- Airlines have been hit hard by the coronavirus pandemic, in many cases grounding their entire fleets, furloughing thousands of staff, and issuing dire warnings about their future.
- Some budget airlines in Europe have already collapsed.
- Even after the pandemic ends, changes in the market could drive up the famously low ticket prices that opened up the continent, or force airlines to change the way they fly.
- But airlines’ best call may ultimately be to tempt back travellers through cheap flights — if they can afford it.
- Visit Business Insider’s homepage for more stories.
As governments around the world close their borders and advise against travel, demand for air travel has plummeted, causing airlines to ground their entire fleets.
Airlines have left planes sitting idle on runways, and furloughed hundreds of thousands of staff. The head of the International Air Transport Association, an organization representing the world’s airlines, said “the air transport industry is in its deepest crisis ever.”
The pandemic has left virtually all of the world’s airlines at risk of bankruptcy. Some have already collapsed.
One analyst said that, even in the best-case scenario, pre-outbreak levels of demand will not return until at least mid-2021.
And when that demand does return, the industry will not be the same as before.
There’s uncertainty about which airlines will survive, how many people will want to fly after a pandemic, and the what kind of new precautions airlines may take in future.
John Strickland, an independent air transport consultant, told Business Insider that one thing is for sure: “Aviation is going to be smaller.”
And among the things at risk are Europe’s famously cheap flights, which regularly let people fly for the equivalent of just a few dollars, and for some underpin their entire way of life.
Liberal aviation restrictions, plus an abundance of airlines competing with each other — far more than in the US — resulted in what are often very low prices. With Ryanair, outside of peak times, flights across Europe rarely cost more than €100 ($109), and its sales sees flights for as little as €9.99, €5, or even €0.01, for flights.
“Those markets have grown enormously because many people who couldn’t afford to travel before have done so whether it is for visiting friends and family going on holiday,” Strickland said.
The result is not only uber-cheap flights, but the knock-on effects of tourism booms and people moving to work all over the continent.
Among the largest are Irish airline Ryanair and UK airline EasyJet, the biggest and fourth-biggest airlines in the world respectively by their number of routes.
Both are hurting from the crisis — and any collapses, or changes to their models, would have huge impacts on the way people fly.
The biggest low-cost airlines are under immense pressure
The Irish Times reported that Ryanair is now operating fewer than 20 flights a day, less than 1% of their usual daily average of 2,500.
And EasyJet is not offering any flights. It has grounded its entire fleet of planes and is furloughed its 4,000 cabin crew based in the UK.
The airline has deferred 24 of the planes it had ordered from Airbus, after Sir Stelios Haji-Ioannou, the airline’s founder, said the airline would run out of money in August unless it scrapped the entire £4.5 billion order for 107 planes, which said were now “useless.”
The company has since secured a £600 million loan from the UK Treasury and said it will bring its cash reserves to £2.3 billion this week. Haji-Ioannou, who is now a major shareholder, had threatened to “personally sue those scoundrels” if the company took the loan and still went ahead with the order for 107 planes.
Ryanair is among Europe’s best-placed airlines to ride out the crisis
Analysts have noted that Ryanair has €4 billion of cash on hand — enough for 18 months. This makes it one of Europe’s best-placed airlines.
Strickland said that Ryanair has a “phenomenal amount of money” and is “not loaded down with debt” from its plane purchases.
He credits this to the airline’s “aggressive approach” to being low-cost — an approach that made it famous both for one-cent flights sales and unpopular money-saving policies like passengers only being able to bring a tiny bag on board without paying more.
Ryanair at one stage even proposed charging passengers to use the bathroom, and has explored “standing” seats to it could fit more passengers on planes.
“Some people look at Ryanair’s margins of profitability and would think it’s excessive,” Strickland said. “I’ve seen so many failures and so much weakness that I defend an airline like Ryanair and its need to have that money in the bank.”
Dr. David Warnock-Smith, an air transport adviser and head of aviation at the UK’s Buckinghamshire New University, told Business Insider that “only very few, maybe a handful of carriers worldwide, have substantial cash reserves.”
Strickland credited Ryanair’s reserves to the way that it, like many low-cost airlines “will really negotiate toughly on every cost, particularly airport charges” to bring costs to a minimum.
And the airline has thrived after previous industry shocks, like the September 11 attacks in New York, when it used the opportunity to buy more planes from Boeing.
But savings could potentially make it harder to get the financial relief that governments are exploring to keep airlines afloat.
Warnock-Smith said that asking for government support when you have substantial cash reserves is “tricky.”
