How the aviation industry has been affected by Covid-19

11th May 2020

As a result of COVID-19 travel restrictions, the aviation industry has been crippled as planes have been grounded and airports closed across the world. A form of transport that inadvertently helped to spread the virus across the globe initially, as they carried infected passengers from China to the rest of world, many aviation companies are now fearing collapse if they do not have some form of financial help from their respective governments. As nations start to ease their lockdowns, many travel bans remain in place, and with no known end to this virus outbreak, demand for air travel could see significant reductions for years to come.

Global airline revenues are forecast to drop by more than half or roughly £249 billion this year, with around 95% of international passenger traffic lost due to travel restrictions.1 With such staggering losses companies will have to make cuts and this will inevitably lead to job losses as current furloughing schemes or similar support packages come to an end. Ryanair has said it will cut 3,000 jobs, 15% of its workforce, as just “the minimum needed to survive the next 12 months”, according to boss Michael O’Leary.2

International Airlines Group (IAG), the Spanish parent group of British Airways, are planning to cut more than 12,000 staff, around 30% of its workforce for the UK carrier.3 They have also asked their staff to sign new ‘zero hour’ contracts that would enable them to lay off staff without negotiations. Unite the Union has currently ordered legal proceedings demanding BA to support its UK workers, as they are currently in receipt of government funds to furlough over half their staff. Although the company has also asked the Spanish government to bail out their Iberia and Vueling carriers, they have not yet asked for a bailout for BA from British authorities.4 CEO Willie Walsh believes they will be better placed to come out of this crisis if they are not beholden to the British government.5

However, the effects of this pandemic are being felt throughout the aviation sector. IAG predicts that demand for flights may not return to former levels for years to come and is therefore not certain if it will resume its currently suspended operations at Gatwick and London City airports.6  UK manufacturer Rolls-Royce is cutting 8,000 jobs, needing to save £750 million.7 In the US Boeing have announced they will cut production rates and eliminate 16,000 jobs or 10% of its workforce worldwide by this year’s end, due to a fall in demand for planes.8 United Airlines are reducing working hours by 25% for 15,000 employees while General Electric, whose aviation unit make engine parts, had to furlough 50% of their staff. EasyJet has deferred taking on 24 Airbus jets and will have to cancel 107 more without further investment from their founder, so will not take on any new planes in the 2021.9 As the company currently has no income the potential acquisition threatens the company’s survival.

Governments are reacting differently in aiding their airline industries. Many governments are not rushing to help and are only providing rescue packages with strings attached. The US was quick to come to the aid of its airlines with financial backing but their Covid-19 relief bill bans companies from giving raises to their top executives, buying back their own stock or paying dividends to shareholders.10 The UK chancellor, Rishi Sunak, has told airlines that the government would only step in to help “as a last resort”, entering into negotiations once the airlines had “exhausted other options”.11 Virgin Atlantic boss, Richard Branson, has asked the UK government for £500 million to the airline, offering to put in £250 million of his own money.12 Flybe, Europe’s largest independent regional airline, was allowed to collapse at the start of March 2020, amid a significant funding shortage compounded by a lack of demand, due to the outbreak of Covid-19.13

Realising the catastrophic impact this current crisis has had on airlines and the potential for the industry to help in an economic recovery, the Australian government has said it will prop up their aviation industry with $1billion, and will underwrite Qantas and Virgin Australia. They will pay them $165 million in order to maintain some key domestic routes, as it was “critical to Australia’s success” coming out of this pandemic.14 This has allowed Virgin, under increased financial pressure to stay afloat, to carry on flying and to reinstate its staff. However, critics have stated that this will do little to help, as $700 million of this aid package comes through waivers of fees that are not charged when planes are grounded. Additionally, Virgin Australia was already in the process of asking the government for a bailout of $1.4billion alone to stave off administration.15 This is something the government have not done, due to significant foreign investment in the company from Chinese state-owned group HNA, Singapore Airlines and Etihad, so the future of Virgin Australia remains uncertain.

Some countries are considering nationalising their airlines, as either they already have significant government debt or due to the important nature their continued survival represents. However, governments have the difficulty of deciding who to bailout if they are not able to support the industry as a whole. Where there is one national carrier the decision is clearer but choosing not to help out smaller low-cost airlines will be hard to justify, or require governments to accept a stake in airlines rather than full nationalistion.16

The Italian government was forced to take over Alitalia to avoid its collapse at the beginning of March 2020.17 The airline had been previously nationalised, consistently making a loss and has currently been under state-appointed administrators for the past two years.18 The Covid-19 pandemic finally pushed it over the edge as investors would not commit to a purchase in the current climate. Even Lufthansa, the national carrier of Germany, has asked for a bailout, though it is confident their government will provide €10 billion resulting in them taking a 25.1% stake in the airline.19 The future of Air India is also uncertain as it had been put up for stake sale by their government immediately preceding the Covid-19 pandemic, and they are still looking for a buyer in an increasingly tense global market.20 As the airline is state-owned it has currently been flying in supplies of medical equipment from China and repatriating foreign citizens.

