- In a letter penned on April 2nd, Delta’s SVP of Flight Operations John Laughter writes, “with essentially no passenger revenue, and even with all of the cash savings measures we’ve already taken, our spending over the next three months is almost $5 billion. That’s roughly the equivalent of the entire federal assistance we expect to receive… This one-time cash infusion from the Federal Government helps us in Q2, but in Q3 and beyond we are on our own. Click here to read his full letter to Delta pilots.
- Here’s the highlights from Scott Kirby’s United employee town hall briefing: United spends $1 billion a month on payroll. They expect to get a little north of $5 billion in grants. That gets the company through September/October. The goal in the October timeframe is to have a cash burn of zero (that does not mean profit). If demand is still down 50% then costs will have to obviously be reduced to compliment demand.
- Concerned bailout money may be misused, ALPA and Teamsters penned a letter to Steve Mnuchin, Secretary of the Treasury, on April 3rd. Wanting to ensure federal funds are quickly released, get to employees wallets, and are subject to oversight, union leaders plead their case to have the Secretary step in quickly and clarify certain CARES Act language. Click here to read the full letter including all of their requests.
- In an effort to mitigate the spread of COVID-19 and out of an abundance of caution, we [Southwest] will begin offering voluntary temperature readings for all of our Frontline Employees. Effective Friday, April 3, voluntary temperature screenings will be available in all bases. Please note that temperature monitoring prior to ETOPS flights is mandatory but all other temperature monitoring will be strictly voluntary.
- Spirit Airlines, with a fleet of a little over 150 aircraft is planning to cut their service down to only 56 daily departures. Their trade group NACA states that the CARES Act ”unjustly discriminates against, and penalises, air carriers that provide seasonal air services.” Dropping service to this level potentially removes Spirit Airlines from access to Federal Government assistance through the CARES Act.
- “Big carriers like American Airlines are getting all the attention for the unprecedented damage that Covid-19 is causing airlines. Most of the action, though, may end up happening at the regional level.”
- “Because the industry has already consolidated so much over the past decade—creating four airlines that seem to be too big to fail—it is unlikely to be radically reshaped by this crisis. None of this applies to regional carriers.”
- “The big airlines were already cutting back on regional contracts before the viral outbreak, and could now slash even more low-volume routes. A key to their profitability over the past 10 years has been a focus on fewer hubs. This has meant reorienting regional feeder traffic to carry fewer people for longer distances on larger planes.”
- “The long-touted pilot shortage is now over,” says David Nolletti, a director at consulting firm Conway MacKenzie. “Airlines will be able to use that for their renegotiation of the clauses.”
- “Although aircraft order books haven’t changed for now, orders and deliveries will certainly slow dramatically in the coming months as airlines find themselves awash in unused capacity. If Boeing got permission for its 400 or so grounded 737 MAX jets to fly, would any airline want or need that capacity?”
- “How the industry serves that growth as it evolves out of the crisis will depend on 5 key factors:
- Volume will probably not regain its peak for at least 3-5 years depending on the distance segment.
- Pricing recovery will lag volume recovery by at least a year.
- Business travel will recover more quickly than leisure travel, but at a permanently lower level due to new technologies.
- Long-haul narrow body aircraft will change the nature of international networks by replacing hub and spoke models with point-to-point flying.
- Regional travel will move from an expensive business-oriented model to a cheaper leisure-oriented model.”
- “There is no precedent for the pandemic’s impact on long-haul traffic. Many nations have closed their borders to prevent the spread of the disease today and will probably continue to regard foreign travel with far more suspicion than domestic travel. For similar reasons, customer confidence in international flying will return more slowly than for domestic flights.”
- “With the evolution of improved tools like Zoom and more distributed teams, travel substitution trends were well underway prior to the crisis. The Covid-19 crisis represents the largest trial-by-use period for creating remote workspaces and virtual teamwork in the history of business. Does anyone really think there will not be a material, permanent substitution of online meetings for business travel?”
- “As a result, regional routes now largely support the stations of hub and spoke oriented carriers (e.g. United, Delta etc.) for business passengers. As the business travel market declines both temporarily and structurally, the regional network could undergo another significant round of retrenchment.”
- “Leisure may snapback more slowly as consumers take time to gain confidence in flying again. It will take time for the memories of the risk of contagion and of being stranded far from home to fade.”
- “Low-cost carrier (LCC) models like Spirit and Frontier will become more attractive… expect profit and growth acceleration out of this group first and rapid share gains taken from the hub and spoke carriers as the recovery takes hold.”
- Last week OAG hosted a webinar that led to some interesting insights on how COVID-19 is and will affect the industry.
- Looking back over the past 20 years we have seen three primary reset events: 9/11, 2007 financial crisis, and now COVID-19. Notably each event resulted in a multi-year halt in growth.
- The experts at OAG are expecting a two to three years halt before the volume of travel reaches pre-virus levels. OAG reports that they have already seen a slight rebound in China with load factors around 60% reported.
- OAG surveyed the attendees who joined from 50 countries around the world. Most attendees believed that COVID-19 effects would peak in May, 16% said June would be the peak and 15% saw the peak happening in July or beyond.
- There was consensus that business travel would see a decline moving forward, judging by the results, it seems business travel may have peaked for the foreseeable future.
- The mass adoption of services like Zoom have increased comfort with remote meetings. Anxiety around economic outcomes and disruptions that the virus returning could cause, will likely continue to lead a decline in travel.