“The longer this outbreak goes on, the worse it will be for those that have actually made substantial cash reserves. Because there’s absolutely no chance they will get any support until they are on death’s door.”
The collapse of some airlines could make tickets more expensive
The crisis could result in more expensive flights, or changes to the way flights are run.
Andrew Charlton, an independent aviation analyst, told Business Insider that reduced economic activity and flight demand could cause the collapse of many airlines — potentially creating a landscape in Europe that more closely resembles the US.
In the US, he said, the top four airlines control more than 80% of the market as of 2018. But in Europe, the top four control 40%.
“I think what’s going to happen is that we get a significantly smaller number of airlines, and those airlines will start to behave a little bit more like the airlines in the United States behave. In other words: with fewer airlines, fares go up.”
This would mean fewer airlines to meet demand, so those that remain could decide to, or might have to, increase fares.
But higher fares could put people off flying when airlines need travellers the most.
Warnock-Smith said Europe’s prices got so cheap because there are so many airlines: “Supply is higher than demand, which has led to a surplus of seats, and that’s put downward pressure on fares.”
He said if airlines collapse, and then demand for flights picks up again, “we might see higher fares because, because demand will outweigh the supply.” But he said that would only be likely for a “temporary period.”
Some European budget airlines have already collapsed. UK airline Flybe cited the virus when it collapsed in March, and Lufthansa shut its budget airline Germanwings in April as it restructured, warning that it will take “years until the worldwide demand for air travel returns to pre-crisis levels.”
And flying could change with airlines that survive
Low-cost airlines could end up making changes to some of their unpopular cost-saving policies, or double down on them. In the case of Ryanair, Strickland said: “I think the one thing that you can safely guarantee is that they will do whatever they think makes them profitable.”
He said that some carriers could return to the market with a smaller offering of flights, even if the reduced offering is temporary.
Some airlines might expand to capitalize on weakness in their rivals or new openings in the market.
Strickland said entire routes could be left up for grabs, pushing airlines into new spaces.
It could even push some airlines to branch into areas they have never entered, like Ryanair into long-haul flights.
“[Ryanair CEO] Michael O’Leary has time and time again denied that he ever wants to do that. But gosh, if at the moment, given how everything else has changed, there’s no reason why that might not change as well. We just don’t know.”
The most vulnerable airlines could be driven to ultra-low fares to entice travellers, even if that is not sustainable, Strickland said.
“Some airlines, which frankly have bad business models or bad locations or whatever … are going to do stupid things.”
He said a “fundamental flaw” in aviation economics could occur, whereby “a good, successful airline can put a ticket out at a particular price in the market and then an irresponsible, financially struggling, bankrupt airline can put out a ridiculous fare.”
And extended social distancing requirements may mean people have to stay further apart on planes.
“If there are going to be those kind of restrictions, what would that mean for flights?” Strickland asked.
“Would that mean that airlines are going to have to fly, let’s say half full, or always have a middle seat free as you would typically have in a business class?”
“That would arguably force you to put prices up — but if you put prices up then you get less people going anyway.”
One Wall Street analyst has already recommended that the middle seats of planes be removed.
But Warnock-Smith said spacing out passengers would be a huge financial risk for airlines.
Airlines also have to hope that people will want to fly
Airlines will need people to actually want to fly — and for countries to want visitors when the outbreak ends.
Strickland said that Ryanair and EasyJet can typically tempt people with cheap prices during any uncertainty: “They’ve got so many wonderful places. They know people are going to take advantage.”
“But at the moment there’s much wider uncertainties: We don’t know how much demand there will be.”
He estimated that demand will be “substantially” lower. Reasons may include people having less money being of a wider economic collapse, and lingering fears of flying from the pandemic.
Warnock-Smith said that people are likely to take fewer non-compulsory trips. “I think initially there’ll be sort of a lack of confidence and then over time that will pick up again, just like after September the 11th.”
Many popular low-cost destinations, like Spain, France, and Italy, are among the worst-hit. “We don’t know what state these markets will be in,” Strickland said, either in wanting visitors or visitors wanting to go there.
They key could be in keeping the cheap flights that won over customers in the first place.
Strickland said that airlines’ response to other crises, like the September 11 attacks or the 2008 financial crisis, was to set prices that incentivize flyers.
“I keep using Ryanair as an example, but it’s certainly the best one,” he said. “They’ve offered prices at almost nothing,” he said, “to kickstart the market and get people back to flying.”
But the question remains as to whether Ryanair, or any other airline, will be in a position to do it.
Leave a Reply
Leave a Reply
This site uses Akismet to reduce spam. Learn how your comment data is processed.
