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Airlines slash prices to get the world flying again

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The nightmare year of 2020 brought the airline industry’s first decade of sustained profitability to a shuddering halt.

The nightmare year of 2020 brought the airline industry’s first decade of sustained profitability to a shuddering halt. Picture: Ian Landsberg/African News Agency (ANA).

INTERNATIONAL – The nightmare year of 2020 brought the airline industry’s first decade of sustained profitability to a shuddering halt.

The coronavirus pandemic tore through in a tumultuous, unprecedented way — leaving carriers in a deep hole, along with a constellation of aerospace manufacturers, airports and leasing firms.

2021 is shaping up to be a transition year for an enterprise that takes passengers on the equivalent of 208 million annual trips around the globe. At best, the path ahead will be bumpy, with progress toward a return to travel dependent on the pace of vaccine roll-outs, access to capital, government policies and the unpredictability of a virus that’s not yet fully understood. Still, there will be leaps, including the first commercial flights to near-space.

Here are some developments to look for over the next 12 months

– Fare wars: Airline traffic won’t see a major boost until vaccines saturate populations enough to stamp down infection rates. Even then, it may take effort to get some people back on planes. In Europe, that’ll mean fares as low as 9.99 euros (R186.90), according to Ryanair Chief Executive Officer Michael O’Leary. The Irish discounter on Thursday slashed its schedule through March, underscoring the uncertainties still clouding the industry outlook.

Other ideas being floated to entice travellers are free hotel stays, 2-for-1 deals and complimentary travel insurance. Travel-pass promotions from carriers such as China Eastern Airlines Corp., which is offering unlimited flights for a single price, have proved popular, while online agents show ultra-cheap trips in China for the Lunar New Year holiday next month. The key question is how long it’ll take to wean customers off those incentives.

An upturn in leisure and family travel should hit most regions by around midyear. More lucrative business traffic is likely to trail as companies resist sending people out on the road. John Grant, chief analyst at flight-bookings specialist OAG, says it won’t be a recovery until enticements are no longer needed and carriers can manage routes for profit.

– Cash quest; Airlines raised record amounts of money in 2020. More will be required in 2021. Stock sales and debt conversions will take on a greater importance as companies try to restore balance sheets to health. Governments, which ponied up $220 billion in state aid last year according to Moody’s, will continue to play a role. France and the Netherlands, the largest shareholders in Air France-KLM, are in negotiations to inject billions of euros more, while converting part of the 10.4 billion euros already loaned into hybrid debt.

Carriers like EasyJet are likely to raise more equity, while cash burn remains a concern, according to Daniel Roeska, an analyst at Sanford C. Bernstein. Some airlines are in more desperate straits. Norwegian Air Shuttle’s court-supervised restructuring plan relies on attracting new investment and would largely drop its well-known trans-Atlantic business to focus on regional services.

Creditors of bankrupt Thai Airways International are due to consider a rehabilitation plan in February. AirAsia X, the Malaysian long-distance carrier, and Thailand’s Nok Airlines are also due to present plans in coming months. US airlines will receive $15 billion in federal aid to help pay workers through March 31, on top of $25 billion in similar help provided during 2020. The US Treasury Department has made billions more available in the form of loans.

– Airline shakeout: Dozens of airlines have disappeared or filed for bankruptcy since the pandemic began. More are on life support, in danger of getting swallowed by stronger players. In Germany, Deutsche Lufthansa is taking straight aim at holiday specialist Condor by adding routes to sunny spots like Zanzibar and Corfu. Condor, once a Lufthansa unit that in 2019 survived the failure of then-parent Thomas Cook, could make a tempting target.

However, natural consolidators like Lufthansa that accepted bailouts may be prevented from making purchases under terms of state aid packages. In India, Tata Sons bought out struggling partner AirAsia Group Bhd.’s stake in a local joint venture. State-owned Air India is another potential target, possibly through Vistara, Tata’s venture with Singapore Airlines. Air India’s buyer would “definitely need to make it a lot leaner,” Bloomberg Intelligence analyst James Teo says.

– Space trips: After years of work and premature predictions, the first “ordinary” space adventurers are poised to take flight in 2021 with billionaire Richard Branson inaugurating commercial suborbital rides at Virgin Galactic Holdings Inc. The company has told investors its spacecraft will carry Branson from New Mexico in the first quarter and then commence services with a group of about 600 early customers who have paid as much as $250,000 a ticket.

