Updated: Mar 11, 2021
The aviation sector, both domestically and across the globe, has been suffering from several worrisome problems. This has been the case even when the luxury of not having a global pandemic to worry about could be afforded. Now, with the additional challenges posed by the absence of this luxury, it is very hard to argue against the claim that COVID-19 has dealt a deathblow to aviation when it was already in poor shape.
Even before the advent of the pandemic, there has been a huge amount of stress in airlines’ financial books. This is evident by the fact that it has become almost routine to see airlines collapse and the ones that do survive make narrow margins; if not heavy losses. Some big names that have gone down in the recent past include India’s Jet Airways domestically, and Iceland’s Wow Air internationally.
More recently, Indian carriers have been posting heavy losses and even the most robust ones report only moderate profits. Air India’s problems have only been exacerbated by the problematic disinvestment process. Full-service carriers like Air India have been struggling to remain competitive against low-cost ones. Meanwhile, low-cost carriers, popularized in the domestic sector by airlines like Indigo, have been more profitable. The reason why carriers like Indigo have been so successful is that they have been able to give customers extremely competitive prices. The vast majority of passengers have simply preferred to pay a small amount to fly humble rather than an exorbitant amount to obtain the complete flying experience; as offered by Jet Airways. Low-cost carriers have been offering only what passengers need at the minimum - flying from point A to point B and charging extra for anything beyond that.
For domestic carriers, exchange rates have also played a role in determining margins. This is because several of the airline’s payments are to be made in dollars, while their income comes from bookings in the local currency. Thus, fluctuating exchange rates can be detrimental. Additionally, factors such as the high seasonality of demand, government intervention in ticket prices, and fluctuating oil prices have all added to the list of airlines’ worries.
COVID-19: A New Wave of Problems
The novel coronavirus, while implicitly making nearly all of these existing problems more acute, has also brought some of its own novel challenges to the airline industry. In the very initial stages, carriers started bleeding cash to hordes of customers seeking refunds and witnessed demand plummet. Soon, planes began to be grounded as operations ceased due to lockdowns. One of the most striking consequences of this abrupt shutdown has been the huge number of lay-offs. The seriousness of this issue can be noted from the fact that a household name, Emirates, has recently laid off 600 workers (bringing the total to 792).
The damage caused to airline companies by the pandemic has resulted in a ripple effect, which has ensured that they have not been the only ones suffering. As airlines began to go under, orders for aircrafts had been cancelled, and this affected those that make them - as was seen when Boeing cut close to 7000 workers out of its payroll. Since jobs in aviation, such as pilots, have always required very high specialization, laid-off workers cannot as easily find employment elsewhere. This means that the risk of having ‘discouraged workers’, as the term is used in economics, may materialize.
Furthermore, since flights are not made to sit idle for months on end as they are now, airlines will have to bear significant maintenance costs before they can safely get them in the air again. However, a window of hope in this regard has been the upsurge in demand for cargo transport, due to the growing need for PPE kits and other medical equipment. Besides exploiting this increase in demand, another reason for airlines to start flying more cargo flights has been avoiding some of the above-stated maintenance costs. Hence, several passenger aircraft have also been used for transporting cargo, even without passengers.
For airlines in the United States, another window of hope arrived in the form of a $25 billion federal stimulus for passenger airlines in order to help cover payroll expenses. However, even this has proved to be merely a bandage on a deep gash, since United Airlines could furlough as many as 36000 workers when the stimulus ends in October despite this.
Outlook For The Future of The Industry
As the pandemic has continued to spread and precautions have become rampant, operational costs have increased due to the implementation of safety regulations. If stricter regulations like having empty seats become the norm, ticket prices are bound to increase since the number of passengers to split the costs (primarily fuel) among decreases per flight. It is also a very real possibility that a monopolistic or oligopolistic market scenario will arise if this crisis spares only those airlines that have the financial capacity to take the most damage. Travellers, too, are likely to remain apprehensive of travelling to as wide a range of places or as frequently as they once used to. In the case of business travel, companies are now apprehensive of taking on the risk of legal liability in the case that an employee gets infected while travelling. All these factors work in unison towards further depressing demand for air travel.
It is therefore only rational to expect that in the near future, airlines will not be able to reach the same level of competition or volume of passengers that they enjoyed before. Losing the luxury of living in a pandemic-free world almost certainly spells mayday for the aviation industry.