Could the Pandemic End Air Transport Liberalization?

Governments are looking inward and becoming more protectionist in response to the pandemic

Pushing Back: Inside the Issue

Brian Pearce has been IATA’s chief economist since 2004, and in that time he’s seen his share of exogenous shocks to the industry: SARS, MERS, the global financial crisis, the historic spike in oil prices, and now Covid-19. The industry has weathered all of them, but the breadth and scale of this pandemic has left no almost no airline unscathed. And governments have responded, many stepping up with financial support for the industry. But what will happen after? Pearce notes in this week’s Feature Story that more governments are turning inward and becoming increasingly protectionist. That doesn’t bode well for an industry that by its definition is global. It especially doesn’t bode well for future consolidation or liberalization. And just how profitable was the industry before the pandemic?

Elsewhere in this issue, even though Norse Atlantic reached an agreement with the largest U.S. flight attendants union, pilots unions remain skeptical. Fallout continues after the Belarus hijacking incident, with governments moving quickly to ban flights from that country and to bar their airlines from overflying Belarus. This raises concerns that air transport and safety are becoming politicized and that the tit-for-tat could escalate. Are U.S. ultra-low-cost carriers best positioned to emerge from the crisis? Opinions are split. Iberia is returning aircraft to its fleet and re-converting some “preighters” back to passenger aircraft — perhaps a sign that travel demand is returning.

Meanwhile, Covid-19 has shown its not done with us. While vaccination rates in Europe and North America climb and societies return to normal, infections elsewhere are rising. Countries that were standouts early in the pandemic — Uruguay, Vietnam, and Japan, for example — are grappling with new surges. Disturbing new variants continue to evolve. While U.S. airline CEOs are bullish about the potential return of business travel, it’s becoming increasingly clear that globally, this will be a second lost year for the airline industry.

Verbulence

“I think the volumes of domestic [business] travel 12 months forward are actually going to be even higher than the domestic volume we saw in 2019 alone because there is such a demand.”
Delta CEO Ed Bastian on the surge in U.S. business travel could begin as soon as July.

The Airline Weekly Lounge Podcast

New episodes drop every week and are available wherever you get your podcasts and on AirlineWeekly.com. In the latest podcast, Edward “Ned” Russell and Madhu Unnikrishnan debate whether European airlines face another lost summer, and why is there so much merger talk in Brazil? Listen to the episode.

Weekly Skies

Swiss Adds Summer Flights Despite Slow European Recovery

Europeans may be flocking to Mediterranean beaches for getaways delayed by the coronavirus pandemic, but — at least at Swiss International Air Lines — the rise in leisure bookings belies a broader travel recovery.

“We regretfully still see no signs of any broader structural recovery of the air transport sector,” said Tamur Goudarzi Pour, commercial chief at the Zurich-based carrier, in Swiss’ summer schedule unveiled last week. All in, the airline will fly 50-55 percent of its 2019 capacity during the peak summer months of July and August, a marked increase from less than 30 percent in May but still far below some its network peers in Australia, China and the U.S.

The issue facing Swiss is that of every airline without a large domestic market. The carrier has negligible domestic flying — less than one percent of its system capacity in 2019 — and overwhelmingly relied on business travel before the crisis. Together, this leaves Swiss at a significant disadvantage when it comes to a recovery that favors domestic leisure and visiting friends and relatives (VFR) travel.

Swiss is far from alone. IATA expects passenger traffic in Western Europe to recover slower than in other regions with large domestic markets, chief economist Brian Pearce said during a briefing on May 26. The lagging recovery, which is forecast to last into 2023, is in large part due to the region’s reliance on international travel — both within the EU bloc and from long-haul points.

“You’re likely to see a more cautious industry, as we come through this crisis and go into the recovery mode,” said IATA Director General Willie Walsh.

Cautious is an accurate description of Swiss’ approach to the recovery. In May, the carrier unveiled significant fleet and staff cuts that will see it emerge from the pandemic smaller than it was before. The airline plans to operate fewer frequencies on European routes and cut some long-haul destinations from its map.

The Lufthansa Group, which owns Swiss and four other carriers, could fly as much as 70 percent of pre-crisis capacity during the peak summer, executives said at the end of April. However, how much the group’s carriers fly will depend on the pace of countries reopening to visitors — something many both inside and outside the industry agree is progressing slower than hoped.

Swiss has seen a rise in summer bookings to destinations along the Mediterranean as well as to the United Arab Emirates and U.S., said Pour. However, volumes remain “well below” pre-crisis levels.

— Edward Russell

U.S. Suspends Belarus Air Services Agreement

The U.S. State Department has suspended the 2019 U.S.-Belarus bilateral air services agreement in the aftermath of that country hijacking a Ryanair flight last month to detain a dissident journalist, White House Press Secretary Jen Psaki said. But the speed with which governments have moved to sanction Belarus, although applauded by free-press and human-rights activists, has raised concerns about the politicization of air traffic control and air transport.

This could lead to a tit-for-tat that ultimately may compromise air safety, IATA said. “Two wrongs do not make a right,” IATA Director General Willie Walsh said. “Politics should never interfere with the safe operation of aircraft and politicians should never use aviation safety as a cover to pursue political or diplomatic agendas.”