- Over half of the respondents expect a large number of airlines to go out of business.
- “The National Air Carrier Association (NACA), which represents ULCCs Allegiant, Frontier, Spirit Airlines, and Sun Country, says on 1 April the order ”unjustly discriminates against, and penalises, air carriers that provide seasonal air services”.
- “In its objection to the DOT order, Indigo Partners-owned Frontier says maintaining its routes as mandated, with no or very few passengers aboard, will quickly eat into its reserves, and go against what the government relief package originally intended.”
- “By using the week of 29 February as a benchmark, the airline says the government ignored the “rapidly changing, unprecedented and precipitous drop in passenger traffic” that resulted from travel restrictions and lockdown orders in many jurisdictions, as well as the fact that its winter schedule looks very different from its summer schedule.”
- “The ULCCs contend that imposing a one-size-fits-all policy for all airlines will put them at an undue disadvantage compared to mainline carriers. ULCCs generally operate with lower margins and serve a different audience base.”
- “Allegiant adds, ”The order, were it finalised without substantial change, would allow Allegiant neither the seasonality nor the frequency flexibility required for it to serve its network without squandering much of the financial assistance it will receive under the CARES Act – a result that would be contrary to the public interest.”
Have you found yourself wondering this lately? Afterall, most of us are suffering from information overload and stuck guessing; when will the Coronavirus end and the economy get back on track? Airline executives say one thing, the news media says another, pilot forums are dumpster fires, and economists are all over the place! So, will we ever get back to “normal”? If so, when will that be, and what will it look like?
- Like the 2008 Great Recession and 1973 Oil Crisis, everyone is getting hit hard, not just the airlines.
- The U.S. and China are the world’s largest business travel consumers. Their business travel accounts for 12% of airline passengers while making up as much as 75% of airlines’ profits.
- Weekly unemployment has seen an exponential increase in seasonally adjusted claims over the past few weeks. In the week ending on March 28, claims reached 6,648,000 – a staggering 3,341,000 increase from the week prior. This marks the highest level of seasonally adjusted claims ever.
- Nothing good or bad can last forever. So, while this nightmare will end, many are left speculating: how uncomfortable will life get in the meantime?
As it stands today, states all across the U.S. will begin hitting their peak confirmed Coronavirus cases in early April and likely extend throughout the month of May. As the virus continues to approach apex in areas like New York, we will soon learn how accurate the mortality estimates were. Regardless, it’s becoming clearer daily that the economic consequences will linger far beyond the health crisis.
You don’t need to be an economics professor to figure out what’s going on here. The economic effects boil down to simple mathematics when it’s all said and done. Need proof? Recently, I’ve begun telling anyone that’ll listen, that I haven’t gotten my haircut in over a month. I tell folks this, not because I’m concerned about my appearance, but to show how devastating the economics are to normal, everyday Americans. My barber is very popular, booked up every day from 8am to 6pm, cutting hair for $40 per person.
In Ohio, where I live and he works, all non-essential businesses have been shut down, which means, on a busy day, he’s losing upwards of $400; on a slow day, upwards of $200. Stretch this out over 2 or 3 months, and he’s lost around $18,000 that he’ll never recover. As a small business owner, he has rent/mortgage, insurance, employees, etc. How long do you think it’ll take for hard working folks like him (and those that work for him) to start eating out or travelling again? I can tell you Americans won’t start spending immediately, as many will still be recovering financially, and large numbers may be in massively higher debt. How many local businesses did you previously support that aren’t receiving your dollars today due to shelter in place orders?
V or U Shaped Recovery?
It’s increasingly more likely that this global pandemic is going to be followed by a global recession. As such, IATA’s chief economist Brian Pearce recently began warning of a “U-shaped” recovery, different from the “V-shaped” one seen after the 2002 SARS outbreak. He compares our current situation to previous pandemics when he says, typically “we’ve seen the worst point three months after the crisis and then three to four months after that a return to pre-crisis levels.” The difference here being, “we have never seen a pandemic coincide with the deep global recession that is now expected. That will delay recovery, so it will be a much more gradual upward slope”.
Scott Kirby, United’s soon to be CEO, sharing Pearson’s gloomy outlook, recently said, “while we all think that the Coronavirus will be behind us and recovery is going to be somewhere on the horizon, we can’t be too aggressive about assuming it’s right around the corner and expecting the so-called V-shaped recovery because if it doesn’t happen we put ourselves in even more risk and even more danger.” United is currently assuming that fourth-quarter demand will decrease by 30 percent, year-over-year, and perhaps more. Adding to his earlier comments, Kirby stated, “If that’s the case, we are going to have to figure out how to adjust our cost structure to be consistent with the $1.3 billion decline in revenue.” Ending his statement with as much positivity as he could muster “But it’s possible we could be back to normal, or down 10 percent.”
Philipp Calsson-Szlezak, Martin Reeves and Paul Swartz contributed to an insightful article titled “Understanding the Economic Shock of the Coronavirus” for The Harvard Business Review. These economists do a wonderful job of outlining the various aspects of V, U, and L shaped economic recoveries, however they also admit how difficult this situation is to predict: “It is fair to say the risk profile of the Covid-19 crisis is particularly threatening. While there is a policy playbook for dealing with financial crises, no such thing exists for a large-scale real economy freeze. There is no off-the-shelf cure for liquid cash problems of entire real economies.” As we continue down this path our brightest economic minds show increased uncertainty in forecasting a recovery.
By James Onieal & Jason DuVernay
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