3 SCENARIOS FOR THE AIRLINE INDUSTRY

The worldwide COVID-19 pandemic has had a devastating impact on the airline industry, unlike anything the world has seen since the end of World War II. As of late March, it is unclear what the post-pandemic airline industry will look like, but the two main factors in the industry’s future will almost certainly be the duration of the pandemic and the state of the global economy after the pandemic ends.

According to IATA’s current estimates, European carriers are expected to lose USD76 billion in revenue in 2020 due to the virus, with passenger demand projected to decline 46% year-on-year. IATA warned such a decline puts at risk about 5.6 million jobs and USD378 billion in GDP supported by air transport. UATA detailed some of the impacts at the national level as follows:

1. UK : 113.5 million fewer passengers resulting in a USD21.7 billion revenue loss, risking almost 402,000 jobs and around USD32.7 billion in contribution to the UK economy;
2. Spain: 93.7 million fewer passengers resulting in a USD13 billion revenue loss, risking 750,000 jobs and USD49.4 billion in contribution to Spain‘s economy;
3. Germany : 84.4 million fewer passengers resulting in a USD15bn revenue loss, risking 400,000 jobs and USD28 billion in GDP;
4. Ital: 67.7 million less passengers resulting in a USD9.5 billion airline revenue loss, risking 256,000 jobs and USD67.4 billion in contribution to GDP;
5. France: 65 million fewer passengers resulting in a USD12 billion revenue loss, risking 318,000 jobs and USD28.5 billion in contribution to France's economy.

Best-Case Scenario

The best-case scenario for airlines would be a quick return to normalcy after the COVID-19 pandemic ends. Such a scenario would require authorities to contain and eliminate the virus worldwide in the next 2-3 months. This scenario also relies on the economic impacts of the pandemic being temporary and quickly reversed once the pandemic ends. Under this scenario, the airline industry, like the global economy as a whole, would effectively pick up at the same strong position in which it ended 2019. While this scenario is the objective of all major policy makers, it is unclear if it is realistic. Under a quick recovery scenario, businesses would likely encounter high demand for flights shortly after the end of the pandemic. The end of the pandemic under this scenario would likely trigger a surge of business and leisure travel, as businesses and families take the trips that had been delayed during the pandemic. Should this surge emerge before airlines have completely resumed their normal operations, businesses may encounter seat shortages and high airfares until the pent-up demand has been satisfied and airlines have all of their aircraft and crews back in service. This best-case scenario would cause few long-term changes for the airline industry. The short duration of the flight disruptions, the continued strength of the global economy, and the return to normalcy by the time of the busy northern summer travel season mean that few airlines would go out of business. Indeed, under this scenario the pandemic could be beneficial for some airlines such as Alitalia that was struggling prior to the pandemic. The pandemic has provided the Italian government with a convenient pretext to provide Alitalia with more support than it may have been willing to provide under normal circumstances. The attractive nature of the best-case scenario for the COVID-19 pandemic could also create pitfalls for policy makers. Should policy makers pursue the best-case scenario by lifting travel restrictions before COVID-19 is fully eliminated, the resulting surge in travel could cause a second wave of the pandemic. A premature return of widespread air travel could contribute substantially to a second COVID-19 wave, and the resulting re-imposition of travel restrictions and loss of demand for travel would cause widespread damage to the airline industry.

 Short Recession

 Should the COVID-19 pandemic last through the northern summer before subsiding in the fall, it would likely cause permanent changes to the airline industry. The main concern under this scenario is that the pandemic would cause a global recession that would last for months beyond the pandemic’s end. While some airlines would likely go out of business during the pandemic, the greater concern would be the subsequent recession, which would hamper airlines’ financial prospects after the pandemic ends. Airlines are among the most cyclical industries in the world, making them vulnerable to financial recessions. While the recession envisioned under this scenario would be shorter than the Great Recession that began in 2008, it would still cause significant financial hardship for airlines around the world. Airlines that were in vulnerable financial positions prior to the COVID-19 pandemic would have difficulty surviving under this scenario, especially because governments’ willingness to provide airlines with financial support would likely decrease after the pandemic ends. Airlines that were financially healthy prior to the pandemic could emerge from this scenario in a stronger position than they were in before, as the recession would likely eliminate some of their key competitors. The main concern for business travelers under this scenario would be the increased rate of airline failures. Businesses and their travelers would have to keep a close eye on airlines’ financial health to avoid being stranded by an airline going out of business. Failures would likely be more common in Europe as the airline market is more fragmented, EU rules severely limit government aid to airlines, and several major carriers were already in challenging financial situations before the COVID-19 pandemic began. A moderate recession would be unlikely to threaten air travelers’ safety. While financial stress at airlines has played a role in some prior accidents, airlines have maintained strong safety standards through the industry’s two most recent economic crises in 2001 and 2008.

 Global Depression

 The worst-case scenario for the airline industry is that the COVID-19 pandemic and associated disruptions trigger an economic chain reaction that sends the world into a recession or depression that lasts multiple years. Predicting the outcomes of this scenario is difficult, as it would be unlike anything the world has seen since the airline industry became a major part of the global economy, but it would almost certainly cause major long-term changes to the airline industry. Under this scenario, very few airlines will be able to survive without sustained government assistance. Governments would therefore have to effectively choose which airlines stay in business and which go out of business. These governments would be most likely to save large airlines that are “too big to fail,” or national airlines that are a point of national pride. Multinational low-cost carriers, such as those that play major roles in the European market, may have difficulties finding a government to save them. The global supply of air travel would decrease considerably, as numerous airlines would go out of business and surviving airlines would significantly scale back their operations. Some airports that are currently major connecting hubs would likely lose their hub status, and some smaller destinations may find themselves losing all their scheduled flights. Businesses under this scenario would be faced with significantly less choice for air travel, resulting in longer travel times and higher costs for employee travel. Many city pairs currently connected by non-stop flights would lose those flights, forcing passengers flying between them to make time-consuming connections. Competition would decrease on many routes, which would almost certainly lead to higher airfares for travelers. Costs could increase further if major low-cost carriers go out of business, as these carriers play a major role in driving down airfares at all airlines in their respective markets. Businesses facing a major recession or depression would likely reduce travel budgets and replace many meetings that require travel with virtual meetings. It is unclear what sort of impact a deep depression would have on airline safety. The strong safety cultures at major airlines proved resilient enough to withstand the financial hardships of the post-Sept. 11 slump in air travel and the 2008 Great Recession, but a deep multi-year depression would put unprecedented financial stress on the airline industry. While the professionalism of airline employees and national regulators would likely preserve safety standards at most carriers, it is impossible to rule out the possibility of financial pressure causing standards to slip at some carriers.

Airlines should take the following actions

1. Airlines should start by determining the optimal size and dimensions of their networks and fleet, and they should do so within the next few weeks. They should make big decisions—including which fleet types to recommission first and which routes are most likely to recover—on the basis of several demand and market structure scenarios and while optimizing for free cash flow. 
2. Airlines should consider M&A and consolidation opportunities. Leading airline groups ought to review options, including potential divestitures and the sale or purchase of minority equity stakes.
3. Airlines should resize and restructure the operating model and organization using a zero-based approach, which can be done in a matter of weeks.
4. Airlines should also prepare for ramping up, once airports and countries reopen. The period of ramping up will be even more challenging and dynamic than the one for ramping down.
5. Airlines should establish a project management office to manage cash until the environment stabilizes and regular financial processes and routines can be implemented once again.