Branson’s venture could see competition from Jeff Bezos, who’s developing Blue Origin’s New Shepard reusable rocket for suborbital rides. In October, the company performed its seventh test flight from Van Horn, Texas. It plans “a couple” more before humans fly. A third outfit, Elon Musk’s Space Exploration Technologies Corp., is set to fly a four-person private crew for Axiom Space Inc. late in the year. The group will have a 10-day stint aboard the International Space Station as part of NASA’s efforts to spur commercial enterprise in low-earth orbit.

– Wide-body woes: While interest is starting to pick up for smaller jetliners, the market for twin-aisle aircraft from Airbus and Boeing is “beyond grim,” said aerospace consultant Richard Aboulafia. Sales were depressed before the outbreak, and a surplus of used models will crimp demand for years.

With long-distance travel on hold, Airbus and Boeing have seen higher retirement rates for their biggest planes within airline fleets and a dearth of new orders. And there’s not much sign of encouragement. Boeing is fighting to hold on to orders for the largest plane on the market, its 777-9, which is two years behind schedule. Analysts see more production-rate cuts ahead for the better-selling Boeing 787 — which is also beset by production snafus — and the Airbus A350.

Output of the less-popular A330 could go down to one a month, according to Agency Partners analyst Sash Tusa. The plane has struggled to attact orders despite a reengined version, with biggest customer AirAsia X’s financial troubles the latest blow. Still, analysts predict the program will limp on at lower rates rather than being scrapped.

– Weaker links: Major airlines packed into ever smaller destinations as the boom in air travel hit its zenith in 2019. Now, they’re dropping newly unprofitable routes to stem losses. Fewer flights, smaller planes and reduced big-city connections are eating into the economies of some tourism-dependent locations. A portion of the pullback could last indefinitely, according to OAG’s Grant.

Particularly vulnerable are longer routes that were still in their developmental phase. From late March, British Airways will permanently axe 13 long-haul destinations across North America, the Middle East, South Africa and Asia. Cathay Pacific will cease services to seven global locations as losses mount. Cities such as Manchester, England, are vulnerable to weaker links to key markets like China, while flights from Beijing to Lisbon, Barcelona and even Madrid could come under pressure as airlines re-evaluate. Large Middle Eastern carriers like Emirates and Qatar Airways, which thrive on whisking passengers across the world, aren’t likely to fill the gaps, according to Grant. He says they’re serving as many destinations as they can, given a dearth of connecting traffic. “It’s more about getting back to pre-Covid capacity and demand levels.”

– Startup hustle: While launching an airline into the teeth of the industry’s worst-ever downturn might seem reckless, there is some logic. Financing remains cheap, and the pandemic has created a huge fleet of grounded jetliners, many owned by leasing firms desperate to find new operators. Planemakers are also seeking buyers for brand-new aircraft following order cancellations — Boeing’s 737 Max in particular as the model returns from a 20-month grounding.

Incumbents have cut capacity and thousands of jobs, providing would-be rivals with a glut of experienced staff, while high debt levels limit their ability to fight back. Among projects underway, Cyrus Capital aims to revive Britain’s Flybe after buying the brand from administrators, while newly founded Emerald Airlines has won a contract to provide regional flights for Ireland’s Aer Lingus. Oslo-based Flyr, set to launch in coming months, wants to pick up traffic from Norwegian, and the founders of PT Lion Mentari Airlines are said to be planning a startup in Indonesia.

In North America, Canada’s Flair Airlines aims to expand from three jets to 50 under a new brand and management, while in Miami, Global Crossing Airlines, flying as GlobalX, plans to operate charter flights to Latin America. South African lessor Global Airways helped launch discounter Lift on Dec. 10 with its own surplus jets, indicating a possible new direction for finance firms stuck with idled planes.

– Brave new world: Just as long security lines, removing your shoes and limits on liquids have colored the post 9/11 experience of air travel, Covid is likely to herald continued use of masks, social distancing and apps for passenger records. “When we look back on this in five or 10 years, it’s going to be a catalyst for many changes,” says John Strickland of airline advisory firm JLS Consulting.

Customers are likely to demand airlines maintain their current high levels of hygiene, which could impact profitability. One major change that’s becoming part of the landscape is the introduction of pre-departure Covid tests. Carriers had pushed for the step as a way to encourage travel, but had little success until the detection of a new strain of the virus in Britain forced governments into a rethink.

France and other European nations demanded screening for all UK passengers, while carriers including British Airways and Virgin Atlantic Airways made checks mandatory for US-bound flights – a policy the US is itself considering for flights coming in from abroad. Separately, many airlines have eliminated change fees, and refunds could get easier after cash-strapped carriers held on to revenue for cancelled flights, prompting an outcry. Improvements to processes for boarding and check-in are also likely to become permanent.

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