going to be conducted virtually. This will have a material effect on business travel, especially long-haul travel,” Derchin predicts.
“COVID-19 will force companies to rethink the way they conduct business in the future. Companies like Amazon have told employees to avoid all nonessential travel now. Nonessential business travel will be replaced by videoconferencing in the future — something that was predicted many years ago will finally come to pass. As traffic growth slows, the airlines won’t need as many aircraft from Boeing and Airbus,” he adds.
Reid disagrees, noting that traveling on business is “how stuff gets done. Technology will not replace it. The fact is people are social animals. I believe it will rebound.”
Harteveldt adds, “Business people prefer to meet in person when possible. Supervising a factory, negotiating a sale, working with colleagues in detail on a project is not as easy, effective or enjoyable when done remotely. Plus, people like to get out of their offices.”
Becker and Derchin also expect pent-up demand for leisure travel will rebound — Derchin projects sharply — stimulated by millennials seeking new experiences, and baby boomers visiting family and taking what Becker calls ‘bucket-list trips.”
Pointing to equipment such as GermFalcon, a sanitizer that uses ultraviolet lamps to clean germs such as COVID-19 from aircraft interiors, Crandall predicts that going forward, there is “likely to be public insistence on higher levels of aircraft cleaning on a continuing basis. This will probably have some unfavorable impact on carriers’ unit costs long-term, since it will cost more to keep planes clean.”
In general, adds Harteveldt, people “will be far more aware of hygiene wherever they are, at home, at work, traveling. I don’t expect many visitors to China will be eager to visit a wet market any time soon.”