Signs that the incident could devolve into escalating and reciprocal government actions — with airlines caught in the crossfire — are already emerging. In response to Western outrage, Russia briefly rejected European airlines’ flight plans that skirted Belarus en route to Moscow, but reversed that decision last week. Germany this week barred flights from Russia to land in Germany before allowing them to resume on Thursday. This was in response to a corresponding ban from Russia, which also was reversed.

The U.S. also moved quickly by suspending the bilateral air services agreement that had allowed unlimited flights between the U.S. and Belarus and points beyond by passenger and cargo carriers from either country. Both countries have the right to suspend the agreement if its terms or international laws are violated. “We take these measures, together with our partners and allies, to hold the regime accountable for its actions and to demonstrate our commitment to the aspirations of the people of Belarus,” Psaki told reporters.

Although IATA condemned Belarus’ May 23 hijacking of a Ryanair flight in the strongest terms, the group warned that air safety should be kept out of geopolitics. “Banning European aircraft from using Belarusian airspace with a Safety Directive is also a politicization of aviation safety,” Walsh said. “This is a retrograde and disappointing development. EASA should rescind its prohibition and allow airlines to manage safety as they do each and every day — with their normal operational risk assessments.”

The European Union and the UK moved quickly after the May 23 incident to prohibit Belarusian carrier Belavia from flying through European airspace and landing in either jurisdiction. European airlines have been ordered not to overfly Belarus. The UK has formally suspended Belavia’s air operators certificate, and the EU is expected to do the same. The EU and the U.S. are expected to levy further sanctions on Belarus in the coming days.

Ryanair Flight 4978 was en route between Greece and Lithuania — both EU member states — on May 23 when Belarus President Alexander Lukashenko’s regime scrambled a MiG-29 fighter jet to escort the aircraft to Minsk on the false ruse that Belarus had intelligence that a bomb was on board the flight. Upon landing, authorities arrested dissident journalist Roman Protasevich and his companion. Protasevich lived in exile in Lithuania. The incident sparked a diplomatic row, with several European leaders decrying it as tantamount to state-sponsored hijacking of a commercial flight.

Russian President Vladimir Putin dismissed Western concerns, arguing the matter is an internal affair for Belarus. Russia’s carriers have increased the number of weekly flights to Belarus, and Putin’s regime has lent Belarus $500 million.

— Madhu Unnikrishnan

IATA Urges Governments to Use Data to Guide Reopening

IATA Director General Willie Walsh implored leaders of the Group of Seven (G7) advanced economies, set to meet at a summit this month, to turn to data to determine when to reopen their countries. Measures such as quarantines and lockdowns have outlived their usefulness in containing the disease, he said.

The world — even among the G7 economies — remains sharply delineated by vaccine access and response to the disease. Australia and New Zealand, for example, have all but barred international travel and only recently established a travel corridor across the Tasman Sea. Canada still requires quarantines and expensive testing. Much of Asia is seeing infections spike, even among countries like Vietnam that were early success stories. While the pandemic is easing in Brazil, other South American countries are seeing fresh outbreaks. And meanwhile, the U.S. had an “almost normal Memorial Day,” and Europe could rebound this summer, Walsh said.

Scientists say it’s likely the world will have to live with the coronavirus for years, if not decades, to come, so it is increasingly important to use data tools to mitigate risk rather than trying to stamp out all incidences of the disease, Walsh told reporters during a press conference last week. Both Airbus and Boeing have developed data tools to calculate the risk of travel and have found that with rigorous testing and tracing, even travelers from “restricted” countries present a small risk of causing an outbreak. “It is clear to us that we can do better and in fact must do better,” he said. Universal restrictions on people are no longer necessary, he added.

Requiring vaccines is not the solution, either, given the uneven distribution of the shots worldwide. “We cannot forget people who have not been vaccinated cannot be vaccinated or do not have access to vaccines,” Walsh said. “We cannot deny their freedom.” Instead, effective screenings can be a stopgap measure to keep infections from spreading.

However, the cost of testing, especially with the gold-standard PCR test, remains a barrier. Countries that mandate universal testing should pick up the tab for PCR tests, Walsh said. In most cases now, travelers pick up the bill, which can easily outrun airfare. Airlines are unable to pass on the costs. With cheaper, if less accurate, antigen tests, consumers can bear the cost, IATA said. “We have to question why the costs [for PCR tests] are as. high as they are and why governments are charging for those tests,” Walsh said.

— Madhu Unnikrishnan

Views Split Over Whether U.S. Discounters Will Gain Share in the Recovery

U.S. budget carriers accelerated years worth of market share growth into a single pandemic year. Their collective share of passengers jumped several percentage points in 2020 as the returning leisure travelers fit nicely with their strategy of taking vacationers directly to popular holiday destinations.

