This is the Coronavirus Case Studies series. Every post in this series will talk about how the coronavirus pandemic of 2020 will affect different businesses for years to come. We’re all still processing this massive, life-changing event. This week, we talk about how coronavirus will affect the aviation industry.
What companies make up the aviation industry?
When most people use the phrase “aviation industry,” they are referring to airlines, airplane manufacturers, and airports. The industry as a whole also includes additional sub-industries such as gliding, ballooning, flight training, and aerial photography.
For the purposes of this post, we will focus on commercial airlines and airports. Airlines, in particular, have shouldered a huge financial burden because of the coronavirus pandemic. This has had downstream impacts for every other kind of business that relies on stable airlines.
Aviation Revenue Went into a Tailspin
As of May 10, passenger air traffic in the United States dropped by 94%. Half of all planes are sitting on the tarmac. Major airlines are collectively losing between $350 and 400 million PER DAY because revenues have dried up.
On top of that, airlines are supposed to save 25% of their revenue to prepare for economic shocks. Airlines didn’t save money, leading to issues with cash on hand as well. On top of that, airlines have a history of collapse and bailouts.
Airlines were doing pretty well prior to the coronavirus, so despite some liquidity issues, we have pretty good reason to believe the business models were sound before the pandemic hit. Nevertheless, airlines need a bailout from the government in order to continue. This leads policymakers to ask probing questions about the nature of their financial crisis.
According to The Conversation, “in any bailout, the key question is whether this is a solvency or liquidity crisis. Solvency means that the airline will be very unlikely to ever remain financially viable. Liquidity means that the airline has a high risk of running out of cash flow but should be solvent soon, if supported. Assessing this is sometimes complex.”
Nonstop Flights: Airlines Can’t Stop Running
At this point, you would think airlines would try to cut their expenses as much as possible. One way to do that would be to start cutting routes and stop flying planes with only a handful of passengers on them. Empty seats don’t make money, after all.
Of course, the airline industry is incredibly complicated. The European Union has a “use-it-or-lose-it” law that requires airlines to fly at least 80% of their flights. Airlines that fail to do so might get bumped from major hubs. For this perverse reason, many empty planes are still flying. Losing a major hub can cause massive problems for airlines down the road, meaning that running empty planes is in their long-term best interest.
Of course, in addition to burning fossil fuels, airlines are also forced to burn money, some of which is coming from taxpayers pursuant to the CARES Act. It’s an all-around bad situation for airlines to be in.
The Aviation Industry’s New Destination
Figuring out where the aviation industry goes from here is no easy task. For starters, this is probably the biggest crisis the aviation industry has ever faced. That is a sentence I read from an expert in the Harvard Business Review magazine, which is hardly given to sensationalism.
Much like we said in our hospitality industry post, people just aren’t traveling much right now. Rule #1 of business is to give people something they want. It’s not the aviation industry’s fault that the pandemic dried up demand in a matter of weeks.
Bailouts will probably come in multiple rounds. Airlines are “too big to fail” because they comprise a major part of our nation and world’s infrastructure. Not having air travel is not an option for a developed nation. Yet the public will become increasingly angry with their governments should the airlines prove to be poor stewards of their money.
What a bind to be in!
Next Steps for the Aviation Industry
To move forward from here, the aviation industry will need to either wait or start drumming up demand. Much like after the tragedy of 9/11, airlines will need to go out of their way to give passengers peace of mind.
That may mean implementing all kinds of new hygienic measures like reducing touchable surfaces on a plane. It may means blocking off the middle sit to allow for social distancing. Perhaps the aviation industry will push for a TSA-like agency to fever screen passengers before they board.
Meanwhile, airlines will need to contend with the fact that they will be paying for the lost revenue right now for a long time. In fact, because videoconferencing and eCommerce are growing, there is a good chance that revenue prospects will remain depressed for a long time. This could lead to all sorts of austerity measures.
Airlines might raise the prices of tickets, but I am not so sure about that. Airlines have been pushing prices lower and lower for a long time because that’s what people respond to, even at the cost of amenities. That’s why some airlines charge extra for carry-on luggage and more than 29 inches of legroom.
For this reason, I think amenities such as in-flight entertainment systems and even Wi-Fi might be cut. Airlines will also likely shrink their networks and start cutting bad routes. The days of flying from Chattanooga, TN to Fresno, CA with one stop in between may very well be over.
Finally, as the airlines change, so too will the rest of the industry. Planes will be built as needed by passengers and pilots. Airports will respond to the airlines’ changes.
The next few years will be tough, but perhaps it will lead to a new golden age of air travel. Maybe airlines will even find a way to create enviornmentally friendly planes to reduce fuel costs. Who knows?
What do you think the future holds for the aviation industry? Do you think this article is spot-on or off-base?
Let me know in the comments below. I’d love to hear what you have to say so we can process this together.