Serious questions are being asked as to whether the airline industry can bounce back. Billionaire investor Warren Buffett’s company doesn’t seem to think so. His company Berkshire Hathaway, has sold all of its shares in the four largest US airlines, around 10% equity in each.21 The company recorded a £40 billion first-quarter loss and do not want to fund a sector that is just going “to chew up money in the future”. However, the aviation industry provides 3.6% of the world’s gross domestic product.22 Airlines provide vital communication and logistical links, are large employers, and a symbol of a country’s identity. While governments have a responsibility to guard against profiteering and companies expecting handouts, especially given unethical business practices, any form of national and global economic recovery will have to go hand in hand with a healthy aviation industry.

However, airlines cannot get their operations running again overnight. The logistics of getting around 17,000 aircraft, currently grounded at airports around the world, going again is enormous.23 Aircraft need to be prepared for flight and airports need to be ready to receive them with schedules and staff. Initially, many airlines will have to run reduced services but lifting the travel restrictions will be the key to getting planes flying again as this will increase consumer confidence.

No-one is entirely sure how airlines will operate if social distancing measures are kept in place indefinitely. Ryanair boss, Michael O’Leary, has said it is “idiotic” to resume flights if they have to keep the middle seat empty on flights due to Covid-19.24 Empty seats will not ensure social distancing and is a financially unviable measure, a view backed by the International Air Transport Association.25 EasyJet has announced they will keep the middle seat free on their flights, but Michael O’Leary has said that “If the Irish government imposed this rule then they would have to pay for the middle seat”.26

However, it is not the planes where passenger numbers are a problem. The Chief Executive of Heathrow airport has stated: “It’s just physically impossible to socially distance with any volume of passengers inside an airport.”27 Certainly, airports will have to be kept a lot more hygienic with deep cleans and sanitisers. UK ministers have now agreed a 14-day quarantine for anyone entering the country though airlines have reacted angrily to this, claiming it will “kill air travel”.28

It is possible people will not want to travel in the same way again. High-paying business and first-class tickets can make up as much as 70% of long-haul revenue.29 A predicted global recession, cancellation of major trade fairs, and other set-piece events with the rise of online meeting platforms could reduce these types of flights considerably. It cannot yet be determined how the vacation industry will be affected as the length of this pandemic is such an unknown quantity.

Gatwick Airport has had some positivity after a difficult period. Along with the uncertainty over EasyJet and British Airways, Virgin Atlantic have also said they will cut over 3,000 jobs and end their operations at Gatwick.30 This will have a profound impact on all businesses involved in the running of the airport as profits plunge, with potentially two major customers leaving. However, there is hope as Norwegian Air, the airport’s third biggest carrier, has managed a debt-for-equity restructuring scheme with its shareholders that will give it a boost of £770 million.31 Though they have had to sell new shares at a 79% discount, they will however crucially unlock another £230 million state bailout.32 Norwegian Air was due to run out of money by mid-May 2020 and though they will require further investment have acted as a beacon to other airlines showing a slow and steady way through this crisis.

Gatwick Airport also carried on the optimism by reinforcing that the airport is going ahead with its plans to convert an emergency runway to a functioning second runway.33 Gatwick is the largest single-runway airport and is desperate to increase capacity, while also taking advantage that Heathrow has had to pull back on its plans for an extra runway after being blocked by the court of appeal in February 2020.34 Despite the impact of Covid-19 on operations, French investor VINCI is looking at the longer-term view, and that they want to have something to work towards post Covid-19. Two thirds of local residents already support the proposal and the company is confident at getting planning permission in 2023, by which time they see a demand for air travel returning.

On a local level, Greater Manchester councils will invest £260 million in Manchester Airport Groups to help safeguard its future amid this coronavirus pandemic. Manchester City council has a 35.5% stake in the airport and has realised the benefit of the airport for the success of the local economy.35

Questions have been raised as to whether a sector that produces so much air pollution should serve people better by reducing their services anyway. Aeroplane emissions fell by almost a third in March this year as planes were grounded, equivalent to 6 million cars off the road.36 Airline analysts have recommended that the industry would cope much better if it were reduced in size, getting rid of the many unprofitable carriers and creating a more sustainable industry.37 Covid-19 may have provided some airlines with the perfect opportunity to restructure and streamline their services.

Industry-wide changes will have to be made to cope with this and future global pandemics and taking flights may never be the same again. Recognisable airline names may not survive the next few months and the sheer amount of job losses in the industry will be hard for some, who have made their lives in the industry, to come to terms with. However, the environmental footprint of air travel has become an ever more contentious issue and airlines would be well advised to use the current crisis as a way of slimming down and improving their green credentials. Many are already proving more resilient than others, and those that are strong enough to weather the storm may come out into a market that has fewer competitors and a more secure and robust industry as a whole.