The segment, which includes Allegiant Air, Frontier Airlines, Spirit Airlines, and Sun Country Airlines, has been one of the fastest growing and most profitable in the U.S. for years. And even though they — along with the rest of the industry — contracted dramatically when Covid-19 hit, discounters did not face the larger structural fall off in business and international travel that hamstrung their network competitors. This set up led raised the prospect of the ULCC set emerging from the crisis as a larger force in the U.S. market than before.

“There’s a lot of growth potential for [ultra low-cost carriers] coming out of this pandemic,” Allegiant Senior Vice President of Revenue and Planning Drew Wells told Airline Weekly in a recent interview.

The ULCC segment notched 2.5 points of share growth in 2020 when they carried 11.2 percent of all domestic travelers, U.S. Bureau of Transportation Statistics data via Cirium show. And in the first two months of 2021, they flew just over 13 percent of all travelers in the U.S.

Allegiant already has recovered to its 2019 capacity levels and plans to be roughly 20 percent larger at the end of December than it was two years earlier. This growth will see Allegiant add six new airports — including Jackson Hole, Wyo., Key West, Phoenix Sky Harbor and Spokane, Wash. — and dozens of new routes to its map this year.

Frontier plans to resume 2019 capacity levels this summer and grow from there. Spirit plans to recover 2019 capacity by year-end before growing by roughly 30 percent year-over-year in 2022. While Sun Country plans a slower capacity recovery in order to boost fares and hire new crews, the airline benefits from a dedicated-freighter business with Amazon that it launched in 2020.

But not everyone is sold on the conclusion that discounters will permanently gain share in the Covid-19 recovery.

“Downturns typically beget opportunity for the efficient and nimble,” wrote J.P. Morgan Analyst Jamie Baker in a report last week. “This turned out not to be the case, once the government stepped in with unprecedented generosity and loyalty programs rode to the liquidity rescue. What made this cycle different was that [network carriers] didn’t abandon the field and turn over meaningful share.”

Benefitting from the government largesse that will cover most labor expenses through September, carriers including American Airlines and United Airlines have made some interesting moves to capture new travelers. American has expanded dramatically in Austin and added a number of seasonal routes to Orlando, while United added a slew of seasonal point-to-point routes to Florida this past winter and plans another 26 non-hub routes to beach destinations this summer.

None of this worries Wells at Allegiant. Nor does the entrance of startups Avelo Airlines and Breeze Airways into the U.S. market. “The space is always going to be competitive,” he said. Asked about the varying strategies of Avelo and Breeze, he added that there is “room for some healthy differences of opinion.”

Local Bases

A few planes in a city here, a few in a city there. That has long been the strategy of discount juggernauts like Ryanair and Wizz Air in Europe. The former had 79 operational bases at the end of 2020, and the latter added 18 bases to its network during the year ending in March. These dispersed bases give discounters a greater presence — and chance to capture share — in local markets rather than just flying in.

In the U.S., however, ULCCs have followed a more centralized strategy. For example, the largest carrier in the segment, Spirit, only has seven crew bases. The airline still offers multiple nonstop flights from cities around the country but those additions are separated from the need for locally based aircraft and crews.

Allegiant is adopting a more European approach as it grows. Many of the carrier’s main bases — for example, Punta Gorda, Fla. — lack the space to park additional aircraft overnight, said Wells. This creates a need for new bases in larger destinations elsewhere in the country to facilitate continued growth. The strategy also improves aircraft utilization, he added.

The airline is a long way from reaching the size of either Ryanair or Wizz Air. Allegiant had 19 operational bases in February with two set to open later this year: Des Moines on July 1 and Austin on November 18. Plans for a base in Concord, N.C., near Charlotte that were unveiled just before the crisis remain on hold.

“There will be more bases to come” for summer 2022, said Wells. When asked what Allegiant looks for in a base, he said it wants cities with “a lot of future;” or put another way growth opportunities beyond just flights to the airline’s existing strongholds. For example in Des Moines, Allegiant will add new routes to Austin, Houston Hobby, Portland, Ore., and San Diego when its base there opens in July.

New local bases are also good for staff morale, said Allegiant Senior Vice President of Flight Crew Operations Tracy Tulle. Crews like them because of their smaller size, often greater scheduling flexibility and more opportunities to upgrade for first officers.

“The smaller bases are kind of like family-oriented companies,” she said.

Breeze is taking a similarly dispersed approach to operational bases. It plans for four such domiciles by the end of July: Charleston, S.C., New Orleans, Norfolk, Va., and Tampa. More bases are expected as the airline expands with the addition of new Airbus A220s that begin arriving in October.

Regardless of strategy, ULCCs are growing in the U.S. — and at faster rates than their network peers. Covid-19 did reset the industry but, while it allowed the likes of Allegiant to speed ahead with planned growth, it also enabled dramatic cost and efficiency improvements at all carriers. Delta Air Lines has shaved millions of dollars in expenses out of its business through aircraft retirements and staffing reductions that will allow it to achieve higher margins in 2023 on revenues comparable to 2019.

“The fact that the U.S. government was as strong with its support of the industry through the CARES Act kept the industry intact,” said Delta CEO Ed Bastian at a Bernstein investor conference last week. “Change will happen. It’s just going to be delayed and I think that change [will be] the strong are going to get stronger.”