The Aviation Industry: A New Era Ahead
Only a month ago, neither industry leaders nor successful investors foresaw the current challenge the aviation industry is facing, triggered by COVID-19.
It was only in February that Berkshire Hathaway bought additional shares in Delta Airlines. In November last year, ONEX finalized the acquisition of WestJet – the largest private equity investment in airline history! Today, most airlines stocks have lost 50% or more in value, all within a few trading days. What will happen next?
In a recent press release, IATA, the International Air Transport Association, which represents some 290 airlines, forecasts revenue losses as high as $113 billion in 2020. European as well as US airlines are hoping for state aids, otherwise hundreds of thousands, maybe millions, of jobs could be at risk.
‘Unknown territory’ probably describes the current situation for airlines very well. In no recent crisis (Gulf War ’91, Asian Financial Crisis ’98, 9/11, 2008/09 Financial Crisis) have we seen capacity cuts greater than 50%. The industry is confronted with an international pandemic which has led to many border closures, even in the European Union. Experts are shying away from making any recovery predictions at this point in time.
Canadian airlines have announced drastic cuts to their networks, and implemented immediate cost and capital spending reductions. Airline unions are expecting layoffs as high as 50% of the total work force.
Airlines are not the only companies in crisis mode. Aircraft manufacturers, suppliers, aircraft leasing firms, airports, investors, all feel the drastic fall in passenger demand.
Bankruptcies, consolidations and government bailouts seem inevitable. The longer passenger demand stays at unprecedented lows, the bigger the impact and the longer it will take to recover.
Consumers have greatly benefitted from deregulation in the airline industry. Open competition amongst airlines as well as limited government intervention have resulted in cheaper air fares and more destination options. Moving back in time and nationalizing airlines seems counterproductive. Instead, better cooperation between airlines and governments should be advocated. Building crises reserve funds and a better responsiveness to a crisis breakout, are actions to consider. Imminent isolation of a problem can save cost and reduce recovery time.
In an open letter to the Canadian government on March 16th, John McKenna, CEO and President of the Air Transport Association of Canada, addresses the pandemic impacts on the Canadian aviation industry: “Government financial assistance is urgently needed to avert a crisis in the aviation industry that will severely impact our member carriers, the travelling public and the Canadian economy, both in the short and long term.”
A new era is ahead in the aviation industry, with unpredictable dimensions.
Joe Buchling, MSc. is an aviation consultant at OTUS Group, a team of advisors to business, government and not-for-profit organizations. To find out more about the advisory services we offer to our clientele in the aerospace industry, please contact us at firstname.lastname@example.org or call 613-727-1230 ext. 211.